California is one of America's most populated states, hosting a share of 39 Million people as of 2023.
So it only makes sense that California would also have what is considered to be among the country's biggest economies - a sprawling biome that comprises everything from hospitality and tourism services to manufacturing and sea trade.
While the California economy boasts thousands of industries and roles available to interested and qualified candidates one thing remains consistent: tax deductions. There's the mandatory kind required by state and federal employment laws, and post-tax deductions, which can vary significantly from employer to employer.
In a bid to help you simplify the burden that is taxed, we've broken down what you need to know about post-tax deduction law in California, with details on state income tax to federal income taxes and beyond. Keep reading to learn what you should know before paying one of the state's 18.4 Million talented workers.
What Is a Post-Tax Deduction?
Post-income tax deductions are payments that come out of an employee's paycheck after taxes have been taken out. These deductions can be voluntary or mandatory and include items such as retirement contributions, health insurance premiums, union dues, etc.
Post-tax deductions are important for both employers and employees. Employers benefit from having their employees take on additional expenses, such as health insurance premiums or retirement contributions, that would otherwise be paid out of the company’s pocket.
Post-tax deductions also give employees the ability to save for their future and be rewarded with additional benefits through a voluntary deduction.
While agreeing to a post-tax deduction for additional benefits doesn't necessarily reduce the total amount an employee would pay for them, it at least breaks up the payments into smaller, more manageable chunks.
California state offers tax deductions and credits to reduce your tax liability, including a standard deduction, itemized deduction, the earned income tax credit, child and dependent care credit and college access tax credit.
It is important to note that not all post-tax deductions are voluntary; some employers require them as a condition of employment. For instance, many employers require employees to make contributions to a retirement plan or pay into a health insurance plan as part of their contract and NDA with the company.
What's the Difference Between Post-Tax Deductions and Pre-Tax Deductions?
Post-tax deductions and pre-tax deductions both exist to cover the costs of certain expenses throughout the year. The main difference between the two is when they're taken. As we've already pointed out, post-tax deductions come off an employee's paycheck after the fact.
Discretionary and case-by-case, payments to extra programs and benefits like health insurance and life insurance come entirely out of workers' own pocket, or net pay.
Pre-tax deductions, on the other hand, are taken directly from an employee's gross California taxable income — before anything else. They're issued on a percentage basis, meaning the higher the total wages, the larger the contribution.
Putting government-mandated taxes after benefit premiums would reduce the amount of money flowing into public programs or require state income tax rates to be much higher.
What are Post-Tax Deductions For?
No one in their right mind likes taxes - so why would employees opt for anything outside of what's required by law?
Post-tax deductions are actually very popular, in part because they provide an effective way for employees to get more of the essential services they need with less of an upfront, burdensome cost. Regular monthly payments for things like life insurance are factored in automatically, giving recipients the peace of mind that their coverage is taken care of.
Post-tax retirement contributions are a similarly convenient and valuable opportunity to do something about the future with little effort today.
Employers can offer retirement benefits such as 401(k)s and IRAs that allow employees to save for the future on an incremental basis. In many cases, these plans offer matching contributions that are paid out after taxes, allowing employees to supplement their savings with a bonus from the company.
Plus, there's just the satisfaction of knowing that the number you see on the bottom of your paycheck each pay period is what you actually get to take home; with everything already accounted for, workers don't need to worry about how they'll divide their income.
California State Tax Withholding Requirements
Now, let's focus on California taxes!
Virtually every working individual who receives a regular paycheck in the State of California is subject to California state income tax withholding laws. These establish the different contributions that employees must make to the government per pay cycle to support essential public services and programs.
It's important to differentiate mandatory tax deductions from post-tax deductions, which workers generally get a say over. California's withholding requirements for state income taxes must be factored into payroll; companies that fail to properly deduct their employees' taxable wages face potential repercussions from the Franchise Tax Board (FTB).
California State Disability Insurance (SDI)
California's State Disability Insurance (SDI) program was established to provide short-term disability benefits to eligible workers who are unable to work due to a non-work-related illness, injury, or pregnancy. SDI also offers family temporary disability leave (FTDL) insurance for parents taking time off from work in order to care for a seriously ill child.
