The only certainties in life are death and taxes, and, in California, the latter comes with a long list of rules and obligations for employers. If you’re running a business with employees in the Golden State, payroll taxes aren’t just a line item on your financial statements — they’re a legal responsibility that requires careful navigation.
From state disability insurance (SDI) contributions to progressive income tax rates, California has one of the most complex payroll tax systems in the country. The amount employers withhold from employee paychecks — and the taxes each business pays — depend on multiple factors, including wages, business structure, and even new laws that quietly take effect, like the SDI tax increase in 2026.
With some of the highest tax rates in the nation and strict reporting requirements, understanding California’s payroll taxes requires a herculean effort. But, luckily, you’ve come to the right place. Whether you're a small business owner or managing a large corporation, this article will break down California’s payroll taxes, their rates, and what they mean for your bottom line.
Every paycheck issued in California includes federal tax withholdings. The Federal Insurance Contributions Act (FICA) tax funds Social Security and Medicare, split between employer and employee contributions. Social Security tax, 6.2% (up to the wage base limit), is paid by both employers and employees. Medicare tax, 1.45%, is paid by both employers and employees, with an additional 0.9% surtax for high earners. Additionally, federal income tax is withheld based on an employee’s W-4 form, factoring in income level, filing status, and claimed deductions.
An employer that hires one or more employees and pays wages in excess of $100 in a calendar quarter for services performed in California must register with the California Employment Development Department (EDD) within 15 days.
| Income* | Tax Rate |
|---|---|
| $0 to $10,756 | 1% |
| More than $10,756 to $25,499 | 2% |
| More than $25,499 to $40,245 | 4% |
| More than $40,245 to $55,866 | 6% |
| More than $55,866 to $70,606 | 8% |
| More than $70,606 to $300,659 | 9.30% |
| More than $300,659 to $432,787 | 10.30% |
| More than $432,787 to $721,314 | 11.30% |
| More than $721,314 to $1,000,000-plus | 12.30% |
| Income* | Tax Rate |
|---|---|
| $0 to $21,512 | 1% |
| More than $21,512 to $50,998 | 2% |
| More than $50,998 to $80,499 | 4% |
| More than $80,499 to $111,732 | 6% |
| More than $111,732 to $141,212 | 8% |
| More than $141,212 to $721,318 | 9.30% |
| More than $721,318 to $865,574 | 10.30% |
| More than $865,574 to $1,442,628 | 11.30% |
| More than $1,442,628 | 12.30% |
Once registered, the EDD will assign the business an employer payroll tax account number. The EDD administers the following California payroll tax programs:
While federal payroll taxes apply nationwide, California’s state income tax is where things get more intricate. The state has a progressive tax system with nine brackets, ranging from 1% to 13.3%, the highest in the nation. On top of that, those earning more than $1 million are subject to an extra 1% tax under the Mental Health Services Act.
Employers must withhold PIT from employee wages, with the EDD overseeing the reporting and collection. To determine withholding amounts, businesses can use:
Funded entirely by employers, California’s UI tax helps support individuals while they search for new employment, ensuring economic stability for businesses and communities alike. Unlike other payroll taxes, UI tax is not deducted from employees’ wages — the responsibility falls solely on employers. The tax applies to the first $7,000 of each employee’s wages per calendar year, regardless of how much they earn beyond that threshold. For example, if an employee makes $50,000, you’ll still only pay UI tax on the first $7,000.
California has a low threshold for UI tax liability — if a business pays more than $100 in wages in a single calendar quarter, it’s required to pay UI tax. This is stricter than federal rules, which don’t mandate UI contributions until a business either:
California determines the UI tax rate based on a business’s history:
UI tax filings are bundled with other California payroll tax reports and are due quarterly:
If a deadline falls on a weekend or holiday, it shifts to the next business day. Employers must submit payments using a Payroll Tax Deposit (DE 88) unless they use electronic funds transfer (EFT) or credit card payments through the EDD’s e-Services for Business portal.
