Note: The state of California has delayed individual income tax payments due April 15 to Oct. 15 following the disaster declaration issued by the Federal Emergency Management Agency. For more information, click here. 

The only certainties in life are death and taxes, and, in California, the latter comes with a long list of rules and obligations for employers. If you’re running a business with employees in the Golden State, payroll taxes aren’t just a line item on your financial statements — they’re a legal responsibility that requires careful navigation.

From state disability insurance (SDI) contributions to progressive income tax rates, California has one of the most complex payroll tax systems in the country. The amount employers withhold from employee paychecks — and the taxes each business pays — depend on multiple factors, including wages, business structure, and even new laws that quietly take effect, like the SDI tax increase in 2025.

With some of the highest tax rates in the nation and strict reporting requirements, understanding California’s payroll taxes requires a herculean effort. But, luckily, you’ve come to the right place. Whether you're a small business owner or managing a large corporation, this article will break down California’s payroll taxes, their rates, and what they mean for your bottom line. 

California Payroll Taxes in 2025: What Do I Need to Know?

Every paycheck issued in California includes federal tax withholdings. The Federal Insurance Contributions Act (FICA) tax funds Social Security and Medicare, split between employer and employee contributions. Social Security tax, 6.2% (up to the wage base limit), is paid by both employers and employees. Medicare tax, 1.45%, is paid by both employers and employees, with an additional 0.9% surtax for high earners. Additionally, federal income tax is withheld based on an employee’s W-4 form, factoring in income level, filing status, and claimed deductions.

An employer that hires one or more employees and pays wages in excess of $100 in a calendar quarter for services performed in California must register with the California Employment Development Department (EDD) within 15 days. 

Once registered, the EDD will assign the business an employer payroll tax account number. The EDD administers the following California payroll tax programs:

• Personal Income Tax (PIT) Withholding.
• Unemployment Insurance Tax (UI).
• Employment Training Tax (ETT).
• State Disability Insurance Tax (SDI). Note: Paid Family Leave (PFL) is a component of the SDI program.

PIT Withholding

While federal payroll taxes apply nationwide, California’s state income tax is where things get more intricate. The state has a progressive tax system with nine brackets, ranging from 1% to 13.3%, the highest in the nation. On top of that, those earning more than $1 million are subject to an extra 1% tax under the Mental Health Services Act.

Employers must withhold PIT from employee wages, with the EDD overseeing the reporting and collection. To determine withholding amounts, businesses can use:

• Method A (Wage Bracket Table Method): A simplified approach that applies to incomes below $1 million using predefined withholding tables based on filing status and payroll period.
• Method B (Exact Calculation Method): A more detailed method requiring additional computations, often used for employees with variable deductions or earnings.

UI Tax 

Funded entirely by employers, California’s UI tax helps support individuals while they search for new employment, ensuring economic stability for businesses and communities alike. Unlike other payroll taxes, UI tax is not deducted from employees’ wages — the responsibility falls solely on employers. The tax applies to the first $7,000 of each employee’s wages per calendar year, regardless of how much they earn beyond that threshold. For example, if an employee makes $50,000, you’ll still only pay UI tax on the first $7,000.

Who Must Pay UI Tax?

California has a low threshold for UI tax liability — if a business pays more than $100 in wages in a single calendar quarter, it’s required to pay UI tax. This is stricter than federal rules, which don’t mandate UI contributions until a business either:

• Pays at least $1,500 in wages in any quarter or employs at least one person for 20 weeks in a year.
• Agricultural, domestic (in-home), and certain nonprofit employers may have different requirements.

California determines the UI tax rate based on a business’s history:

• New employers typically pay 3.4% on the first $7,000 of wages.
• Experienced employers receive a variable rate between 1.5% and 6.2%, depending on their experience rating — a measure of how many former employees have filed unemployment claims. The experience rating is designed to reward businesses with lower layoffs by reducing their tax rate, while employers with higher turnover may see increased UI tax rates over time.