SDI offers partial wage replacement and can be used in combination with other benefits such as workers' compensation, unemployment insurance, and Social Security Disability Insurance (SSDI). The program is funded in part by the state budget, however, employees must also pay into the system through payroll deductions.
SDI tax rates change from year to year. In 2023, the government set it at 0.9 percent of gross earnings with a taxable wage limit of $153,164 and a maximum withholding amount of $1,378.48 for each employee per calendar year.
California Personal Income Tax (PIT)
California's Personal Income Tax (PIT) is just like income taxes in other states. It is a progressive tax, meaning the more you earn, the higher percentage of your income will be taxed.
California PIT applies to all sources of taxable income, with wages being one of the most common sources. Employees graduate to new tax brackets based on their income level, residency, and filing status.
There are currently nine income tax brackets in California. These are:
- Tax rate of 1% for earnings between $0 and $10,099.
- Tax rate of 2% for earnings between $10,100 and $23,942.
- Tax rate of 4% for earnings between $23,943 and $37,788.
- Tax rate of 6% for earnings between $37,789 and $52,455.
- Tax rate of 8% for earnings between $52,456 and $66,295.
- Tax rate of 9.3% for earnings between $66,296 and $338,639.
- Tax rate of 10.3% for earnings between $338,640 and $406,364.
- Tax rate of 11.3% for earnings between $406,365 and $677,275.
- Tax rate of 12.3% for earnings of $677,276 or more.
It's worth noting that federal income tax also usually applies to workers' paychecks in California, and it has a completely different set of rates ranging between 10% and 37%. Tiers differ between single and joint filers, with the top bracket starting at $578,126 for individuals and $693,751 for married couples filing together.
What Payroll Taxes Do Employers Pay In California?
California workers are responsible for paying State Disability Insurance and Personal Income Tax because both programs serve their direct needs as employees.
Should they ever become injured and unable to do their job, for example, the money they put into SDI while working will ultimately come back to them in the form of disability payments from the government.
Businesses are expected to make their own mandatory contributions to government programs as well, albeit slightly different ones that fall under their purview as an employer. These include:
California Unemployment Insurance (UI)
California has an Unemployment Insurance (UI) program operated in conjunction with the U.S. Department of Labor. Funded by employer payroll taxes, it provides benefits to eligible individuals who are out of work through no fault of their own or who meet defined eligibility requirements.
UI benefits are intended to provide short-term financial relief while individuals seek new employment. The program is administered by the Employment Development Department (EDD). Employers are responsible for paying the UI tax on wages paid to employees, meaning it comes from the employer’s pocket, not workers' paychecks.
The UI tax rate is broken up based on how long a company has employed workers in the State of California. New employers are subject to a 3.4 percent contribution on the first $7,000 in wages paid to each employee in a calendar year for a period of two to three years.
For everyone else, the government determines which Schedule of Contribution Rates should be used. UI tax rates vary between 1.5 percent to 6.2 percent within those schedules. As of 2023, the state government uses Schedule F+. Employers can find out how much Unemployment Insurance tax they need to pay by using the UI Rate Search tool.
California Employment Training Tax (ETT)
California's Employment Training Tax, otherwise abbreviated ETT, is a unique initiative designed to support talent development in some of the state's most economically significant industries.
ETT funds are typically collected from employers on an annual basis at a rate of 0.1%. It applies to the first $7,000 in wages earned by each worker per calendar year.
Examples of Common Post-Tax Deductions In California
California's share of common post-tax deductions looks very similar to those of other states. They cover 'nice to have' and circumstance-specific expenses. Employers should know that there are some ground rules, though.
