California is one of the most business-friendly states in the United States, attracting a diverse range of companies from around the world. As an employer in California, you are required to comply with various state and federal laws, one of which is paying employer payroll taxes. In this post, we will break down the essential components of California employer payroll taxes, providing an in-depth understanding of them and how they work.
What Are California Employer Payroll Taxes?
These are taxes that employers in California must pay to the state and federal government on behalf of their employees. They include Social Security and Medicare taxes, federal and state unemployment insurance taxes, and state disability insurance taxes. Employers are required to withhold a portion of their employee’s wages to pay for these taxes and then remit the taxes to the appropriate government agency.
Social Security and Medicare Taxes
Social Security and Medicare taxes, also known as FICA taxes, are federal payroll taxes that employers must withhold from their employee’s paychecks. The Social Security tax rate is 6.2% on the first $142,800 of wages, while the Medicare tax rate is 1.45% on all wages. Employers must also match the employee’s contribution, resulting in a total FICA tax rate of 15.3%.
Federal Unemployment Insurance Tax
The Federal Unemployment Insurance Tax (FUTA) is a federal payroll tax that employers must pay on the first $7,000 of each employee’s wages. The FUTA tax rate is 6%, but employers can receive a credit of up to 5.4% if they pay their state unemployment insurance taxes on time. This reduces the net FUTA tax rate to 0.6%.
State Unemployment Insurance Tax
Employers in California must also pay state unemployment insurance taxes, which fund unemployment benefits for eligible employees who lose their jobs. The state unemployment insurance tax rate varies based on the employer’s industry, the number of employees, and the employer’s claims history. The minimum tax rate for new employers is 3.4%, while the maximum rate is 6.2%.
State Disability Insurance Tax
The State Disability Insurance (SDI) tax is a payroll tax in California that offers qualifying workers who are unable to work due to a non-job-related illness or injury partial wage replacement compensation. Businesses are required to deduct the SDI tax from employees’ paychecks and send the money to the state. For 2021, the first $128,298 in wages is subject to a 1.2% SDI tax.
Employment Training Tax
The Employment Training Tax (ETT) is a California payroll tax that funds training programs for employees in the state. The ETT tax rate for 2021 is 0.1% on the first $7,000 of each employee’s wages. Employers are required to pay the ETT tax quarterly, along with their unemployment insurance taxes.
Paid Family Leave
Paid Family Leave (PFL) is a California program that offers eligible workers who require time off work to care for a chronically ill family member or bond with a new child partial wage replacement benefits. Although employers are not obligated to contribute to the PFL program, they are required to permit qualified workers to take time off work to benefit from PFL.
How to Calculate California Employer Payroll Taxes
Calculating California employer payroll taxes can be a complicated process due to the various taxes and rates involved. Employers must first determine the gross wages for each employee during each pay period. They must then withhold the appropriate amounts for federal and state taxes, Social Security and Medicare taxes, and state disability insurance taxes.
Consequences of Noncompliance with California Employer Payroll Taxes
Noncompliance with California employer payroll taxes can lead to severe consequences for employers. Failure to pay can result in penalties, fines, and interest charges. Employers who do not pay their payroll taxes on time may also be subject to legal action, including liens on their property, garnishment of their wages, and even criminal prosecution.
Exemptions and Credits
Employers in California may be eligible for exemptions and credits that can help reduce their payroll tax liability. For example, employers who hire certain groups of individuals, such as veterans, may be eligible for tax credits. Additionally, employers may be eligible for exemptions from state disability insurance taxes if they offer equivalent private disability insurance coverage.
Record-Keeping Requirements
Employers in California are required to maintain accurate records of their payroll transactions and payroll taxes for at least four years. These records should include information such as employee earnings, deductions, and payroll tax payments. Employers must also provide their employees with wage statements, commonly known as pay stubs, that include information about their wages, deductions, and payroll taxes. Maintaining accurate payroll records is essential for complying with state and federal payroll tax laws and regulations. It can protect employers in the event of a tax audit or legal dispute.
Understanding California employer payroll taxes is essential for any employer operating in the state. Employers must comply with federal and state payroll tax laws and regulations to avoid penalties, fines, and legal action. By calculating and withholding the appropriate payroll taxes and reporting them to the relevant government agencies, employers can ensure that they remain compliant and protect their businesses from potential legal and financial risks.