Whether you’re a small business with few employees or a large company with several hundred, understanding the cost that comes with having employees is essential. Many employers focus on the wages that will be paid but, they often neglect to consider the tax obligations that are attached to those wages. Though payroll taxes are more significant at the federal level (IRS) it is just as important to know what is happening at the state level. In this blog, we will discuss some initial steps that must be taken when hiring a new employee, what taxes must be withheld from the employees wages and how those calculations are done in the State of California.
When hiring a new employee you will need to report your new hire to the Employment Development Department (EDD) using their New Employee Registry. This is required to be done within 20 days of the start date of the new employee.
You may also fill out form DE-34 and mail it to the EDD or submit a copy of your employee’s W-4 form along with the employee’s start-of-work date, your California employer payroll tax account number, and your federal employer identification number (EIN).
Beyond notifying the EDD about the hire of your new employee, you will also need to figure out what payroll taxes must be withheld from their wages. Wages become subject to payroll taxes after the employer has paid more than $100 to one or more of their employees in a calendar quarter; the payroll taxes are calculated as a percentage of the employee’s wages. A portion of the payroll taxes are deducted from the employee’s paycheck, held in trust by the employer, and then paid over to the EDD. The other portion of the payroll taxes are paid directly by the employer. For more information on the employer/employee responsibility of payroll taxes see our blog Payroll Taxes and The Employer/Employee Responsibility.
California State Payroll Taxes
In California, most employee’s wages are subject to payroll taxes. However, there are a few exceptions. To see what types of employment are exempt from some or all payroll taxes see State of California EDD’s Exempt Employment Information Sheet.
For those employment types that are not exempt, there are four types of California payroll taxes that the wages ares subject to. The first two, which are paid by the employer, are Unemployment Insurance (UI) and Employee Training Tax (ETT). The last two, which are paid by the employee, are California State Disability Insurance (CASDI) and California Personal Income Tax (PIT). What is important about CASDI and PIT is that the employer is actually responsible for withholding this from their employee’s wages and paying it over to the EDD.
Unemployment Insurance (UI)
The unemployment insurance paid by the employer provides support for employees who become unemployed through no fault of their own.
The calculation to figure out how much UI will need to be paid is based off the first $7,000 in taxable wages paid to each employee and your rate, which the EDD notifies you of each December. If you are a new employer, your UI rate will be 3.4% for the first two to three years you are in business. The maximum UI an employer could pay per employee is $434 based on the highest rate of 6.2% ($7,000 x 6.2% = $434).
Example UI Calculation for New Employers
Number of Employees: 2
Employee #1 hire date is 1/1/2020 and taxable wages earned through the first quarter equal $10,000. Calculation: $7,000 x 3.4% = $238. The $238 is paid to the EDD and then reported on California Payroll Tax Return form DE-9 for quarter 1. For employee #1 no more UI will need to be paid by the employer during the year.
Employee #2 hire date is 3/15/2020 and taxable wages paid through the first quarter equal $4,000. Quarter 1 Calculation: $4,000 x 3.4% = $136. The $136 is paid to the EDD and then reported on California Payroll Tax Return form DE-9 for quarter 1. In quarter 2, employee #2 is paid $10,000 in taxable wages. Quarter 2 Calculation: $3,000 x 3.4% = $102. The $102 is paid to the EDD and reported on California Payroll Tax Return form DE-9 for quarter 2. Only $3,000 is subject to UI in quarter 2 because UI is only calculated on the first $7,000 paid to each employee and in quarter 1 $4,000 of the $7,000 had already been accounted for.
Employment Training Tax (ETT)
The ETT raises funds that are used to train workers in certain industries such as those who directly produce or deliver goods and services.
Each employer during their first year is subject the ETT and the rate is 0.1% of the first $7,000 of taxable wages paid to an employee during a calendar year. After the first year, employers with a positive UI reserve account balance will be subject to the ETT. The maximum amount an employer will pay in ETT per employee per calendar year is $7.
California State Disability Insurance (CASDI)
State disability insurance is collected to support temporarily disabled employees who are unable to work due to a non-work-related disability. It also funds Paid Family Leave (PFL) benefits, which are used when an employee is unable to work because they are needed at home to care for a sick family member or to care for a new child. PFL benefits are an especially hot topic currently with the Covid-19 pandemic.
The CASDI is withheld from the employee’s wages, held in trust by the employer, and then paid over to the EDD by the employer. In tax year 2020, the CASDI rate is 1% of each employee’s taxable wages up to $122,909. This means the maximum amount of CASDI to be withheld from an employee’s taxable wages is $1,229.09.
Example CASDI Calculation
Number of Employees: 2
Quarter 1 taxable wages: $15,000 (CASDI withheld and paid $150)
Quarter 2 taxable wages: $15,000 (CASDI withheld and paid $150)
Quarter 3 taxable wages: $20,000 (CASDI withheld and paid $200)
Quarter 4 taxable wages: $30,000 (CASDI withheld and paid $300)
Employee #1 total taxable wages: $80,000
Employee #1 CASDI to be withheld and paid to the EDD: $800 ($80,000 x 1%)
Quarter 1 taxable wages: $50,000 (CASDI withheld and paid $500)
Quarter 2 taxable wages: $50,000 (CASDI withheld and paid $500)
Quarter 3 taxable wages: $50,000 (CASDI withheld and paid $229.09)
Quarter 4 taxable wages: $50,000 (CASDIE withheld and paid $0)
Employee #2 total taxable wages: $200,000
Employee #2 CASDI to be withheld and paid to the EDD: $1,229.09
Total For Both Employees
Total taxable wages for both Employee #1 and #2: $280,000
Total CASDI to be withheld and paid to EDD for both Employee #1 and #2: $2,029.09
For more information on how to calculate Unemployment Insurance, Employment Training Tax, or California State Disability see Determine Taxable Wages and Calculate Taxes Due for Unemployment Insurance, Employment Training Tax, and State Disability Insurance on the EDD’s website.
California Personal Income Tax (PIT)
The California Personal Income Tax is based on the income of California residents or non-residents earning income in California. These taxes are used for public services such as schools, roads, health and human services, etc.
PIT is also withheld from the employee’s taxable wages, held in trust by the employer, and then paid to the EDD. The amount to be withheld from the employee is determined by the withholding allowance the employee provides on their W-4 or DE-4 form and their total taxable wages. There is no limit on the amount that may need to be withheld.
Hiring a new employee for your business is something that takes a great deal of consideration. One of those considerations should be the payroll taxes that come with a new employee’s wages. Often times a business with a large number of employees can greatly benefit from using a payroll service such as Gusto, Paychex, or ADP. For those businesses that have a smaller number of employees you may still benefit from using a payroll service but, if you feel you are unable to afford this then speaking with a tax professional is the next best thing. A tax professional will be able to guide you through the process to make sure you are on track with your California payroll taxes.
If you are having trouble resolving an issue with the EDD give us a call at 760-932-0042 for a free phone consultation. During the consultation we will help you understand your rights and let you know how we can help.