How do I set up payroll to correctly withhold state income taxes and other required deductions for a California employee?

To correctly set up payroll in California, you must register as an employer with the Employment Development Department (EDD) and use the employee's state tax form (DE 4) to calculate and remit required withholdings. Here are the steps to ensure you comply with state law: Step 1: Register as an Employer with the EDD You must register for a state employer account number (SEIN) with the EDD within 15 days of paying more than $100 in wages to an employee. You can register online using the EDD's e-Services for Business portal. This number is required for reporting and paying state payroll taxes. Step 2: Collect Employee Withholding Information Have your new employee complete and sign a federal Form W-4 and a California Employee's Withholding Allowance Certificate (Form DE 4). The DE 4 provides the information needed to calculate the correct amount of California Personal Income Tax (PIT) to withhold from their wages. Step 3: Calculate State Withholdings and Deductions For each payroll period, you must calculate and withhold: - California Personal Income Tax (PIT): Use the withholding schedules found in the EDD's "California Employer's Guide" (DE 44) based on the employee's Form DE 4 allowances. - State Disability Insurance (SDI): This is a mandatory deduction from the employee's wages. The rate is set by the state annually. Step 4: Deposit and Report Payroll Taxes You must deposit the withheld PIT and SDI funds with the EDD according to your assigned deposit schedule (e.g., monthly or quarterly). You must also file quarterly payroll tax returns (Form DE 9) and a reconciliation report (Form DE 9C) with the EDD. These actions are typically done through the e-Services for Business portal. Step 5: Provide an Itemized Wage Statement With every payment of wages, you must provide the employee with an itemized wage statement (pay stub) that complies with California Labor Code Section 226(a). This statement must show gross wages, total hours worked (for non-exempt employees), all deductions, net wages, pay period dates, and your business's name and address. Important considerations: In addition to PIT and SDI, you are responsible for paying employer-funded taxes, including Unemployment Insurance (UI) and Employment Training Tax (ETT). These are not deducted from employee wages but are calculated and paid by you. Using a reputable payroll service can simplify these calculations and ensure timely payments. Note: Failure to withhold and remit payroll taxes correctly can result in significant penalties and interest charges. Misclassifying an employee as an independent contractor to avoid these obligations is illegal and carries severe consequences. This is general information and does not constitute legal advice. For complex situations, consult with a qualified California attorney.