Quarterly Reporting & Deadlines

UI tax filings are bundled with other California payroll tax reports and are due quarterly:

• Q1 (January to March): Due by April 30
• Q2 (April to June): Due by July 31
• Q3 (July to September): Due by Oct. 31
• Q4 (October to December): Due by Jan. 31

If a deadline falls on a weekend or holiday, it shifts to the next business day. Employers must submit payments using a Payroll Tax Deposit (DE 88) unless they use electronic funds transfer (EFT) or credit card payments through the EDD’s e-Services for Business portal. 

Even if a business hasn’t paid any wages in a quarter, it’s still required to file a Quarterly Contribution Return and Report of Wages (DE 9) and a DE 9C (Continuation). Simply check the "No Payroll" box and submit the reports.

If a business is shutting down operations and no longer expects to pay wages, it must notify the EDD by checking the "Out of Business/Final Report" box on its final DE 9 and DE 9C. The EDD will confirm the account’s closure.

ETT Withholding

Unlike other payroll taxes that fund unemployment benefits, the ETT is an investment in California’s workforce, helping businesses thrive by funding job training programs in key industries. 

The ETT is an employer-paid tax designed to support training programs that enhance the skills of California’s workforce. This tax helps workers gain new skills, stay competitive, and keep California businesses at the cutting edge of innovation.

New employers are automatically subject to ETT in their first year of business. After the first year, businesses will continue paying ETT as long as they maintain a positive UI reserve account balance — essentially demonstrating that the business hasn’t had excessive unemployment claims.

ETT Rate & Taxable Wage Limit

For 2025, the ETT rate remains at 0.1%, applied to the first $7,000 of each employee’s wages per year. This means that for each employee, the maximum ETT contribution per year is just $7. The ETT is designed to provide industry-specific training to strengthen the labor market, help businesses access a better-trained workforce without extra costs, and reduce turnover by equipping employees with valuable skills that improve job retention.

SDI Tax

In California, SDI is designed as a partial wage-replacement insurance plan for eligible California workers. The program is mandated and funded through employee payroll deductions. California’s SDI program provides short-term disability insurance and paid family leave (PFL) wage replacement benefits to eligible workers who need time off work. Employers do not directly fund either SDI or PFL.

For 2025, the SDI withholding rate for employees is 1.2%, compared with 1.1% in 2024. As of Jan. 1, 2024, employees subject to SDI contributions don’t have a taxable wage limit or maximum withholding. The SDI withholding rate is the same for all employees and is calculated annually.

Changes to California’s Labor Laws in 2025

California updated and introduced several labor laws in 2025, introducing key changes that impact wages, worker protections, and employer responsibilities. These updates aim to promote fair treatment, workplace safety, and financial security for employees across the state. Here’s what took effect this year. 

Higher Wages and Fair Pay Protections

• Minimum Wage Increase: As of Jan. 1, 2025, California’s state minimum wage rose to $16.50 per hour for all employers, regardless of size. This also means that exempt employees must earn at least $68,640 annually to remain classified as exempt from overtime.
• Computer Professionals’ Minimum Salary: Those working in computer-related roles under exempt status must now earn at least $56.97 per hour or $118,657.43 annually to maintain their classification.
• Ending Subminimum Wages for Disabled Workers: SB 639, which was originally passed in 2021, fully took effect in 2025. The bill ensures workers with disabilities receive at least the standard minimum wage, reinforcing the state’s commitment to equal pay.

New Rights for Freelancers and Independent Contractors

• Freelancer Protections (SB 988): Independent contractors earning more than $250 per contract must now receive written agreements outlining payment terms, timelines, and service expectations. This law also prohibits retaliation against freelancers who demand timely payment, ensuring gig workers receive fair treatment.

Expanded Paid Leave and Workplace Protections

• Paid Family Leave (AB 2123): Employers can no longer require employees to use their accrued paid time off (PTO) before accessing California’s PFL benefits. This gives workers more flexibility in how they manage their leave when caring for loved ones.
• Sick Leave for Victims of Violence (AB 2499): Employees affected by domestic violence, sexual assault, or other qualifying acts of violence now have enhanced workplace protections, ensuring they can take leave without fear of discrimination or retaliation.

