How to Do Payroll in California: What Every Employer Needs to Know

In California, employers have a lot to account for when it comes to payroll. There are federal taxes that must be paid in addition to state and local income tax. Additionally, there is overtime pay which has its own requirements as well. This article will outline what all employers need to know about how they can comply with these rules while making their business run smoothly.

Payroll processing in California is more complicated than in most other states, and regulations and other requirements are subject to change. Furthermore, you must be aware of any local restrictions that may apply in certain cities or counties. Employers must grasp everything from minimum wage and overtime obligations to the ins and outs of paid leave, unlike in places like Texas and Florida, where workers are granted a great degree of protection.

Consider utilizing payroll software like Gusto if you’re processing payroll in California and are concerned about making errors or not comprehending all of the rules. Its all-in-one payroll solution may assist you in appropriately filing payroll taxes, making direct payments, and even onboarding new workers.

Payroll Processing in California: A Step-by-Step Guide

Step 1: Register your company as an employer. Make sure you have an employer identification number (EIN) and an account with the Electronic Federal Tax Payment System on the federal level (EFTPS).

Step 2: Register with the Employment Development Department of California (EDD). You must register as an employer with the EDD if you own a company, employ one or more people, and pay salaries of more than $100 in a calendar quarter. After paying $750 in compensation in a calendar quarter, household employers with one or more household workers must register with the EDD. Visit finish your registration, go to e-Services for Business.

Step 3: Create a payroll system. Employees must be paid at least twice a month under California law, and paydays must be scheduled ahead of time. Regular paycheck notices must be displayed as well, including the date, time, and location/method of payment.

Step 4: Collect employee payroll paperwork. Request all appropriate payroll paperwork, including those particular to California, when onboarding new workers. This should contain the Certificate of Withholding Allowance for Employees (DE 4).

Step 5: Collect, evaluate, and approve timesheets. Make sure you gather timesheets in enough time to evaluate and approve them before the state’s deadline for payments.

Step 6: Work out your payroll and pay your staff. Wages earned between the first and 15th days of a calendar month must be paid on or before the 26th day of that month, according to California payday legislation. Work completed between the 16th and the final day of the month is due on the 10th of the following month. Payroll may be calculated using payroll software, a calculator, or even Excel, depending on your accounting preferences.

Step 7: Register with the federal and state governments to file payroll taxes. All state tax payments must be sent directly to the appropriate agency, according to the timetable provided to your company. EFTPS is required for federal tax payments. In general, you must deposit federal income tax withheld, as well as employer and employee Social Security and Medicare taxes, according to the IRS’s timetable for your firm. You may be assigned to one of the following depositing schedules by the IRS:

Monthly Depositor: This option requires you to deposit employment taxes on payments received throughout the month by the 15th of the following month.
Semiweekly Depositor: Requires you to deposit employment taxes by the following Wednesday for payments made on Wednesday, Thursday, and/or Friday. Taxes paid on Saturday, Sunday, Monday, and/or Tuesday must be deposited by the following Friday.

It’s vital to remember that the deposit and reporting of taxes follow different schedules. Employers that deposit both monthly and semiweekly should only file Form 941 or Form 944 quarterly or yearly to report their taxes.

Step 8: Keep track of your payroll data by documenting and archiving them. Keep records for all of your workers for at least four years, even those who have quit or been fired (eight years for exempt employees). Find out more in our guide on keeping payroll records.

Step 9: Finish your payroll tax reports for the year. W-2s must be completed for all employees, and 1099s must be completed for all independent contractors. By January 31 of the following year, both employees and contractors must have received these papers.

California Payroll Laws, Taxes & Regulations

Payroll rules, taxes, and other restrictions in California are often stricter than those in the federal government. The state’s payroll rules are significantly more complicated than those found in Texas and Florida.

Payroll Taxes in California

California companies must pay four payroll taxes, two of which are taken directly from employee paychecks, in addition to FICA and unemployment taxes. Employers must register with the EDD, create an account, and make quarterly payments to comply with California’s tax reporting obligations.

Income Taxes in the State

Employees who work in California pay two state taxes that must be deducted by their employers in addition to the federal income tax:

State Disability Insurance (SDI) Tax: SDI pays out temporary benefits for illnesses, injuries, or pregnancies that are not tied to employment. Paid Family Leave (PFL) is also included, which provides benefits to those who are unable to work due to a very sick family member or to bond with a new child. For 2021, the SDI Rate and Wage Limit are as follows:
California Personal Income Tax (PIT): The PIT is a tax on California residents’ and nonresidents’ income generated inside the state of California. California PIT is used to provide public services to the state, including schools, parks, highways, and health and human services. Personal income tax is based on income, and the amount withheld is determined by the PIT withholding schedule, as it is in other states. There is no maximum tax or taxable earnings cap.