Even if a business hasn’t paid any wages in a quarter, it’s still required to file a Quarterly Contribution Return and Report of Wages (DE 9) and a DE 9C (Continuation). Simply check the "No Payroll" box and submit the reports.
If a business is shutting down operations and no longer expects to pay wages, it must notify the EDD by checking the "Out of Business/Final Report" box on its final DE 9 and DE 9C. The EDD will confirm the account’s closure.
Unlike other payroll taxes that fund unemployment benefits, the ETT is an investment in California’s workforce, helping businesses thrive by funding job training programs in key industries.
The ETT is an employer-paid tax designed to support training programs that enhance the skills of California’s workforce. This tax helps workers gain new skills, stay competitive, and keep California businesses at the cutting edge of innovation.
New employers are automatically subject to ETT in their first year of business. After the first year, businesses will continue paying ETT as long as they maintain a positive UI reserve account balance — essentially demonstrating that the business hasn’t had excessive unemployment claims.
For 2026, the ETT rate remains at 0.1%, applied to the first $7,000 of each employee’s wages per year. This means that for each employee, the maximum ETT contribution per year is just $7. The ETT is designed to provide industry-specific training to strengthen the labor market, help businesses access a better-trained workforce without extra costs, and reduce turnover by equipping employees with valuable skills that improve job retention.
In California, SDI is designed as a partial wage-replacement insurance plan for eligible California workers. The program is mandated and funded through employee payroll deductions. California’s SDI program provides short-term disability insurance and paid family leave (PFL) wage replacement benefits to eligible workers who need time off work. Employers do not directly fund either SDI or PFL.
For 2026, the SDI withholding rate for employees is 1.2%, compared with 1.1% in 2024. As of Jan. 1, 2024, employees subject to SDI contributions don’t have a taxable wage limit or maximum withholding. The SDI withholding rate is the same for all employees and is calculated annually.
California updated and introduced several labor laws in 2026, introducing key changes that impact wages, worker protections, and employer responsibilities. These updates aim to promote fair treatment, workplace safety, and financial security for employees across the state. Here’s what took effect this year.
These new laws reflect California’s ongoing effort to strengthen worker protections while clarifying employer obligations. Businesses must ensure compliance with updated wage standards, paid leave policies, hiring practices, and workplace safety measures. Meanwhile, employees stand to benefit from increased financial security, stronger legal protections, and improved working conditions.
For employers, proactive compliance is key — reviewing payroll processes, updating handbooks, and ensuring employees’ hours are accurate will help avoid penalties.
California has some of the most comprehensive overtime laws in the country, designed to ensure fair compensation for employees who exceed standard working hours. Unlike federal law, which primarily focuses on weekly overtime thresholds, California enforces daily, weekly, and consecutive-day overtime rules. Employers who fail to comply risk significant legal and financial penalties.
In California, overtime pay kicks in under the following conditions:
Most nonexempt employees are eligible for overtime, but exemptions apply to specific job classifications, including:
Failure to adhere to California’s overtime laws can lead to severe consequences. Employers must compensate employees for unpaid overtime, often with accrued interest. Some employees may be entitled to additional compensation equal to the amount of unpaid overtime. Additionally, employers may face lawsuits, class actions, or regulatory fines for repeated violations. In extreme cases, noncompliant businesses risk losing their ability to operate in California. Employees who believe they have been denied proper overtime compensation may submit a claim with the California Division of Labor Standards Enforcement (DLSE) or seek legal advice.
From withholding the correct amount of personal income tax to navigating UI and SDI contributions, staying compliant in California isn’t just about avoiding penalties — it’s about ensuring employees are paid accurately and on time.
The key to managing these responsibilities efficiently? A reliable payroll and time tracking system. Automating employee hours, deductions, and tax calculations reduces administrative burden and minimizes errors, giving business owners more time to focus on growth.
If you’re looking for a seamless way to track employee hours and simplify payroll, OnTheClock can help. Download OnTheClock today and experience the benefits of time tracking free for 30 days.
Check out the other posts we have written related to this article.