California Payroll Taxes and Employer Responsibilities
State payroll taxes differ from state to state and must be paid in addition to federal payroll taxes and any form of voluntary payroll deduction. Failure to withhold employee payroll taxes, failure to deposit your payroll tax payments, and failure to accurately file your respective quarterly tax returns and end-of-the-year tax reports can result in hefty fines and an even heftier headache.
If you are setting up a small business in the Golden State or are in the process of hiring your first employees, it is important to get things right from the get-go and adhere to California Payroll Taxes and Employer Responsibilities. Here’s what you will need to know:
California State Payroll Taxes vs. Federal Payroll Taxes
Every employee is entitled to fair wages. These fair wages are paid out as net pay, which is gross pay (pay rate times hours worked) minus mandatory payroll tax deductions, and voluntary payroll deductions.
In California, employees must be paid twice a month: payment for the days worked between the 1st and the 15th of the month must be paid on or before the 26th of the month, and payment for the days between the 16th and the last day of the month must be paid on or before the 10th day of the next month.
Every pay slip an employee receives must mark their respective payroll taxes. These can be further divided into federal payroll taxes, state payroll taxes, local payroll taxes, and voluntary payroll deductions.
- Federal payroll taxes include federal income tax withholding (as per the withholding tables the IRS publishes), Social Security tax withholding (the employee’s half, which the employer must match), and Medicare tax withholding (the employee’s half, which the employer must match as well).
- State income tax withholding differs from state to state. In California, it entails unemployment insurance, employment training tax, state disability insurance tax, and personal income tax.
- Local payroll tax deductions include city, county, or district taxes.
- Voluntary payroll deductions include health insurance and life insurance premiums, stock purchase plans, retirement plan contributions, and other job expenses, such as uniforms and union dues.
It is among the many duties an employer has to ensure that every payment an employer makes to their employee withholds the prerequisite amounts needed to pay for each of the aforementioned obligations. Furthermore, employers must match each employee’s Social Security tax withholding and Medicare tax withholding amounts with the company’s coffers.
Getting Started With California's Payroll Taxes and Employer Responsibilities
Before we get started with issuing payments to people, let’s take it from the top.
If you have registered as a small business in California, you may consider hiring someone to help you out. If you want to hire someone and pay them wages of over $100 in a calendar quarter, then you must register as an employer with California’s Employment Development Department. This can be done online.
Once you are an employer under California’s laws, you must set up a payroll. Organize your payroll through a third-party application, or independently. Payments must be made at least twice a month, but you can pay employees every week if you’d like. Every paycheck must be preceded by an advance notice of payment, and paydays must be kept regular.
Payroll information is crucial. You must know what your employees owe in taxes. Some of this can be based on their gross pay. Some of it is based on their tax information, including their filing status. This is where payroll forms are important, especially those pertinent to the state. You can find the federal payroll forms under the IRS Employment Tax Forms page, and the California Tax Service Center’s info on payroll tax forms.
Once you’ve retrieved your employee’s information, you must accurately track their working hours to establish gross pay.
Finally, you have the information you need to calculate payroll, including California payroll taxes. This is where most of the legwork is involved. The IRS and California tax authority provide ample information to calculate payroll taxes, including how to determine income tax withholding and other mandatory state and federal taxes. This is where the help of a tax professional, CPA, or payroll software can greatly simplify things.
Once you have paid your employees, you must take the money you’ve withheld from their paychecks to the respective state, local, and federal tax authorities. Federal tax payments can be made directly to the IRS.gov website through the Electronic Federal Tax Payment System (EFTPS). Payments to the California tax authority can be made through their website. You can opt to make payroll tax deposits monthly, or semi-weekly.
Last but not least, your tax returns. Employers must file quarterly or monthly tax returns via Forms 941 or 944, as well as annual tax reports via per-employee Form W-2s, or Form 1099s for independent contractors. This leads us to the last point.
The Importance of Proper Documentation
Most cases of conflict between state or federal tax authorities and small businesses could be resolved quickly or avoided altogether via a neat and organized paper trail. Don’t give yourself time to lose these documents or lose track of where things go!
Set up a paper filing and electronic filing system to store all relevant information, including per-employee binders, backups of your payroll software information, wage calculations, time sheets for the last few years, and templates for each of your monthly, quarterly, and annual tax paperwork.
In Trouble?
Managing a small business can be challenging. If you are at the helm alone, then that means a mountain of paperwork to take care of every day, in addition to your responsibilities as a managing business owner.
Growing and expanding your operations while simultaneously contending with California's Payroll Taxes and Employer Responsibilities that come with business ownership can be frustrating. Even simple mistakes are heavily punished at times. State tax agencies and the IRS come down hard on people who fail to properly withhold taxes or fail to deposit payroll taxes – or even worse, fail to prepare the money for payroll taxes in the first place.
If you are in trouble with local, state, or federal tax authorities over your responsibilities as an employer, fear not. We can help. Our tax professionals at Rush Tax Resolutions are experienced in dealing with federal and state tax authorities alike, and we can help you resolve your situation, and get better organized when it comes to managing payroll, calculating withholding, managing your tax payment schedules, and keeping clean records for end-of-the-year reporting duties.
We know managing a small business is hard. Let us help you take some of the burden.