How to Do Payroll in California Step by Step

Payroll processing for businesses in California involves navigating a distinct set of regulations that go beyond federal requirements. Adhering to these state laws is fundamental for compliance and avoiding penalties. California’s detailed payroll landscape necessitates careful attention to initial setup, employee information gathering, ongoing calculations, payments, and tax reporting.

Gathering Essential Information

Before processing payroll, businesses must secure identification numbers and gather employee details. An Employer Identification Number (EIN) from the IRS is a federal step, essential for tax reporting. Businesses must also register with the California Employment Development Department (EDD) to acquire a state employer account number. This registration is mandatory if wages exceed $100 in a calendar quarter, or $750 for household employers. The EDD account is necessary for state payroll taxes: Unemployment Insurance (UI), State Disability Insurance (SDI), Employment Training Tax (ETT), and Personal Income Tax (PIT).

Collect comprehensive employee information, including the federal Form W-4, which guides federal income tax withholding. In California, the state-specific Form DE 4 is used to determine state income tax withholding. Employers must also complete Form I-9, Employment Eligibility Verification, to confirm an employee’s legal authorization to work in the United States, requiring proper identification. Essential personal details, such as full name, current address, Social Security Number, and bank account information for direct deposit, are vital for accurate payroll processing.

Establishing a consistent pay frequency, such as weekly, bi-weekly, semi-monthly, or monthly, is necessary, as California law generally mandates payment at least twice per month. Maintaining organized record-keeping systems for all payroll data is important. This includes timekeeping records, wage rates, deductions, and payment dates. Proper records are critical for compliance and fulfilling reporting obligations to both federal and state agencies.

Understanding California-Specific Payroll Calculations

Calculating payroll in California requires understanding the state’s wage and hour laws, which often exceed federal standards. Gross pay determination begins with adherence to California’s minimum wage, $16.50 per hour as of January 1, 2025, with certain cities and industries having higher rates. Overtime rules are expansive, requiring time-and-a-half for hours worked beyond eight in a workday or 40 in a workweek, and for the first eight hours on the seventh consecutive day of work. Double-time pay applies for hours exceeding 12 in a day or eight hours on the seventh consecutive workday.

Meal and rest break compliance is important; non-exempt employees are generally entitled to an unpaid 30-minute meal break for shifts over five hours and a paid 10-minute rest break for every four hours worked. Failure to provide these can result in an additional hour of pay at the employee’s regular rate for each missed break. Commissions, bonuses, and other supplemental wages must be included in the regular rate of pay for overtime calculations.

California state tax withholding includes Personal Income Tax (PIT) withheld from employee wages based on the DE 4 form. State Disability Insurance (SDI) and Paid Family Leave (PFL) are employee-paid contributions, with a combined rate of 1.2% of wages as of 2025. Unemployment Insurance (UI) and Employment Training Tax (ETT) are employer-paid contributions, with rates assigned by the EDD.

Mandatory deductions include wage garnishments, which are legal requirements to withhold funds from an employee’s pay for obligations such as child support, tax levies, or court-ordered debts. California law generally limits garnishments to the lesser of 25% of disposable earnings or a percentage based on the minimum wage. California’s mandatory sick leave law requires employers to provide at least 40 hours or five days of paid sick leave annually, accruing at one hour for every 30 hours worked. Voluntary deductions, such as health insurance premiums or 401(k) contributions, are also processed, with their tax implications depending on whether they are pre-tax or post-tax.

Processing Each Payroll Cycle

Executing each payroll cycle involves accurate calculation of gross pay for the current period. This requires applying established wage rates, accounting for all hours worked, and correctly calculating any overtime hours based on California’s daily and weekly thresholds. All forms of compensation, including commissions or bonuses, must be included to determine total earnings before deductions.

Once gross pay is determined, apply all necessary deductions in the correct order. This sequence starts with pre-tax deductions, such as health insurance premiums or retirement contributions, which reduce the employee’s taxable income. Subsequently, federal and state taxes, including federal income tax, Social Security, Medicare, California PIT, SDI, and PFL, are calculated and withheld. Following these, any post-tax deductions, like garnishments or voluntary contributions, are applied.

After all deductions, the net pay is calculated. Generating detailed pay stubs or wage statements is a compliance requirement in California. These statements must itemize information, including the employer’s and employee’s names and addresses, the last four digits of the employee’s Social Security Number or employee ID, total gross and net wages, pay period dates, all deductions, total hours worked (unless exempt), and applicable hourly rates.

Issuing payments to employees can be done through direct deposit or traditional paper checks. California law mandates specific pay frequencies, with most employees needing to be paid at least twice per month on predetermined regular paydays. Wages earned between the 1st and 15th of the month must be paid by the 26th of that month, while wages earned from the 16th to the last day must be paid by the 10th of the following month. Maintaining accurate payroll records for each cycle, including hours, wages, and deductions, is important for ongoing compliance.

Meeting Tax Deposit and Reporting Requirements

After processing payroll, businesses must fulfill tax deposit and reporting obligations to federal and California state agencies. Federal tax deposits, including federal income tax withholding and FICA taxes, are typically made via the Electronic Federal Tax Payment System (EFTPS). Deposit schedules can be daily, monthly, or semi-weekly, determined by the business’s total tax liability.

California state tax deposits for PIT, SDI, UI, and ETT are remitted to the EDD. The EDD offers an online e-Pay system for electronic payments, and deposit schedules are also determined by the amount of tax liability, often aligning with federal schedules or following state-mandated due dates.

Quarterly, businesses file Federal Form 941, the Employer’s Quarterly Federal Tax Return, to report wages paid and taxes withheld. Concurrently, California employers submit Form DE 9, the Quarterly Contribution Return, and Form DE 9C, the Quarterly Contribution Return and Report of Wages, to the EDD, detailing state payroll taxes and employee wages.

Annually, Federal Forms W-2, Wage and Tax Statement, are provided to employees and submitted to the Social Security Administration, summarizing annual wages and withheld taxes. Form W-3, Transmittal of Wage and Tax Statements, accompanies the W-2s. Federal Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, reports the annual FUTA tax liability. For California, employers file Form DE 7, the Annual Reconciliation Statement, with the EDD, reconciling quarterly reports and summarizing annual wages and contributions. If independent contractors were paid $600 or more during the year, Form 1099-NEC, Nonemployee Compensation, must be issued and filed with the IRS.