California payroll taxes: A complete guide for employers

Making your first California hire means taking on a few new payroll responsibilities. On top of the federal taxes you already owe the IRS, you’ll need to navigate the state’s own set of state payroll taxes, including some that you’ll pay as the employer, and others that are withheld from each employee’s paycheck and sent to the Employment Development Department (EDD). Each tax has its own rates, forms, and deadlines.

This guide outlines California’s four payroll taxes as well as the key 2026 rates and limits, so you’ll know what to set up before your first payroll and what to check each year. (If you’re new to payroll taxes, start with this plain-language guide to payroll tax.)

California has four state payroll taxes:

• Unemployment insurance (UI) tax: UI is California’s version of the state unemployment tax (often called SUTA). It funds temporary benefits for people who lose their jobs through no fault of their own.
• Employment training tax (ETT): ETT funds training programs aimed at improving workers’ skills and competitiveness.
• State disability insurance (SDI) tax: SDI funds two state programs: disability insurance, for workers who can’t work because of a non-work-related illness, injury, or pregnancy, and paid family leave, for workers caring for a seriously ill family member or bonding with a new child.
• Personal income tax (PIT) withholding: PIT is California’s income tax, and it applies to residents’ income and to income nonresidents earn in the state.

To manage these taxes, you’ll register your company with the EDD and get one employer payroll tax account number. You’re required to register within 15 days of paying more than $100 in wages in a calendar quarter — a threshold you’ll likely hit with your first payroll.

Your company pays employer payroll taxes (California’s UI and ETT) on top of wages, and you withhold SDI and PIT from employees’ paychecks. In both cases, you send the money to the EDD.

Base your PIT withholding on Form DE 4, California’s Employee’s Withholding Allowance Certificate, which each employee is required to fill out. If you have payroll software, it will do the math for you using the EDD’s tables and formulas.

Don’t forget bonuses, taxable stock options, commissions, and severance. If you pay these supplemental wages on a separate check, you can withhold a flat 10.23% on bonuses and stock options and a flat 6.6% on everything else. If you pay them on the same check as regular wages, add them to regular pay and withhold as usual.

California payroll tax rates and wage limits can change from year to year. Here are the numbers to know for 2026.

UI: 2026 rate and wage limit

New employers pay 3.4% for two to three years. After that, you’ll get an experience-based rate, which depends on the California UI taxes you've paid and the benefits your former employees have claimed. For 2026, UI rates range from 1.5% to 6.2%. The rate only applies to the first $7,000 of each employee's annual wages. At the 6.2% maximum rate, UI tax can reach $434 per employee per year; at the 3.4% new-employer rate, it can reach $238.

To let you know your rate for the upcoming year, the EDD mails you a Notice of Contribution Rates and Statement of UI Reserve Account (DE 2088) every December. You can also find this notice in e-Services for Business, the EDD’s online employer portal.

ETT: 2026 rate and wage limit

The 2026 ETT rate is 0.1% on the same first $7,000 of wages as UI, which works out to a maximum of $7 per employee per year.

Most employers, including new ones, pay ETT — but there are some exceptions. For example, employers with a negative UI reserve account balance generally don’t pay it. You can check your ETT rate on the DE 2088 the EDD sends you each year.

SDI: 2026 rate and wage limit

The 2026 withholding rate is 1.3% of all wages — and California removed the wage limit in 2024, so there’s no annual maximum. For an employee earning $250,000, for example, you’ll withhold $3,250 for California State Disability Insurance tax this year.

PIT: 2026 rates

PIT has no single rate. California has graduated income tax rates (higher levels of income are taxed at higher rates), so withholding depends on each employee’s pay and the information they provide on Form DE 4.

Here's a summary of rates and wage limits for all four taxes, based on the EDD's 2026 California Employer's Guide (DE 44):

Calculating payroll taxes in California follows the same pattern every pay period. The example below uses a new employer that hires an engineer at $120,000 a year, paid semimonthly ($5,000 per paycheck), starting in January.

Step 1: Establish gross pay

Start with the employee’s gross pay for the pay period (in this case, $5,000).

Step 2: Check year-to-date wages against the $7,000 limit

UI and ETT apply only to the first $7,000 an employee earns each year. The first paycheck covers $5,000 of that, so only $2,000 of the second paycheck is taxable for UI and ETT.

Step 3: Calculate UI and ETT on the taxable wages

Multiply the taxable wages by your UI rate (3.4% for new employers) and the 0.1% ETT rate. For the engineer, you’ll pay $170 and $5 on the first paycheck and $68 and $2 on the second, for a total of $245 for the year.

Because the engineer reaches the $7,000 wage limit in January, the full $245 in UI and ETT is calculated on their first two paychecks. After that, you won’t incur any additional UI or ETT for this employee until the wage limit resets the following January.

Step 4: Calculate SDI on all wages

Multiply your employee’s gross pay by 1.3% to calculate SDI withholding: $65 per paycheck, or $1,560 for the year.