As of 2021, if you have workers working in San Francisco, you’ll have to collect income tax at a rate of 1.5 percent, which applies to both residents and nonresidents.

Unemployment Insurance Contribution

California requires employers to pay Unemployment Insurance Contribution. The UI program exists to provide temporary relief to people who are unemployed at no fault of their own. The EDD determines a percentage rate for each employer, which it needs to pay on the first $7,000 of wages to each employee annually.

Annually, the UI schedule and taxable pay level are decided, and employers are informed of their new rate in December.

Employers in the government and charity sectors have the option of choosing a “reimbursable mode” of UI funding. In this situation, they must repay the UI Fund for any benefits provided to their former workers on a dollar-for-dollar basis.

Please keep in mind that you’re also accountable for paying federal unemployment tax (FUTA), which is 6% of each employee’s first $7,000 in salary. You may save up to 5.4 percent on FUTA if you pay your state unemployment taxes in full and on time.

Tax on Employment Training

California also requires employers to pay a Tax on Employment Training (ETT). This is an employer-funded program that provides funds to train employees in targeted industries to make California businesses more competitive. Its purpose is to promote a healthy labor market and help businesses to invest in a skilled and productive workforce.

For 2021, the ETT Rate and Wage Limit are as follows:

Insurance for Workers’ Compensation

Section 3700 of the California Labor Code requires that all California companies give workers’ compensation coverage to their employees if they have one or more employees. Section 3351 of the California Labor Code specifies who is an employee, and hence who is covered by a workers’ compensation coverage.

Employee: Any individual hired by an employer, whether legitimately or illegally, under any appointment, contract of employment, or apprenticeship, whether stated or implicit, oral or written.

Unless the business is wholly owned by the directors and officers, executive officers and directors of companies must be covered by workers’ compensation. A commercial insurance firm or a public fund may provide coverage to business owners.

Pro Tip: Even though coverage is not required by state law, some sole proprietors may still desire to purchase coverage for themselves. Since Insurance for Workers’ Compensation is a type of liability insurance where the employer assumes complete liability for all worker injuries, a workers’ compensation policy for a sole proprietor may not be the best choice. Health, life, and/or disability income insurance can be a better option for sole proprietors.

Minimum Wage in California

California’s minimum payment is much higher than the federal minimum wage, and it is subject to extra rules.

California will be one step closer to achieving its goal of a $15 per hour minimum wage with this latest rise. California passed laws in 2016 that laid out steady increases in the minimum wage through 2023; the minimum wage in California will continue to climb each year until it hits $15.00 per hour on a statewide basis.

California’s Local Minimum Wage Law is set to take effect in 2021.

Many towns and counties have implemented their own minimum wage regulations that surpass state standards, in addition to California’s statewide minimum wage rise. Employers must follow local legislation if a local minimum wage rate is more generous to workers than the state minimum pay rate. As of July 1, 2021, the following regulations are in effect:

The city of Los Angeles established no difference between small and medium enterprises as of July 1, 2021. There is just one minimum wage rate.

Overtime Regulations in California

Overtime is defined as any hours done in excess of 40 in a conventional workweek and is paid at 1.5 times the employee’s usual hourly rate. It mainly impacts nonexempt employees. California goes even farther by forcing companies to pay workers time and a half, if not twice, for hours performed outside of their regular workweek. See the table below for further information on California’s overtime regulations:

However, certain California workers are exempt from these restrictions and, as a result, do not get overtime as required by state law.

The following are examples of exemptions:

Salespeople that work outside the company
Employees who fall under the executive, administrative, or professional categories
Certain workers who are covered by a collective bargaining agreement are unionized.

It’s critical to compute overtime appropriately and categorize workers correctly to avoid workplace audits, penalties, and fines. In California, certain employment classifications, such as live-in home health care employees, are free from overtime. That’s why we advocate automating these overtime regulations and computations using payroll software.

Employees in California are compensated in a variety of ways.

While there are several methods for paying workers, California’s Labor Code requires that wages be paid in one of the following ways:

Cash
Check payable without discount or charge on demand
Deposits made directly into your bank account (with employee consent)
Cards are accepted as payment (the use of payment cards is allowed in California as long as your employees are made aware of all payment options and it is their choice to be paid via pay card)

Pay Stub Laws in California

According to California’s Labor Code, all employers must furnish workers with an itemized account of earnings and deductions on each payday that includes:

The employer’s legal name and address
The employee’s legal name and Social Security number (last four digits, only)
Earned total gross and net wages
The employee’s pay period begins on the first day of the month and ends on the last day of the month.
During the pay period, all relevant hourly rates were in force.
Except for employees whose income is completely based on a salary and who are excluded from overtime pay, the total hours worked by the employee
All deductions, provided that all deductions made on the employee’s written instructions are combined and displayed as a single item.

