California has four state-level payroll taxes, all administered by the Employment Development Department (EDD). You need to handle all four correctly regardless of whether the cost comes out of your pocket or your employees’ paychecks.

The two employer-paid taxes are Unemployment Insurance (UI) and Employment Training Tax (ETT). UI rates vary based on your experience rating, but new employers typically start at 3.4% on the first $7,000 of each employee’s wages per year. ETT is a flat 0.1% on that same $7,000 wage base. Both come directly out of your pocket as the employer.

The two employee-paid taxes are State Disability Insurance (SDI) and Personal Income Tax (PIT) withholding. You withhold both from employee paychecks. The SDI rate changes annually so check the current year’s rate on the EDD website. PIT withholding depends on each employee’s filing status and allowances claimed on their DE 4 form, which is California’s version of the federal W-4. You’re responsible for withholding the right amounts and sending them to the EDD on time.

On top of state taxes, you still owe federal payroll taxes. Social Security and Medicare (FICA) are split between you and your employees. Federal Unemployment Tax (FUTA) is employer-paid at 6% on the first $7,000 per employee, though most employers get a 5.4% credit for paying state unemployment. That brings the effective FUTA rate down to 0.6%.

To get started, register with the EDD through their e-Services for Business portal. You’ll receive an eight-digit employer account number. You also need a federal EIN from the IRS if you don’t have one already. Both registrations must happen before you run your first payroll.

File quarterly using forms DE 9 and DE 9C. The DE 9 is your quarterly contribution return showing total wages and taxes owed. The DE 9C breaks out wages paid to each individual employee. Both are due by the last day of the month following the end of each quarter. Federal Form 941 follows a similar quarterly schedule.

Deposit schedules depend on your total tax liability. Smaller employers may deposit monthly or quarterly while larger payrolls require more frequent deposits. California requires electronic payments for most employers, and the EDD doesn’t offer much grace on late payments. Penalties and interest start accumulating immediately.

One thing that trips up a lot of trade and construction businesses is worker classification. California’s AB 5 law uses the ABC test to determine whether someone is an employee or an independent contractor. Misclassifying workers as 1099 contractors when they should be W-2 employees means you owe back payroll taxes, penalties, and interest on every dollar you paid them. The EDD audits for this regularly, and construction is one of the industries they scrutinize most.

Workers’ comp insurance is also required for every employee in California. It’s not technically a payroll tax, but it’s tied to your payroll and you need it before hiring anyone. Rates vary by job classification, and construction and trade businesses typically pay higher premiums due to the physical nature of the work.

Getting payroll system setup right from the start prevents compounding problems. Incorrect withholding, missed deposits, and late quarterly filings all generate penalties that add up fast. If you’re unsure about any part of the process, it’s worth getting help before you run your first payroll rather than trying to fix mistakes after the EDD sends you a notice.