Every employer in the State of California is required to pay payroll taxes and file payroll tax returns. A failure to do so, or to do so correctly, can result in serious financial trouble.
All of California’s payroll taxes are collected and administered by the California Employment Development Department, or EDD. It is the responsibility of the EDD to make sure that California employers are paying the correct amount of Unemployment Insurance (UI), State Disability Insurance (SDI), Employment Training Tax (ETT) and personal income withholding tax. To this end, the EDD is also a part of the California Employment Task Force. It is the job of the Task Force to detect, deter, educate, and bring into compliance those employers that are avoiding their employment tax liabilities. Let’s take a closer look at the specific payroll taxes employers are required to pay, as well as their purpose, rates, and the penalties involved if the taxes are not paid promptly.
California Payroll Taxes
There are four different payroll taxes collected in the State of California:
- Unemployment Insurance – Unemployment Insurance, or UI, is an employer funded program that provides short-term payments to workers who lose their jobs. The UI tax rate for new employers is set at 3.4% for the first two or three years but for all other employers it depends on a number of variables and ranges from 5% to 6.2% of an employee’s first $7,000 in wages each year.
- Employment Training Tax – Employment Training Tax, or ETT, is also an employer funded program that provides training to workers in specific California industries. Designed to make those industries more competitive, the ETT tax rate is 0.1%. Employer ETT contributions are based on an employee’s first $7000 in wages each year. Thus, the maximum ETT tax is $7 per employee.
- State Disability Insurance – State disability insurance, or SDI, is an employee funded program the provides short-term payments to workers who have a disability caused by a non-work related incident. It also provides short-term payments to a worker who is caring for seriously ill relative or child. The SDI tax rate is 1% of an employee’s gross income. The taxable wage limit in 2018 is $114,967 for each employee per calendar year. Thus, the tax is capped at $1,149.67 per employee in 2018.
- California Personal Income Tax – California’s Personal Income Tax, or PIT, rates range from 1% to 13.3% of gross income. The tax is used to fund roads, public schools, and infrastructure. Both SDI and PIT are legally considered trust funds which the employer withholds from the wages of employees and holds “in trust” for the state.
Both UI and ETT must be paid to the state quarterly, along with a payroll tax return (DE-9 and DE-9C), no later than the last day of the month following the quarter in question. For example, if the second quarter ends on June 30, a payroll tax return for an employer’s UI and ETT contributions must be filed no later than July 31.
Both SDI and PIT must be paid to the state based on your federal deposit schedule. This is typically on a monthly basis, no later than the 15th day of the month following the month in question. For example, June’s SDI and PIT payments must be made to EDD no later than July 15th. If the 15th of the month falls on a weekend or holiday, the payment is due no later than the following business day.
California Payroll Tax Penalties
California has several penalties that can be imposed when payroll taxes are not paid timely or are underpaid. The specific penalty that’s imposed depends on why the taxes were not paid or were underpaid, whether the non-payment or under payment was intentional or unintentional and whether fraud was involved.
It should be noted that the EDD takes its tax collection responsibilities very seriously. It vigorously investigates all employers who are suspected of underpaying their payroll taxes. It also shares any information it discovers with the IRS. A noncompliant employer may find itself facing two investigations and audits, along with two separate sets of penalties.
In situations where payroll tax payments are paid late, the penalty imposed is 15%. That is a hefty penalty and it can add up very quickly if an employer gets into financial trouble.
When the underpayment or nonpayment of payroll taxes is found to be fraudulent, the EDD penalties jump up to 25%. Of course, an employer who can show that the tax shortfall was an honest mistake can request that any penalties imposed be abated or reduced but the employer must show “reasonable cause” and an absence of willful neglect.
The EDD has been given considerable leeway when it comes to recouping outstanding payroll taxes. Liens can be placed against business assets, both real and personal property. Even bankruptcy will not discharge the debt owed to the state. In the most extreme cases, where tax fraud is involved, an employer may find himself or herself facing jail time.
In the end, California payroll tax liabilities will not simply go away. The government will do whatever needs to be done to get the money that it is owed. Unpaid tax obligations can quickly overwhelm and destroy a business. This is where an experienced California payroll tax attorney, employment tax attorney, or other payroll tax professional can help to make sure any tax assessment against you is valid, assess your available options and guide you through the appeal process. Contact us today for a free and confidential consultation.