If your small business has employees working in California, you’ll need to withhold and pay California income tax on their salaries. This is in addition to having to withhold federal income tax for those same employees. Here are the basic rules on California state income tax withholding for employees.
With rare exceptions, if your small business has employees working in the United States, you’ll need a federal employer identification number (EIN). You should obtain your EIN as soon as possible and, in any case, before hiring your first employee. EINs are issued by the IRS and you’ll need one first and foremost for federal taxes. In addition, some states use the federal EIN for state withholding tax purposes. Other states (like California) issue separate state tax ID numbers. You’ll need an EIN to register with the state (see below). You can apply for an EIN at the IRS website. Generally, if you apply online, you will receive your EIN immediately.
Apart from your EIN, you also need to establish a California withholding tax account with the California Employment Development Department (EDD). Be aware that you don’t need to establish an account until you’ve paid over $100 in wages in a calendar quarter. You set up your account by registering your business with the EDD either online or on paper. To register online, use the EDD’s e-Services for Business. If you register online you should be assigned an account number within 24 hours. To register on paper, most employers should use Form DE 1, Registration Form for Commercial Employers. (Certain employers, such as agricultural employers, employers of household workers, and nonprofit employers, need to use different registration forms.) You can download blank forms from the Payroll Taxes Forms and Publications section of the EDD website. You can submit Form DE 1 by regular mail or by fax. If you register on paper, you should be assigned an account number within 10 days. There is no fee to register your business with the EDD.
All new employees for your business must complete a federal Form W-4. In addition, a new employee may also need to complete the related California Form DE 4, Employee's Withholding Allowance Certificate. Form DE 4 is used in relation to California Personal Income Tax (PIT) withholding. A new employee should complete DE 4 if the employee either:
Otherwise, you can use federal Form W-4—but make sure to clearly label the form as being used for California state withholding. You can download blank Form DE 4s from the Payroll Taxes Forms and Publications section of the EDD website. You should keep the completed forms on file at your business and update them as necessary.
You must report all new or rehired employees who work in California to the state’s New Employee Registry within twenty days of their start-of-work date. You must report the following information: employee’s full name, social security number, address, and start-of-work date. You can report new hires in any of the following ways:
If you are reporting on paper you can submit the information by regular mail or fax.
In California, there are four possible payment schedules for withholding taxes: next-day, semi-weekly, monthly, or quarterly. Your payment schedule mainly depends on the average amount of PIT you withhhold from employee wages over time. The more you withhold, the more frequently you’ll need to make withholding tax payments.
The exact threshold dollar amounts for the different payment schedules, as well as other rules, may change over time, so you should check with the EDD at least once a year for the latest information.
Here are the due dates for the various payment schedules:
If the payment is due on a Saturday, Sunday, or legal holiday, the due date is extended to the next business day.
You can make payments electronically or on paper. To file electronically, use the EDD’s e-Services for Business. If filing on paper, you must include a completed Form DE 88, Payroll Tax Deposit, with each tax payments. You can obtain Form DE 88s, which are also known as payment coupons, from the Payroll Taxes Forms and Publications section of the EDD website. For additional information on making payments, check the Payroll Taxes section of the EDD website.
The EDD provides several different methods for calculating how much tax to withhold. For more information, check the current edition of Publication DE 44, California Employer’s Guide. The guide is updated each year. You can download a copy from the Payroll Taxes Forms and Publications section of the EDD website.
Apart from making scheduled tax payments, businesses also must file quarterly withholding tax returns and reports. These documents: (a) reconcile the tax paid for the quarter with the tax withheld for the quarter; and (b) report each individual employee’s wages paid for the quarter. California requires that you submit two forms for this purpose:
Larger employers are required to file these forms electronically. Other employers may file electronically or by regular mail. To file electronically, use the EDD’s e-Services for Business. If filing by mail, send both forms together, and do not include any payroll tax deposit (Form DE 88). You must file the quarterly reports even if you paid no wages during the quarter.
Quarterly returns are due on or before the last day of the month following the close of the quarter:
As with tax payments, for any return due date that falls on a Saturday, Sunday, or legal holiday, the due date is extended to the next business day.
The federal government and many other states require employers to file an annual reconciliation after the end of the year. (For the federal government, this generally is IRS Form W-3 with copies of Form W-2s included.) The annual reconciliation, where required, is in addition to the requirement to provide each of your employees with a federal Form W-2 summarizing the employee’s withholding for the year. California, however, currently does not require you to file an annual reconciliation apart from the required quarterly reports (Forms DE 9 and DE 9C).
This article is only concerned with employees, not independent contractors. In general, different tax rules apply to independent contractors.
You may decide that it’s easiest to hand over responsibility for payroll, including withholding taxes, to an outside payroll service. If so, keep in mind that your business, or even you personally, may still be held directly responsible for mistakes made by an outside payroll company.
This article touches on the basic elements of California employee withholding taxes. Avoid possible penalties for making mistakes by checking both the IRS and EDD websites for the latest information. You also can get more information about small business tax issues in other articles here on Nolo.