Minimum Pay Period

Most firms in California are required to pay their workers at least twice a month on days set in advance as regular paydays. Employers are obligated to set a regular payday and display a notice informing all workers of that payday.

Wages earned between the first and 15th days of any calendar month must be paid by the 26th day. Wages received from the 16th to the final day of the month must be paid by the 10th of the next month. Other payroll periods, such as weekly, bimonthly, or semimonthly, must be paid within seven calendar days of the end of the payroll period during which the wages were earned.

The Fair Labor Standards Act allows employers to pay executive, administrative, and professional staff once a month, on or before the 26th of the month.

California’s Final Paycheck Laws

According to California Labor Code 202, workers must get their last payment depending on the circumstances surrounding their termination or dismissal.

Employees in the state of California are subject to the following regulations:

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In California, there is a system of severance pay.

If your workers are dismissed or leave willingly, you are not required to give them severance compensation as a California employer.

Only a documented written agreement between an organization and an employee will compel you to provide severance payments to your workers under California law.

Paid Time Off Payouts That Have Been Earned

There is currently no legal necessity for California firms to give paid or unpaid vacation time to their workers. However, if a company does have a policy in place, there are some constraints that it must adhere to in order to remain compliant. Vacation pay is accumulated as it is earned and cannot be lost under any circumstances.

All earned and unused vacation must be reimbursed to an employee at their usual rate of pay upon termination unless otherwise provided in a collective bargaining agreement. This policy is unaffected by the reason for termination. Whether an employee leaves willingly or is fired, they are still entitled to reimbursement for any wasted vacation time.

HR Laws in California That Affect Payroll

Many HR rules exist in California that are aimed at safeguarding workers. It’s critical that you understand what they are and how they should be followed. Make sure to pay close attention to any needed breaks as well as any rules or laws regarding the employment of children.

Reporting of New Hires in California

In California, new hire reporting is necessary to set salary withholding for child support payments and to find parents who do not pay on time. The data is also forwarded to the National Directory of New Hires, which might help find debtors in other states.

New Employee(s) Report (DE 34)

All new workers and rehires must be reported to the New Employee Registry using the DE 34 form within 20 days of the first day they provided services for wages—their start-of-work date. A rehire is someone who previously worked for the company but was laid off for at least 60 days before returning to work.

Independent Contractor(s) Report (DE 542)

Employers must additionally disclose information to the EDD if they are required to file a federal Form 1099-NEC. If any of the following apply, employers must file a DE 542 to the EDD within 20 days of employing an independent contractor:

For the services provided by the independent contractor, you must submit a Form 1099-NEC.
You pay the independent contractor at least $600 or sign a contract for at least $600.
A person or a single proprietorship is considered an independent contractor.

Visit the EDD’s Independent Contractor Reporting website for additional information on the requirements if you have independent contractors.

Rest & Lunch Breaks in California

California’s regulations diverge from federal norms, which do not mandate any rest or lunch breaks. Employers in California are required to give a 10-minute paid rest break for every four hours working. These rest stops should be placed in the midst of the four-hour period. Off-duty meal breaks, on the other hand, are unpaid.

For every five hours an employee works, the employer must give a 30-minute meal break. Lunchtime is considered an on-duty meal and must be paid at the standard pay rate unless the employee is freed of all duties during the 30-minute meal break.

A second lunch break is available to those who work more than 10 hours each day. If certain requirements are satisfied, the employee may forego meal breaks.

We strongly advise adopting time and attendance software that can be pre-programmed with California’s standards to manage breaks. This may assist workers in accurately recording their rest and lunch breaks, as well as streamline payroll calculations and ensure you have the appropriate paperwork for tax and audit reasons.

Paid Time Off in California

Paid time off (PTO) isn’t mandated by the federal government, and firms in California aren’t compelled to give paid vacation or PTO to their workers. California law, on the other hand, restricts PTO in several ways:

Vacation time that has been accrued never expires. California does not allow “use it or lose it” PTO rules to safeguard an employee’s entitlement to paid time off. Employers may, however, limit vacation benefits and impose notice requirements for workers who want to use vacation days.
Vacation time that has been earned is comparable to pay. If an employee who has accrued PTO is dismissed, the unused vacation time must be paid in their last paycheck. For each day of unused PTO, payment must include a full day’s compensation or the salary equivalent.
PTO cannot be revoked as a form of punishment. PTO is considered as a pay once an employee earns it, and it cannot be taken away. Employers, on the other hand, may deduct partial-day absences from PTO, such as extended meals, half-day trips, and personal errands.

