What to know about California paychecks and taxes
Paying employees can get complicated. It's not as simple as taking their annual salary and dividing it by a set number of pay periods—you have to withhold the appropriate amount of taxes from employee paychecks, pay your own payroll taxes, and follow numerous paycheck rules.
Here’s what you need to know about California payroll taxes and paycheck laws.
California state payroll taxes
Depending on your type of business, you may need to pay the following state payroll taxes:
- California unemployment insurance tax: You’ll pay this state unemployment insurance tax on the first $7,000 of each employee’s wages each year—up to $434 per employee in 2019. The tax rate can change each year and is specific to your company.
- Employment training tax: Like with the unemployment insurance tax, you’ll also pay this tax on the first $7,000 of each employee’s wages each year. Here, the tax rate is 0.1% for all employers. That means the 2019 maximum you’ll pay per employee is $7.
Your employees may be subject to two state payroll taxes:
- California personal income tax: The amount you withhold depends on information on each team member’s Form W-4 or DE 4. Your employees complete these forms when they are hired or whenever they need to change their tax withholding.
- State disability insurance: For 2019, you’ll need to withhold 1% of the first $118,371 of each employee’s wages.
Federal payroll taxes
Both you and your employees also need to pay a variety of federal payroll taxes. You’ll need to pay FICA and FUTA, and your employees will need to pay FICA, federal income tax, and possibly the Additional Medicare tax.
Both you and your employees pay:
- Federal Insurance Contributions Act (FICA) tax: FICA has two parts: Social Security tax and Medicare tax. For 2019, you each contribute 6.2% of the first $132,900 of wages for Social Security tax and 1.45% of all wages for Medicare tax.
- FUTA (federal unemployment) tax: You’ll pay this tax on the first $7,000 of each employee’s wages each year. The 2019 rate is 6.0%, but there are credits that can reduce your rate to 0.6%.
Your employees pay:
- Federal income tax: You’ll need to withhold this tax from your employees’ paychecks based on information from Form W-4. Things such as marital status, withholding allowances, and salary determine how much tax to withhold. You can use the IRS withholding tables or a payroll service to calculate the correct tax withholding amount.
- Additional Medicare tax: Some of your employees may also be subject to the Additional Medicare tax. The tax rate for 2019 is 0.9%, and you’ll need to withhold this tax from employees earning more than $200,000 per year.
Generally, California requires you to pay employees at least twice a month. However, there are exceptions for executive, administrative, and professional employees.
The date, time, and location that employees are paid must be posted for all employees to see. If a regularly scheduled pay date falls on a holiday or any day when your business is closed (e.g., the weekend), you can either move the payday to the next business day or pay your employees in advance. Any employee that works overtime must be paid no later than the next regularly scheduled pay date after the overtime was worked.
When you pay your employees, you must pay them with good funds and on the designated paycheck dates. If you pay them with bad funds and your check bounces when they try to deposit it, it’s a misdemeanor.
The pay stubs you give your employees should include the following information:
- Company’s legal name and address,
- Employee’s name and last four digits of Social Security number,
- Pay period beginning and ending date,
- Gross wages,
- Total hours worked (for salaried nonexempt employees),
- All deductions, and
- Net wages.
California vacation laws
Paid vacation time is not required in California, but if you provide it, there are special rules you must follow.
California considers paid vacation time an earned wage. This means that it must be accrued and tracked in your payroll process. You can limit the amount of vacation time each employee can accrue, but you can’t have a “use it or lose it” policy that requires employees to forfeit unused earned vacation time.
Paid sick time
While offering paid vacation time is optional, offering paid sick time is not.
California’s Healthy Workplace, Healthy Family Law of 2014 requires you to offer paid sick time to your employees. You can offer sick time in a few different ways, but generally, you must provide at least one hour of paid sick leave for every 30 hours worked.
As part of your payroll process, you’ll need to inform your employees of the number of sick time hours they have available. You can include this on their pay stub or provide a separate document on payday.
If there comes a time when you must terminate an employee, you must provide their final paycheck the same day you terminate them.
Since California considers accrued vacation time an earned wage, you must also pay out any unused accrued time on their final paycheck. One exception: If you have an unlimited vacation policy, you don’t need to pay out unused vacation time when an employee leaves. Since unlimited vacation time isn’t accrued, California doesn’t consider it an earned wage.
Have more questions? Look to a local payroll specialist for answers.