Owning and operating a business is both rewarding and time-consuming. This especially rings true when hiring and managing employees. In California, every employee comes with tax obligations. Knowing how to appropriately handle these obligations is an essential piece of being a business owner. If you need assistance managing payroll taxes, you should speak with an experienced Roseville small business tax lawyers. The tax lawyers at the NewPoint Law Group, LLP are available to assist you with your tax needs. We are tireless advocates of client rights and will diligently work with you to achieve your goals.
Types of Employee Payroll Taxes in California
Payroll taxes are taxes paid using employee wages and salaries. These taxes are then used to fund social insurance programs, like Social Security and Medicare. California has four types of state payroll taxes which are governed by the Employment Development Department (EDD). These four payroll taxes are:
- Unemployment Insurance (UI) Tax – California’s unemployment system provides temporary payments to people who are currently unemployed through no fault of their own. The UI Tax is paid by the employer to fund this. Employers must pay a percentage on the first $7,000 paid to each employee in a given calendar year.
- Employment Training Tax (ETT) – The ETT aims to improve the competitiveness of California businesses by funding training programs for employees in specific industries. The ETT is paid by employers and requires employers to pay one-tenth of 0.1 percent on the first $7,000 in wages paid to employees in a calendar year.
- State Disability Insurance (SDI) Tax – The SDI Tax charges taxes to fund provisional benefits paid to workers who possess a disability that is unrelated to work. This tax also funds Paid Family Leave (PFL) benefits. The SDI Tax is paid by employees. Employers must withhold a percentage on the first $114,967 in wages paid to each employee in a calendar year. This is the current tax rate for the year 2018.
- California Personal Income Tax (PIT) – The California PIT program provides funds needed to sustain California public services, like schools, public parks, roads, health, and human services. There is no taxable wage limit for this program. This tax is withheld from the income of California residents and the income that nonresidents derive from California.
What an Employer Should Know about Payroll Taxes
Employers who operate the following kinds of businesses are likely subject to payroll taxes:
- Sole Proprietors
- Nonprofit and Charitable Organizations
- Limited Liability Companies
- Limited Liability Partnerships
- Public entities (state and federal agencies)
- Associations and Trusts
- Joint Ventures
- Indian Tribes
If you pay wages to individuals who work in or around your home, you may be considered a household employer in California. Household employers can include people who hire nannies, cooks, gardeners, or other employees within their household.
In California, a business becomes subject to state payroll taxes once an employer pays wages over $100 to one or more employees. For the purpose of California tax law, wages include: compensation for services performed, cash payments, commissions, bonuses, and the cash value of noncash payments like food or housing for services. Once an employer is subject to employee payroll taxes, they must register with the Employment Development Department within 15 days.
A household employer becomes subject to employee payroll taxes once they pay one or more individuals cash wages of $750 or more in a calendar quarter. Household employees must also register with the EDD within 15 days of becoming subject to employee payroll taxes.
Employers should also know whether a person is an employee or an independent contractor. An employee is identified as a worker who is under the direction and control of the employer, meaning an employer has the power to decide how work will be completed and when. Independent contractors are then individuals who have discretion to complete their work in their own way. The advantage some employers see in classifying an employee as an independent contractor is the ability to avoid withholding and paying employment taxes. This greatly increase the risk for payroll tax audit liability if the employee is erroneously classified.
Consequences of Payroll Tax Errors
Payroll taxes are also known as “trust fund taxes.” The reason for that is because a portion of payroll taxes are withheld from employee paychecks is held in trust for the government until a federal tax deposit is made. The Internal Revenue Service may impose deposit penalties if an employer fails to withhold the appropriate wages for taxes.
Penalties will also apply if taxes are not withheld for social insurance programs. These penalties will likely include the Trust Fund Recovery Penalty. This penalty is levied against those who are responsible for collecting payroll taxes and willfully do not collect payroll taxes. California also imposes liability on officers of a corporation, major stockholders, and individuals responsible for payroll taxes who willfully do not comply with California’s payroll tax laws.
The IRS and EDD are slightly lenient with employers who make unintentional mistakes regarding payroll taxes. However, proving that a mistake was unintentional is not an easy process.
If you are having problems concerning employee payroll taxes, you should speak with an experienced California tax lawyer.
California Employee Payroll Tax Lawyers Ready to Handle Your Tax Problems
If you are a business owner in California and are having employee payroll issues, you should consult with a tax lawyer today. The Roseville and Sacramento tax lawyers at the NewPoint Law Group, LLP are experienced in many facets of tax law. Our lawyers have served the residents of California for years and would be happy to serve you. To schedule your confidential consultation, call us at 800-358-0305.