As any entrepreneur running a business in the Golden State will tell you, it isn't all sunshine and profits. In fact, operating an SMB can be incredibly challenging and stuffed with details that could potentially hinder a company's success. Take California payroll tax, for example. Small business employers have to contend with factors like SDI, UI, ETT, and PIT withholdings, accidental overpayment, missed deadlines, or worse, the risk of incurring an audit. If California state payroll tax is draining your time (and triggering your anxiety), this guide cuts through the complexity. Whether you’re looking to start an LLC in California or you're managing a growing business, you’ll get a clear breakdown of who pays what, common mistakes, and how to stay compliant while keeping costs in check.
California Payroll Tax Breakdown: Who Pays What
When it comes to payroll taxes, both employers and employees share responsibility, and it’s important to understand payroll taxes vs income taxes. Some taxes are withheld from employee wages, while others are paid directly by the employer.
Get it wrong, and you could face serious penalties. Here’s exactly which payroll taxes are paid by employers as of 2025:
Which payroll taxes are paid by employers?
Businesses in California are responsible for:
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Unemployment Insurance (UI): Paid entirely by the employer to fund benefits for workers who lose their jobs.
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Employment Training Tax (ETT): An employer-paid tax that funds workforce training programs.
Which ones Are Paid by Employees?
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State Disability Insurance (SDI): Covers short-term disability and paid family leave. The SDI rate is set annually and deducted directly from employee paychecks.
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Personal Income Tax (PIT): Withheld based on earnings and the employee’s W-4 elections. The amount varies depending on income level and filing status.
How Much Do California Payroll Taxes Cost in 2025?
Understanding the question, “How much is payroll tax in California?” isn’t as straightforward as one might hope because there are many variables in calculating the bottom line. Furthermore, the financial impact of payroll taxes is critical for any business owner as they represent a significant operational expense that requires careful planning and budgeting.
In truth, taxes on payroll costs in California depend on several factors, including employee wages, industry risk, and your business’s history with unemployment claims. While some rates stay consistent year-to-year, others (like UI and SDI) are adjusted annually. Here’s what you need to know about calculating California payroll taxes as of 2025:
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Unemployment Insurance (UI): New California employers pay a 3.4% UI tax rate (or 6.2% for construction businesses) for their first two to three years. After this period, rates adjust based on the employer’s history and the state’s UI rate schedule. For 2025, Schedule F+ applies, with rates ranging from 1.5% to 6.2%. These rates only apply to the first $7,000 paid to each employee annually.
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Employment Training Tax (ETT): Employers must also pay a flat 0.1% tax on the first $7,000 of each employee’s wages, which funds workforce development programs. Nearly all employers are subject to this tax, with very few exemptions.
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Additional Costs: Beyond state taxes, employers pay federal unemployment tax (FUTA) at 6.0% on the first $7,000 per employee. Workers’ compensation insurance is also mandatory, with premiums varying by industry and claims history.
To ensure accuracy, always check the EDD’s California payroll tax page, which also provides online calculators and resources to help estimate obligations based on your specific workforce composition. However, if managing payroll taxes becomes overwhelming, consider using payroll software or hiring professional services. These solutions can help you stay compliant and avoid penalties.
The Role of the California Employment Development Department
In simple terms, the California Employment Development Department (EDD) oversees the state’s payroll tax system, ensuring employers comply with tax laws and employees receive the benefits they’re entitled to.
They also set unemployment insurance (UI) rates, adjust annual tax percentages, and maintain taxable wage bases.
As a business owner, your key interactions with the EDD include:
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Registering for a Payroll Tax Account
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Receiving your annual UI tax rate notice
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Filing quarterly wage reports and payments
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Respond to unemployment claims
But beyond enforcement, the EDD also provides useful tools like California payroll tax calculators, compliance guides, and an employer hotline, helping businesses maintain compliance.
Avoid These Payroll Tax Mistakes That Trigger Audits
Even small payroll tax errors can lead to costly penalties and unwanted EDD scrutiny. To avoid this, watch out for these common mistakes:
1. Misclassifying Workers
Many businesses try to save on California payroll tax by classifying workers as independent contractors instead of employees. However, worker misclassification is the #1 audit trigger. The EDD uses a strict ABC test to determine worker status. If you're unsure, refer to their official worker classification guide to avoid penalties.
2. Failing to Pay Payroll Taxes on Time
Missing quarterly payroll reports (DE 9/DE 9C) or paying taxes late raises red flags. Set calendar reminders for all EDD deadlines—they don’t accept "I forgot" as an excuse.
3. Math Errors in Wage Reports
Transposing numbers or underreporting wages, even by small amounts, can trigger audits. The EDD cross-checks payroll reports with other state and federal records, so always double-check wage amounts against payroll records before submitting.
4. Ignoring UI Claim Notices
Failing to respond to unemployment claims (DE 1101CZ forms) within 10 days automatically makes you liable. Always contest invalid claims with documentation.
5. Incorrectly Calculating UI Taxable Wages
The EDD updates UI rates and wage bases annually, and using outdated rates can result in underpayment. Always verify the latest rates before processing payroll.
Pro Tips to Minimize Your Payroll Tax Burden
Paying California payroll tax is unavoidable, but there are steps you can take to stay compliant and manage your obligations efficiently.
For instance, make sure you stay on top of deadlines, particularly when contesting inaccurate unemployment claims. The EDD gives you just 10 days to respond, so prompt action is critical. Maintain detailed records of employee separations to support your case.
You can also structure your payroll strategically. Timing bonuses or adjusting pay frequency (where permitted) may help manage cash flow and tax liabilities without violating compliance rules. Just ensure any changes align with California’s strict payday laws.
If cash flow becomes tight, payroll loans can help ensure employees are paid on time while avoiding late tax penalties. However, it’s essential to compare options carefully and use them as a short-term solution rather than a recurring fix.
Finally, consider consulting a payroll tax specialist. They can help you take advantage of potential savings while avoiding costly missteps that trigger audits or penalties.
How Payroll Compliance Earns You Lower Tax Rates
A strong compliance record with the EDD can lead to lower California payroll tax rates over time. Their system rewards businesses that avoid excessive layoffs, successfully dispute invalid unemployment claims, and consistently meet tax deadlines.
Keeping a stable workforce and maintaining proper documentation helps prevent rate increases tied to unemployment claims. By staying proactive with payroll compliance, you can reduce long-term costs and keep your business in good standing.