Employer's Guide to Unemployment Insurance Tax in California

If your small business has employees working in California, you'll need to pay California unemployment insurance (UI) tax. The UI tax funds unemployment compensation programs for eligible employees. (In California, state UI tax is just one of several taxes that employers must pay. Other important employer taxes not covered here include federal UI tax and state and federal withholding taxes.)

Different states have different rules and rates for UI taxes. Here are the basic rules for California's UI tax.

Register With the Employment Development Department

As a California employer subject to UI tax, your small business must establish a California payroll tax account with the California Employment Development Department (EDD). 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 online or on paper.

Registering Online

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.

Registering By Paper

To register on paper, most employers should use Form DE 1, Registration Form for Commercial Employers. (Certain other 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 14 days.

There is no fee to register your business with the EDD.

Rules for UI Tax Liability

In California, you're liable for UI taxes once you've paid more than $100 in wages in a calendar quarter. This is unlike many other states, which follow the federal rules for UI tax liability under the Federal Unemployment Tax Act (FUTA) or very similar rules.

Under federal rules, employers don't become liable for UI tax until they either:

• pay at least $1,500 in wages in any calendar quarter, or
• have one or more employees in each of 20 calendar weeks.

Different rules, not covered here, apply to agricultural workers, domestic (in-home) workers, and employees of some (but not all) non-profit organizations.

Wage Base and Tax Rates

State UI tax is paid on each employee's wages up to a maximum annual amount. That amount, known in California as the "taxable wage limit" (other states use the term "taxable wage base"), recently has been stable at $7,000. However, that number could change.

The state UI tax rate for new employers, known in some states and federally as the "standard beginning tax rate," also can change from one year to the next. In California, in recent years, it has been somewhere around 3.4%. A new employer's rate usually will remain the same for at least the first two or three years.

Established employers are subject to a lower or higher rate than new employers depending on an "experience rating." This means, among other things, whether your business has ever had any employees who made claims for state unemployment benefits.

File Quarterly UI Tax Reports and Payments

In California, UI tax returns and payments are combined with other payroll tax reports and payments. The returns and payments generally are due a month after the close of each calendar quarter.

In other words, they are due by the following dates:

• 1st quarter returns and payments due on or before April 30
• 2nd quarter returns and payments due on or before July 31
• 3rd quarter returns and payments due on or before October 31, and
• 4th quarter returns and payments due on or before January 31.

If a due date falls on a Saturday, Sunday, or legal holiday, the due date is extended to the next business day. (Withholding tax payments, unlike UI tax payments, might be due more often than quarterly.)

All tax payments must be submitted with a completed Payroll Tax Deposit (DE 88/DE 88ALL) unless payments are made by Electronic Funds Transfer (EFT) or credit card using e-Services for Business.

Apart from filing a DE 88 to make a payment, you also must separately file a Quarterly Contribution Return and Report of Wages (DE 9) and Quarterly Contribution Return and Report of Wages (Continuation) (DE 9C). 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 can download blank forms from the forms and publications section of the EDD website.

File Even If No Wages Paid

If you paid no wages during a quarter, you are still considered an employer and required by law to file the DE 9 and the DE 9C. Check the "No Payroll" box in Item A on the DE 9 and Item C on the DE 9C, then sign and mail both reports.

If you do not expect to pay wages within the next year, you may notify EDD by writing to them or by checking the "Out of Business/Final Report" box in Item B on the DE 9 and Item D on the DE 9C. They will send you a confirmation that your account has been inactivated.

Post a Notice (Poster)

Once an employer registers with EDD, they receive a notice to post, which informs their employees of their rights under the Unemployment Insurance (UI), Disability Insurance (DI), and Paid Family Leave (PFL) programs. This notice must be posted in a prominent location easily seen by the employees.

You can download a form that meets the legal requirements for the notice from the Required Notices and Pamphlets section of the EDD website.

Do Not Misclassify Employees as Independent Contractors

Employers who use independent contractors rather than hiring employees aren't subject to the UI tax. However, it's important that you don't misclassify an employee as an independent contractor.

You could be subject to penalties or fines if you misclassify an employee.

Using Payroll Service Companies

You may decide that it's easiest to hand over responsibility for payroll, including UI taxes, to an outside payroll service. If so, keep in mind that your business, or even you personally, might still be held directly responsible for mistakes an outside payroll company makes.

Additional Information

This article touches on only the most basic elements of California UI taxes. Avoid possible penalties for making mistakes by checking both the IRS and EDD websites for the latest information.

You can also check the EDD's Form DE 44, California Employer's Guide, which is updated annually. Download a copy of the guide from the forms and publications section of the EDD website.

In addition to state UI tax, employers have other responsibilities not covered in this article, such as federal UI tax, state and federal withholding taxes, and required reporting of new hires. Talk to a tax lawyer or employment attorney to learn more.