California Payroll Taxes: A Plain-English Guide for Owners

If you've ever looked at a payroll report and thought "why is this so much more than what my employees take home," you're not alone. Payroll comes with a stack of taxes, some paid by your employees, some paid by you, and some split between both. Here's what each one actually is, who pays it, and when it's due.

The Two Sides of Payroll Tax

Before we get into the list, one thing to understand: payroll taxes fall into two buckets.

Employee-side taxes. These come out of your employee's paycheck. You withhold them, hold onto the money temporarily, and then send it to the IRS or California's EDD on a set schedule. The money was never yours; you're just the middleman.

Employer-side taxes. These come out of your pocket as the business owner. They don't show up on your employee's pay stub. They're an additional cost on top of wages.

Some taxes are employee-only, some are employer-only, and some are split down the middle.

Federal Payroll Taxes

Federal Income Tax Withholding

Who pays: Employee (you withhold it)

Every employee fills out a W-4 when they're hired. That form tells you how much federal income tax to hold back from each paycheck. You don't decide the amount; the W-4 and IRS tax tables do.

You collect it each pay period and deposit it with the IRS on your assigned schedule (monthly or semiweekly, depending on the size of your payroll). This is not your money. If you spend it, you owe it anyway, plus penalties.

Social Security Tax

Who pays: Split 50/50 between employee and employer

The Social Security tax rate is 12.4% total, split evenly: 6.2% withheld from the employee's check, 6.2% paid by the business. It applies to wages up to a cap ($184,500 for 2026). Once an employee earns above the cap, Social Security tax stops for the rest of the year.

Medicare Tax

Who pays: Split 50/50 between employee and employer

Medicare is 2.9% total: 1.45% from the employee, 1.45% from the employer. Unlike Social Security, there's no wage cap; Medicare applies to every dollar.

There's also an Additional Medicare Tax of 0.9% on wages over $200,000 for single filers or $250,000 for married filing jointly. The employer doesn't withhold this automatically; it kicks in once an employee's wages pass $200,000 in the calendar year, regardless of filing status. The employee reconciles any difference on their tax return.

Social Security + Medicare = FICA

You'll often see these two lumped together as "FICA" (Federal Insurance Contributions Act). Combined, that's 7.65% from the employee and 7.65% from the employer on most wages. It adds up fast.

FUTA (Federal Unemployment Tax)

Who pays: Employer only

FUTA funds the federal unemployment system. The rate is 6.0% on the first $7,000 of each employee's wages per year, but most employers get a credit of up to 5.4% for paying state unemployment taxes on time, bringing the effective rate down to 0.6%. Small dollars per employee, but it's still a deposit you need to make.

California Payroll Taxes

This is where it gets layered. California has its own set of payroll taxes on top of everything federal.

California PIT (Personal Income Tax) Withholding

Who pays: Employee (you withhold it)

Same concept as federal income tax withholding, but for California. You use the employee's DE 4 form (California's version of the W-4) and the state tax tables to calculate the amount. Withhold it from each check, deposit it with the EDD.

SDI (State Disability Insurance)

Who pays: Employee only

SDI funds short-term disability and paid family leave benefits for California workers. For 2026, the withholding rate is 1.3% of wages. There is no wage cap for SDI. The business doesn't match this; it comes entirely out of the employee's pay.

UI (Unemployment Insurance)

Who pays: Employer only

California's unemployment insurance tax is paid by the business on the first $7,000 of each employee's wages per year. The rate varies by employer. New employers get a default rate, and it adjusts over time based on your claims history. The EDD assigns your rate and notifies you annually.

ETT (Employment Training Tax)

Who pays: Employer only

ETT funds workforce training programs in California. The rate is 0.1% on the first $7,000 of each employee's wages per year. It's small, but it's another line item on your EDD filings.

The Cheat Sheet

Why This Matters for Cash Flow

When you add it all up, the employer's share alone typically runs 10-15% on top of gross wages, depending on your UI rate and where employees fall on the wage caps. That's before you account for the employee-side money you're holding.

Here's the part that catches business owners off guard: all of this money sits in your bank account between payday and deposit day. It looks like available cash. It's not. It's already owed.

The fix is simple: know what you owe, know when it's due, and don't mix payroll money with operating cash. If you're not sure whether your books are tracking payroll liabilities correctly, that's the first thing to check.