California payroll taxes: A guide for contractors

Tax obligations follow employees across state lines. Whether or not employees and business owners live in the state is irrelevant; if companies perform work on projects located in California, both employer and employee have California tax obligations.

California payroll tax rates and rules change annually, so there’s a lot to keep track of. And if construction crews move between jobs and states, finance teams have to deal with even more classification and withholding complexity. 

With this guide in hand, construction companies can manage California payroll tax with more confidence. Read on to learn about current employer and employee tax obligations and rates.

What are payroll taxes in California? The 4 core elements

Doing business in California means navigating various state tax initiatives, alongside all standard federal tax rules. Each of these programs applies to wages paid to California residents and nonresidents working in the state.

California payroll tax rates and wage bases vary for each program. The state’s Employment Development Department (EDD) adjusts tax rates periodically, so it’s best to keep up with the latest numbers to prevent compliance issues.

Here’s how much payroll taxes are in California and what each initiative does.

1. Unemployment Insurance (UI)

UI is California’s state unemployment program, and it’s funded by employers. It’s for employees who have been laid off through no fault of their own, providing a financial buffer while they search for new employment.

These taxes come from the employer’s pocket. Employers have a 3.4% tax rate on employee wage amounts for the first two to three years of business, depending on when they pay enough wages to become subject to premiums.

After this initial window, the rate adjusts depending on how much an employer has paid in UI benefits. To determine these rates, the EDD maintains a record called a UI reserve account that outlines benefit charges and credits. Established employers typically have UI tax rates between 1.5% and 6.2%. 

The taxable wage limit for UI is $7,000 per employee per year.

2. Employment Training Tax (ETT)

ETT is an employer-covered tax that funds job training programs. The goal is to foster a strong labor market and make businesses operating in California more competitive.

Employers pay ETT, and the EDD sets rates based on UI reserve accounts. If businesses have paid out more in unemployment claims than they’ve contributed to UI, their balance percentage goes up. Companies with a reserve account balance of zero or greater pay a rate of 0.1% of employee wage amounts. Employers with a negative balance don’t have to pay ETT at all.

Like UI, the taxable wage limit for ETT is $7,000 per employee.

3. State Disability Insurance (SDI)

SDI provides temporary benefits to those who can’t work due to pregnancy, illness, or injury not related to the job. Workplace injuries don’t qualify; that’s what workers’ compensation insurance is for.

This tax also funds paid family leave benefits. These are for people who can’t work because they’re taking care of sick family members or new infants. Employees may also qualify if their family member is on a military deployment.

The SDI rate for 2026 is a blanket 1.3% withheld from employees’ paychecks, with no taxable wage limit.

4. Personal Income Tax (PIT)

Like most states, California levies PIT to fund essential public initiatives such as schools, parks, and roads. Employers withhold a certain amount from employee pay based on individual W-4s. 

California has nine state income tax brackets. For 2026, rates range from 1% to 12.3%, with an additional 1% surcharge on income above $1 million. There’s no taxable wage limit.

How to pay payroll taxes in California

While California payroll taxes can be complex, contractors can manage the process by following these steps:

• Register with the EDD: To comply with payroll tax reporting and pay requirements, employers must create an account with the EDD. This must be within 15 days of paying out $100 or more in wages in a quarter.
• Sign up for e-Services for Business program: Employers can register for e-Services for Business to manage their payroll tax account, file and adjust reports, and make payments.
• Calculate and withhold taxes: Using current tax rates and wage limits, contractors calculate how to pay for UI and ETT and how much to withhold from employee’s paychecks for SDI and PIT. They can do this by hand or by using payroll software.
• Submit reports and tax returns: Contractors then submit tax returns plus a variety of reports to stay compliant. This includes the DE 34, DE 542, DE 9, and DE 88.
• Make payments: Employers have several options for remitting taxes. For most contractors, paying online via e-Services for Business is the simplest option. Otherwise, they can use online Express Pay, electronic funds transfer, or credit card.

Common California payroll mistakes and penalties for noncompliance

Noncompliance with California payroll tax laws can lead to expensive fines, accrued interest, and even litigation. With job-based payroll and variable workforces, construction businesses are susceptible to worker misclassification and underreported wages.

Here’s a look at the most common tax mistakes that lead to penalties.

Underpayment and late payment

Paying less than the required amount of UI and ETT contributions or sending them in late results in fines of 15% of the outstanding balance, plus interest.

Electronic payment noncompliance

Employers in California must submit payments electronically. Failing to do so can result in a penalty of 15% of the contributions. Contractors filing with paper forms must request a waiver from the EDD in advance.

Failure-to-file

There are different fines for failing to submit documents on time based on the type. The fine is typically a percentage of the unpaid tax. You can find a list of filing penalties and fees on California’s Franchise Tax Board website.

Misclassification

Misclassifying employees as independent contractors strips them of due benefits. It’s easy to make this mistake for two reasons: 

• The ABC Test: California uses this test to determine worker classification, which is harder to satisfy than federal standards. Workers are presumed employees unless the company can prove otherwise, so the bar for using 1099 labor is higher here than in most states.
• Subcontractor employees: California automatically treats any worker hired through an unlicensed subcontractor as the general contractor’s employee for payroll tax purposes. If a general contractor hires an unlicensed subcontractor, the workers on that subcontractor’s crew can become the general contractor’s tax liability — even if the general contractor didn’t hire them directly. 

Incorrect classification can lead to fines, back pay for unpaid wages, and even lawsuits. Contractors must also be careful to correctly classify worker job types (such as journeyman and tradesman) to prevent back tax liability and audits.

Keep California construction payroll compliant with Miter.

Maintaining compliant payroll in California is complicated. Layer in prevailing wage jobs, union requirements, and other regulations for contractors that work in multiple states, and it’s a recipe for a major headache.

Miter is built for this. Miter Payroll collects and remits all four California payroll taxes, files the required EDD forms, and handles multi-state tax obligations automatically, including employees who work across state lines in the same pay period. When you need to show your work, certified payroll reports, fringe contribution statements, and tax filing records are ready to pull.

Frequently asked questions

What should I look for in payroll software for construction companies?

Look for payroll software designed with California contractors in mind. From prevailing wage reporting to multi-state tax compliance, working in construction comes with complexities other industries don’t have. And tracking state-specific regulations makes the process even more challenging. 

The ideal California payroll software should have:

• Automatic California tax calculating, withholding, and filing
• Access to California compliance experts
• Automated state-specific reports, including California DIR XMLs and eComply CSVs
• Built-in overtime and break compliance monitoring

How do payroll taxes affect job costing?

Payroll taxes, insurance, and benefits add 40–70% to hourly labor costs. Leaving them out of calculations can throw job costing off target by potentially tens of thousands of dollars. Miter automatically incorporates taxes into labor costs, enabling accurate job costing.