Payroll Tax Deductions in California
Payroll tax deductions must be correct – or else you’ll have potential consequences as an employer – and employee.
These taxes are withheld from an employee’s pay and paid by the employer on behalf of the employee.
Payroll taxes include:
- Federal
- State
- Local
- Social Security
- Medicare
The amount of payroll taxes that are withheld from an employee’s pay depends on the employee’s income, the tax rate, and the tax exemptions and deductions claimed by the employee.
Employers (or their payroll service) are responsible for calculating and withholding the appropriate amount of payroll taxes from their employees’ paychecks, as well as for paying the taxes to the appropriate government agencies.
Employees can choose to have additional amounts withheld from their paychecks for taxes or for other purposes, such as retirement savings or health insurance premiums.
Payroll taxes are separate from income taxes, which are taxes that are based on an individual’s income and are paid directly to the government by the individual.
Income taxes are generally calculated and paid annually, while payroll taxes are calculated and paid on a more frequent basis, such as weekly or monthly.
What are the Payroll Taxes in California?
In California, several payroll taxes must be withheld from an employee’s paycheck.
| Tax Deduction Code | Description | Tax Rate |
|---|---|---|
| Fed Withholding | Federal Income Tax | W-4 Rate |
| Fed MED/EE | Medicare | 1.45% |
| Addl Med | Additional Medicare Tax | 0.9% on wages earned in excess of $200,000 |
| Fed OASDI/EE | Social Security | 6.2% on first $168,600 wages earned |
| CA State Dis/EE | CA Short-Term Disability | 1.1% on wages earned |
| CA Vol Dis/EE | Voluntary Short-Term Disability | 0.9% on wages earned |
| CA Withholding | State Income Tax | DE-4 Rate |
These payroll taxes include:
- Federal income tax: This tax is based on the employee’s income and filing status, and the percentage that is withheld depends on the employee’s tax bracket. The current federal income tax rates range from 10% to 37%.
- Social Security tax: This tax is used to fund the Social Security program and is currently set at 6.2% of the employee’s gross wages.
- Medicare tax: This tax is used to fund the Medicare program and is currently set at 1.45% of the employee’s gross wages.
- California state income tax: The state of California imposes a progressive income tax, with rates ranging from 1% to 12.3% (with an additional 1% surcharge for earners over $1 million). The percentage that is withheld depends on the employee’s income and filing status.
- State Disability Insurance (SDI) tax: This tax funds California’s disability insurance program. The current rate is 0.9% for employees, and employers do not contribute to this tax.
2024 UPDATE: The State Disability Insurance Tax (SDI) withholding rate for 2024 is 1.10%, up from 0.90%.
Effective January 1, 2024, Senate Bill 951 removes the taxable wage limit, so all employee wages are subject to the SDI tax. Previously, this employee paid tax had a cap, or limit, per year on the amount withheld from checks.
There are also employer taxes, including:
- Unemployment Insurance (UI) tax: This tax is used to fund the state’s unemployment insurance program and is currently set at 1.5% of the employee’s gross wages, up to a maximum wage base of $17,000.
- Employment Training (ETT) tax: This is an employer-paid tax that was created in order to fund training for employees in targeted industries in order to improve the competitiveness of California companies.
It is important to note that these tax rates are subject to change and may differ for different types of employees or businesses.
What is a FUTA Credit Reduction State?
A state is a credit reduction state if it has taken loans from the federal government to meet its state unemployment benefits liabilities and has not repaid the loans within the allowable time frame. A reduction in the usual credit against the full FUTA tax rate means that employers paying wages subject to unemployment insurance (UI) tax in those states will owe a greater amount of tax.
The FUTA tax levies a federal tax on employers covered by a state’s UI program. The standard FUTA tax rate is 6.0% on the first $7,000 of wages subject to FUTA. The funds from the FUTA tax create the Federal Unemployment Trust Fund, administered by the United States Department of Labor (DOL).
Generally, employers may receive a credit of 5.4% when they file their Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, to result in a net FUTA tax rate of 0.6% (6.0% – 5.4% = 0.6%).
Source: IRS Futa Credit Reduction
As of Nov. 2023, we verified that in California, employers will pay up to $42.00 extra in tax per employee because the State defaulted on their loan to the IRS. You can read more about that here.
It is recommended to consult with a tax professional, a payroll service provider like Pacific Payroll Group, or the California Employment Development Department for the most up-to-date information on payroll taxes in California.
Additional Paycheck Deductions
There are several other types of payroll deductions that employers may withhold from employees’ paychecks, depending on their circumstances and benefit programs. Some common examples of additional payroll deductions include:
- Retirement contributions: Employers may offer retirement plans, such as 401(k) plans, which allow employees to contribute a portion of their income to a tax-advantaged account for retirement savings.
- Calsavers: California’s new mandatory retirement savings program, CalSavers, is another potential paycheck deduction. California Employers can opt out of CalSavers if they already have a retirement plan in place.
- Health insurance premiums: Employers may offer health insurance benefits to employees and require them to contribute a portion of the premium cost.
- Life insurance premiums: Employers may choose to offer life insurance coverage to employees and require them to pay a portion of the premium cost.
- Short-term and long-term disability insurance premiums: Employers may offer disability insurance benefits to employees and require them to contribute a portion of the premium cost.
- Garnishments: If an employee has a court-ordered garnishment for things like child support or tax liens, an employer can be required to deduct a certain amount from their paycheck.
- Union dues: If the employee is a union member, they may be required to pay union dues as a condition of employment.
- Voluntary deductions: Employees may opt to have additional amounts deducted from their paychecks for things like charitable donations, commuter benefits, or other voluntary programs offered by the employer.
If you have questions on any of these, please contact us. You can also book a free 15-minute call for personalized consultation and quotes.
Pacific Payroll Group handles payroll for small and medium-sized businesses in every state. If you are outside of California, please reach out to us for your city and state, and we’re happy to help!
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