The Tax environment in California is notoriously strict. Your entire payroll history could be audited and subject to retroactive payroll taxes, penalties, and interest for something as simple as misclassifying an independent contractor as a freelancer or an employee. In other words, with payroll taxes in California, one small mistake can trigger years’ worth of back taxes.

This article compiles all the essential elements of payroll that employers need to be aware of, helping you stay up-to-date with deadlines, track changes for the latest filing year, and optimize your funds to meet all payroll tax payment obligations. Here’s Profitjets breaking down all the taxes that are taken out of the payroll.

The state of California mandates several tax withholdings. When broadly classified, it includes federal taxes, such as income, Social Security, and Medicare, as well as California-specific taxes.

Table of Contents

How Much Tax is Taken Out of a Paycheck in California?

Some are employer-only duties, while others are subtracted from employee compensation. Eight different payroll taxes are managed by businesses in California. As of 2025, four at the state level (UI, ETT, SDI, and PIT) and four at the federal level (FICA employee and employer shares, FUTA, and federal income tax). Some are employer-only duties, while others are subtracted from employee compensation.

1. Unemployment Insurance (UI)

• The employer pays UI, with the tax base starting from $7,000 on wages (per employee). The range varies from 3.4% for new employers to 6.2%.
• The employer has to deposit the Unemployment Insurance to EDD as per the schedule and report it through Form DE-9/DE-9C

2. Employment Training Tax (ETT)

• The employer also pays the Employment Training Tax (ETT), which has the same base as UI. The base starts at $ 7,000 per employee and is charged at 0.1%. These funds support job training programs, which are vital to both employees and employers.

3. State Disability Insurance (SDI) + Paid Family Leave (PFL)

• State Disability Tax (SDI): As of 2025, employees pay 1.2% of gross pay with no cap. The tax funds short-term disability and family leave. The employer does not have to match this pay; however, the employer withholds this tax and is required to file it.
• SDI is withheld and remitted through Form DE‑9/DE‑9C.

4. California Personal Income Tax (PIT)

• In California, Personal Income Tax is paid by the employee, rather than being withheld by the employer.  It is taxable on all wages at progressive rates. It is based on DE-4 allowances
• All wages are covered in a progressive rate as specified by DE-4 Allowances

US Federal Payroll Taxes

5. Social Security

• This burden is borne both by the employee & employer; a total of 12.4% of each month’s salary is paid, out of which 6.2% i.e., half of the obligation, is withheld from the employee’s paycheck, and the employer pays the rest.
• The Taxable base starts with $176,100 of wages in 2025

6. Medicare

• Just like Social Security, Medicare is funded equally by both the employee and the employer. All wages are taxable at 1.45%        
• The benefits for individuals include hospital insurance, medical insurance, Medicare Advantage, and prescription drug coverage.

7. Federal Unemployment Tax (FUTA)

• The employer pays the Federal Unemployment Tax in full, with the taxable base starting at $7,000.
• The rate is 6% of gross salary and 0.6% net after state credit.

8. Federal Income Tax

• The employee is liable to pay federal income tax; however, the employer withholds it, and all wages are taxable.
• The taxable rate is based on IRS Form W-4 allowances & payroll period. It is reported by the employer and filed quarterly or annually using Form 941/944, respectively.

How to Register for EDD to Pay Payroll Taxes in California? (H2)

Are you thinking about starting a business in California? Registering with both the IRS (federal) and EDD (California state) is essential for employers before hiring employees and running payroll. Here’s a guide on how to proceed.

How to register:

1. First and foremost, the first step is to apply for an Employer Identification Number (EIN)
   • Web (official IRS) 
2. Once you receive your EIN, you can:
   • Begin to withhold federal payroll taxes.
   • You can now file IRS Forms 941 (quarterly) and Form 940 (annual FUTA).
   • You can also issue W-2s to employees and W-3s to the Social Security Administration.

3.  Register with the EDD (California Employment Development Department)

1.  Go to: EDD’s e-Services for Business

2.  Create an account, and:

o   Register as an employer by filling out the DE 1 Registration Form using the link below. Direct link: https://eddservices.edd.ca.gov

o   Choose “Register for Employer Payroll Tax Account Number”

3.  After submission:

You’ll receive a State Employer Payroll Tax Account Number (SEPTAN) in a few days.

You can use it for DE 9/DE 9C (quarterly reports) and all state payroll tax submissions.

Remember to keep your EIN and EDD account numbers secure and readily available. You’ll need them for filing & to set up your payroll software.

Penalties have to be borne by the employer for late registration or failure to file. Payroll tax planning is essential, especially in California. California has a complex tax structure and strict compliance expectations.

How Can Payroll Tax Planning with a Professional & Using a Payroll Software Make a Difference?

Here’s how payroll tax planning and hiring a proficient tax planner can make a difference

1) Avoid Penalties: 

There’s close to no room for errors when it comes to filing payroll taxes in California. Even honest mistakes, such as misclassifying employees, could result in penalties of up to 25% of the tax due. 

Hiring a Payroll expert and utilizing payroll automation software ensures timely deposits and accurate classification, keeping you audit-ready.

2) Manage Rising costs & Saving Time: 

SDI withholding rate has now increased to 1.2% as per the new rule effective from 2025. UI tax rates remain variable and proportional to turnover, which means they grow as you scale up. 

Hiring a professional to forecast labor costs and budget more effectively during economic cycles. It also saves your time as an employer.

3) Compliance with California-specific Laws:

California has some of the highest combined payroll tax costs in the country. 

Some state-specific taxes include Paid Family Leave (PFL), Disability Insurance (SDI), and Employment Training Tax (ETT). Your interests are protected when you hire a professional to handle them.

4) Cash Flow Management & Scaling: 

You may underestimate how much you need to set aside from gross payroll. 

Effective payroll planning helps align pay cycles with tax deadlines & avoid overdrafts and late payments. Planning helps scaling, as the rates vary with your turnover and employees’ gross wages.

5) Employee Satisfaction: 

Errors in employee payroll, like incorrect SDI withholding, could reduce employee trust. This may lead to complaints and claims. 

Efficient tax planning eliminates this possibility.

Key Takeaways

Ø  The California paycheck includes Unemployment Insurance (UI), Employment Training Tax (ETT), State Disability Insurance (SDI), and Personal Income Tax (PIT)

Ø  The Federal Paycheck obligations are Social Security, Medicare, Federal Unemployment Tax (FUTA) & Federal Income Tax

Tax planning includes two crucial services, priced correctly for the business

1)  A trustworthy tax planner

2)  A reliable payroll software solution

Our recommendation for a reliable payroll software solution is one that we use every day and have successfully handled several crises. Here’s how Gusto compares against other service providers.

Profitjets is a renowned tax planner & advisor. We also provide outsourced accounting and outsourced bookkeeping services. You can rely on us to plan your payroll taxes accurately. Be assured that we meet every deadline and prepare your funds to help you achieve your growth goals.

FAQs on California Payroll Taxes