Step 5: Calculate PIT withholding

You can use the employee’s Form DE 4 and the EDD’s withholding tables to calculate PIT. But because withholding varies based on each employee’s pay and DE 4 elections, it can get tedious as your team grows. Letting your payroll provider handle it tends to be the easier option.

Step 6: Withhold SDI and PIT from the employee’s paycheck

Deduct the calculated SDI and PTI amounts at the same time as federal income tax, Social Security, and Medicare.

Most California employers file the same core set of forms, which the EDD requires you to file electronically through e-Services for Business or a payroll provider. Here’s what you’ll need to file:

• Report of New Employee(s) (DE 34): A report of each new or rehired employee, due within 20 days of their start date.
• Report of Independent Contractor(s) (DE 542): A report of independent contractors who operate as individuals, sole proprietors, or LLCs, due within 20 days of paying one $600 or more or signing a contract for that amount — whichever comes first.
• Payroll Tax Deposit (DE 88): The payment form you use for UI, ETT, SDI, and PIT.
• Quarterly Contribution Return and Report of Wages (DE 9): A quarterly return that compares the taxes you owed with the deposits you made.
• Quarterly Contribution Return and Report of Wages (DE 9C): A quarterly report of each employee’s wages and PIT withheld.

You need to file the DE 9 and DE 9C every quarter, even if you paid no wages. If you don't file a DE 9C within 15 days of the EDD's written demand, or don't file it electronically when required, you'll owe $20 per employee, plus interest.

Quarterly returns and employer-paid taxes follow the same set of dates, while the taxes you withhold follow a separate deposit schedule. Here’s a look at what to expect:

Quarterly returns, UI, and ETT

Forms DE 9 and DE 9C are due the day after each quarter ends, but the EDD gives you until the end of the following month to file without penalty. UI and ETT payments have the same due date and penalty rules.

For 2026:

SDI and PIT

Your SDI and PIT deposit schedule depends on your federal deposit schedule and how much California PIT you’ve accumulated (withheld but not yet deposited).

It works like this:

Quarterly deposits follow the same dates as quarterly returns. Monthly deposits are due by the 15th of the following month.

Late payments carry a 15% penalty plus interest, so staying on top of deadlines matters. That’s one reason many teams choose to automate payroll. For example, you can connect your payroll provider directly to a Mercury account so it can automatically pull payroll funds when they’re due. And with Mercury’s automatic transfer rules, you can keep a dedicated payroll account funded so the money is there when those payments come out.

You’ll owe California payroll taxes in addition to federal income tax withholding, Social Security and Medicare, and federal unemployment tax (FUTA). Federal and California rules interact in two places:

• Deposit timing: Your federal deposit schedule helps determine your California SDI and PIT deposit schedule, so if your IRS deposit schedule changes, your California schedule may change with it.
• FUTA credit: Because California hasn’t repaid its federal unemployment loan, employers here get a smaller FUTA credit than employers in most states. For 2025, the reduction was 1.2%, raising the effective FUTA rate from the usual 0.6% to 1.8%, or up to $126 per employee per year. The reduction generally grows by 0.3 percentage points for each year the loan stays unpaid.

Watch for these three California-specific mistakes:

Mistake #1: Classifying workers as contractors without applying the ABC test

In most cases, California treats a worker as an employee unless the company can show that the worker is free from its control, does work outside its usual business, and runs an independent business doing that kind of work (the ABC test). Federal classification rules don’t override California’s requirements, and misclassification can mean back taxes, penalties, and interest.

Mistake #2: Capping SDI at an old wage limit

SDI no longer has a wage limit, so make sure you aren’t still applying the pre-2024 cap. If you are, you may need to file corrections.

Mistake #3: Ignoring where remote employees live and work

If a California resident works from another state, you still have to withhold California Personal Income Tax on their wages. If that state also requires withholding, withhold its tax first, then withhold only the amount by which California's tax is higher.

Our small business payroll checklist covers general payroll setup. Run through this California-specific list before your first payroll and again at the start of each year.

• Register with the EDD within 15 days of paying more than $100 in wages in a calendar quarter.
• Report each new hire on the DE 34 within 20 days of their start date.
• Collect a W-4 and a DE 4 from every employee before their first paycheck.
• Confirm your rates each year, using your DE 2088 for UI and ETT and the EDD’s rates page for SDI.
• Set your SDI and PIT deposit schedule based on your federal schedule and accumulated PIT, and recheck it if either changes.
• Pay and file electronically through e-Services for Business or your payroll provider, since paper filings without a waiver can draw penalties.
• File the DE 9 and DE 9C every quarter, including quarters with no wages.

California payroll taxes take time to set up, but most of the work only happens once — registering with the EDD, collecting a DE 4 from each employee, and setting your deposit schedule. After that, your main job is checking your rates each year and filing on time, which a payroll provider can make easier for you.

Mercury helps companies bring banking, cards, and financial workflows into one system. If you’re running payroll in California, learn how to set up payroll directly within Mercury so you can manage the banking side of payroll alongside the rest of your company’s finances.