Workplace Safety and Compliance Updates

• Extreme Weather Protections (SB 1105): Farmworkers can now take sick leave during hazardous weather conditions, such as extreme heat, ensuring worker safety in a changing climate.
• Live Event Safety Standards (AB 2738): New pre-show safety and training measures will help protect both employees and audiences at large-scale live events.
• Whistleblower Protections (AB 2299): Employers must now post official whistleblower rights notices developed by the labor commissioner, ensuring workers understand their legal protections against employer retaliation.

Fair Treatment in Hiring and Workplace Policies

• Driver’s License Restrictions (SB 1100): Employers can no longer require a driver’s license unless the job explicitly involves driving. This change aims to reduce hiring discrimination and open job opportunities to a broader workforce.
• Freedom from Employer Political Pressure (SB 399): Employees now have the legal right to refuse attendance at employer meetings where religious or political views are promoted without fear of retaliation.

Legal and Compliance Considerations for Employers

• Private Attorneys General Act (PAGA) Reforms (SB 92, AB 1034, AB 2288): The state has introduced significant reforms to PAGA lawsuits, making it harder for employees to file broad claims unless they have personally experienced specific labor violations. Courts now also have more discretion in limiting cases for manageability purposes.
• Workers’ Compensation Legal Advice Notice (SB 1870): Employers must now inform injured workers about their legal rights, including their ability to consult an attorney for workers’ compensation claims.

These new laws reflect California’s ongoing effort to strengthen worker protections while clarifying employer obligations. Businesses must ensure compliance with updated wage standards, paid leave policies, hiring practices, and workplace safety measures. Meanwhile, employees stand to benefit from increased financial security, stronger legal protections, and improved working conditions.

For employers, proactive compliance is key — reviewing payroll processes, updating handbooks, and ensuring employees’ hours are accurate will help avoid penalties. 

California Overtime Laws in 2025

California has some of the most comprehensive overtime laws in the country, designed to ensure fair compensation for employees who exceed standard working hours. Unlike federal law, which primarily focuses on weekly overtime thresholds, California enforces daily, weekly, and consecutive-day overtime rules. Employers who fail to comply risk significant legal and financial penalties.

When Does Overtime Apply?

In California, overtime pay kicks in under the following conditions:

• Daily Overtime: Employees must be paid 1.5 times their regular hourly rate for hours worked beyond eight in a single workday.
• Weekly Overtime: Any time worked beyond 40 hours in a workweek qualifies for overtime at 1.5 times the regular rate.
• Double Time: Employees who work more than 12 hours in a day must be paid double their regular hourly rate. The same applies to hours worked beyond eight on the seventh consecutive day of a workweek.
• Seventh Consecutive Workday: Employees are entitled to 1.5 times their hourly rate for the first eight hours and double time for any additional hours on this day.

Who Qualifies for Overtime?

Most nonexempt employees are eligible for overtime, but exemptions apply to specific job classifications, including:

• Executive, Administrative, and Professional Employees: Those who meet specific job duty requirements and earn a salary above the state threshold.
• Highly Compensated Employees: Individuals earning well above the minimum salary for exempt status who primarily perform executive, administrative, or professional duties.
• Certain Industries and Alternative Schedules: Employees in industries, such as health care, or those on an approved alternative work schedule (e.g., four 10-hour shifts) may have different overtime rules.

Failure to adhere to California’s overtime laws can lead to severe consequences. Employers must compensate employees for unpaid overtime, often with accrued interest. Some employees may be entitled to additional compensation equal to the amount of unpaid overtime. Additionally, employers may face lawsuits, class actions, or regulatory fines for repeated violations. In extreme cases, noncompliant businesses risk losing their ability to operate in California. Employees who believe they have been denied proper overtime compensation may submit a claim with the California Division of Labor Standards Enforcement (DLSE) or seek legal advice. 

Best Practices to Stay Compliant in California in 2025

From withholding the correct amount of personal income tax to navigating UI and SDI contributions, staying compliant in California isn’t just about avoiding penalties — it’s about ensuring employees are paid accurately and on time.

The key to managing these responsibilities efficiently? A reliable payroll and time tracking system. Automating employee hours, deductions, and tax calculations reduces administrative burden and minimizes errors, giving business owners more time to focus on growth.

If you’re looking for a seamless way to track employee hours and simplify payroll, OnTheClock can help. Download OnTheClock today and experience the benefits of time tracking free for 30 days.