The government recognizes three lawful bases upon which deductions can be made from a worker's pay - anything outside of these is a potential violation of its Labor Code:
1. Deductions required by state or federal law, such as income tax.
2. Deductions for insurance premiums or benefit plan contributions expressly authorized by an employee in writing.
3. Deductions for health, welfare, or pension contributions pre-authorized by a wage or collective bargaining agreement.
With the above terms being clear, let's begin exploring some popular types of post-tax deductions in the State of California:
Health Insurance Premiums
Under a private healthcare system, American citizens face the reality of having to pay medical costs out of pocket should they become sick or need to visit the doctor. Insurance is a big business for its ability to lessen the burden of these expenses, and likewise, a benefit offered by many companies to their employees.
Health insurance premiums are sometimes covered in full by an employer, but a majority of the time, they're taken from a worker's paycheck in the form of a post-tax deduction. This monthly or biweekly payment floats the cost of whatever plan is chosen by the employer and employee.
Retirement Contributions
Retirement is a looming factor for many Americans that's often pushed to the backburner due to its long-term nature. It goes without saying that saving money now can lead to a comfortable life later, and for this reason, many employers offer a 401(k) plan as part of their benefits package.
For those who are unfamiliar, a 401(k) plan is an employer-sponsored retirement savings account. Participants contribute a portion of their paycheck to the account, and depending on their employer’s plan design, they're sometimes offered a matching contribution from the company.
These contributions are then invested in various investments such as stocks, bonds, and mutual funds that have varying levels of risk associated with them.
Payments into retirement funds can be voluntarily made before or after mandatory payroll tax is charged. The State of California has several government plans that allow either arrangement, such as Savings Plus and the 457 Plan.
Group-Term Life Insurance
Another popular supplemental employment benefit, group-term life insurance is a type of life insurance policy purchased by employers to provide coverage for their employees in the event of death. With group-term life, an employer pays a predetermined premium and then distributes the benefits among its insured employees. Some companies choose to pass the cost onto staff with a post-tax payroll deduction.
Similarly to health insurance, group-term life insurance payroll deductions effectively give workers a way of “pre-paying” for the benefits they're automatically entitled to using. The proportion of the premium they cover can range from zero to 100 percent, with many employers opting to split it 50/50.
Participation in additional benefits plans may be required by some employers, meaning staff don't have the choice of opting out of regular deductions. They're lawful so long as the terms are spelled out and agreed upon in writing.
Special Cases
In very rare cases, a business might have the grounds to deduct funds from workers' pay for unprovisioned reasons. Cash shortages, breakages, and equipment loss are all recognized as discretionary deductions that employers are allowed to take out if they have contractual grounds for doing so.
These deductions are, however, extremely rare and subject to very strict regulations under Industrial Welfare Commission Orders. Employers must be able to prove the necessity of such a deduction in order for it to be deemed lawful.
The courts aren't necessarily on their side, though; California judges have made several decisions that significantly impede businesses' capacity to offset staff wages over the years, including Kerr's Catering v. Department of Industrial Relations (1962), Barnhill v. Sanders (1981), and Hudgins v. Nieman Marcus (1995). Employers who find themselves in such a predicament are highly encouraged to consult a lawyer before actively their employees' pay.
Illegal Post-Tax Deductions In California
So, what doesn't count as a post-tax deduction in California? The Department of Industrial Relations' website highlights quite a few, including:
- Gratuities
- Photographs
- Bond
- Uniforms
- Business Expenses
- Medical or Physical Examinations
The Golden State's golden rule on all of this is that deductions must have been pre-agreed to by an employee in some way and meaningful to their employment. Deductions can't be used by businesses as a means of writing off regular expenses to staff.
In Closing
Post-tax deductions are far from simple, with every state, country, and region around the world having its own unique set of rules and regulations governing when and how much is deducted. California is no exception, so if you're an employer planning to hire a worker in the state, you will need to understand the specifics of post-tax deductions as outlined by law to ensure your payroll remains compliant. Failure to do so can result in monetary penalties or even jail time.
With this article serving as your guide - and Borderless by your side - there's no stopping you from finding the best talent in the Golden State and beyond.
Looking to hire in the United States? Read our hiring guide.
Disclaimer: Borderless does not provide legal services or legal advice to anyone. This includes customers, contractors, employees, partners, and the general public. We are not lawyers or paralegals. Please read our full disclaimer here.