We strongly advise all California companies to adopt time tracking software to assist handle sick leave and PTO claims due to the complicated rules.

California’s Leave Requirements

Employers with 50 or more workers must offer qualified employees up to 12 weeks of unpaid leave each year under the federal Family and Medical Leave Act for the following reasons:

An employee’s newborn child’s birth and care
Adoption or foster care placement of a kid with the employee
Taking care of a member of one’s close family who is suffering from a severe illness
When an employee is unable to work owing to a significant health condition, they are entitled to medical leave.

Employees who need to care for a chronically sick family member or connect with a new kid, whether via birth, adoption, or foster care placement, are covered under California’s paid family leave regulations.

Employees are entitled to eight weeks of paid leave at a rate of 60% to 70% of their regular pay. Pregnant and new mothers may get up to four weeks of disability insurance payments before their due dates, and up to six or eight weeks following delivery.

Sick Leave with Pay

California is also one of the states that require employers to provide Sick Leave with Pay to their employees. In California, employees:

Accrue a minimum of one hour of Sick Leave with Pay for every 30 hours worked
Accrue Sick Leave with Pay based on a 40-hour workweek if they are exempt from overtime requirements
Can start using accrued Sick Leave with Pay on their 90th day of employment
Determine how much Sick Leave with Pay they need to use, but use is subject to reasonable minimum increments (up to two hours) set by the employer

In the wake of COVID-19, 2021 California Supplemental Sick Leave with Pay, Cal/OSHA Emergency Temporary Standards, and local county and city ordinances went into effect to provide additional employee protections.

These are just a handful of the types of leaves you’ll need to keep track of as part of your California payroll. As a result, some companies have switched from standard payroll software to an HRIS system that can handle a variety of leave balances as well as the regulations that govern them.

Laws Concerning Child Labor

Any individual under the age of 18 is considered a minor in California. This holds true for students, dropouts, and emancipated kids. Minors working in California must acquire a work permit unless they are working under special conditions.

Employers must have a valid copy of their Permit to Employ and Work on hand before employing a minor. These permissions are given at the school of a minor. Permits are requested from the superintendent of the district in which the minor lives during the summer months or while school is not in session. Permits granted during the school year expire five days after the start of the next school year and must be renewed on a yearly basis.

The California Department of Industrial Relations published requirements on their website categorized by age, and penalties for violating Laws Concerning Child Labor. The regulations are as follows:

Forms for Payroll

In addition to federal Forms for Payroll, there are a few specific to California that you’ll need to make sure are filled out correctly and filed on time.

California State Forms for Payroll

Employers must submit a DE 9 together with a Payroll Tax Deposit (DE 88/DE 88ALL) when tax payments are due.

Forms for Depositing Payroll Taxes in California

The Payroll Tax Deposit (DE 88/DE 88ALL) form is used for reporting and paying Unemployment Insurance (UI), Tax on Employment Training (ETT), State Disability Insurance (SDI) withholding, and California Personal Income Tax (PIT) withholding to the EDD. Use e-Services for Business to submit these online.

Employer payments for UI and ETT are due quarterly depending on the DE 9 and DE 9C due dates, however, businesses may need to deposit employee wage withholdings for SDI and PIT more often. These deadlines may be found in IRS Publication 15 (PDF), and late payments are subject to a 15% penalty and interest.

Federal Forms for Payroll

Employers may use Form W-4 to figure out how much tax to withhold from employees’ paychecks.
Form W-2: Shows the entire amount of money you made in a given year (one per employee)
Form W-3: Reports all workers’ total pay and taxes.
Form 940: This form is used to report and compute the amount of unemployment taxes owed to the IRS.
Form 941: Reports income and FICA taxes deducted from paychecks on a quarterly basis.
Annual income and FICA taxes deducted from paychecks are reported on Form 944.
1099 Forms: Provides information about non-employee compensation to assist the IRS in collecting taxes on contract labor.

Conclusion

When it comes to payroll in California, there are several aspects to consider. Because of the granular rules that affect employment, employers must pay particular attention to laws and regulations for certain towns or counties. Employees in California are afforded a great lot of protection, so it’s critical for employers to be aware of all of the obligations.

Consider utilizing a payroll program like Gusto if you find California payroll to be too cumbersome. It tracks all taxes, both employer and employee, and guarantees that you pay the correct rates.