How to Run Payroll in California: A Guide for Foreign Employers

California is the only U.S. state that runs four separate employer tax accounts simultaneously, federal FICA, federal unemployment, California unemployment insurance (UI), and California State Disability Insurance (SDI), while also imposing a mandatory expense reimbursement statute, daily overtime rules, and one of the strictest pay stub laws in the country.

Getting any one of these wrong generates statutory penalties that run per pay period, per employee, from the first violation. This guide is written for payroll and finance teams at foreign companies that are already employing workers in California, or are about to.

What this guide covers:

• California payroll setup: accounts, registrations, and agencies
• Employer and employee payroll tax rates for 2026
• California income tax withholding and brackets
• The recurring payroll filing cycle and annual deadlines
• California pay stub requirements and statutory penalties
• Additional obligations: expense reimbursement, year-end filings, and local variations

California Payroll at a Glance

The table below is your fast reference. Every figure matches the detailed sections that follow.

The California minimum wage is $16.90 per hour for all employers as of January 1, 2026. Some cities and counties in California have a local minimum wage that is higher than the state rate. Understanding how these rates stack up matters before your first paycheck: see the total cost of hiring in California for a budget-level view of what these combined employer obligations mean for your headcount spend.

How to Set Up Payroll in California

Every step below creates a live account or a legal standing you cannot payroll without.

1. Establish your legal basis for employing in California. A foreign company must either incorporate or register a legal entity in California (typically as a foreign corporation or LLC with the California Secretary of State), or engage workers through an employer of record in California, a structure in which a third party holds the employment liability and runs payroll as the registered employer. Without one of these two paths, you have no legal standing to employ workers in the state.
2. Obtain a federal Employer Identification Number (EIN) from the IRS. The EIN is the tax account number that anchors every federal payroll filing, Form 941, Form 940, and W-2 issuance all require it. Foreign entities can apply directly via the IRS EIN online application or Form SS-4 by fax.
3. Register for California payroll taxes with the Employment Development Department (EDD). The EDD (California's combined workforce and payroll tax agency) requires registration once you pay wages exceeding $100 in a calendar quarter. Registration opens accounts for all four California payroll tax programs: UI, ETT, SDI withholding, and Personal Income Tax (PIT) withholding. You register online through e-Services for Business.
4. Note the new-employer California UI rate. New employers are assigned a 3.4 percent UI tax rate for a period of two to three years, depending on when they meet the criteria under section 982(b) of the California Unemployment Insurance Code. This rate applies on the first $7,000 of wages per employee per year. Being aware of this upfront is important for managing global payroll budgets that span multiple jurisdictions.
5. Obtain workers' compensation coverage. California requires workers' compensation insurance from the first employee, with no size exemption. You may purchase coverage from a private carrier or the State Compensation Insurance Fund (SCIF). Rates vary by industry class code and your claims history.
6. Set the pay schedule to comply with California's pay-frequency rules. California Labor Code §204 (a statute that sets minimum pay frequency requirements) requires most employees to be paid at least twice per calendar month, on predetermined paydays. Wages earned between the 1st and the 15th must be paid by the 26th; wages earned between the 16th and the end of the month must be paid by the 10th of the following month. Overtime worked in a given week must be paid no later than the payday for the next regular payroll period.
7. Check for applicable local payroll taxes or minimum wages. California does not have a personal local income tax. Some cities and counties in California have a local minimum wage that is higher than the state rate. Employers must apply whichever rate is highest for the jurisdiction where the work is performed.
8. Register for new-hire reporting with the EDD's New Employee Registry. Employers must report all newly hired or rehired employees to the New Employee Registry (NER) within 20 days of their start date. The EDD may assess a fee of $24 for each failure to report the required new employee information ($490 for intentional disregard).
9. Establish the payment rail. Federal taxes must be deposited electronically via the Electronic Federal Tax Payment System (EFTPS). California taxes must be remitted electronically through EDD e-Services for Business. Employers are required to electronically submit employment tax returns, wage reports, and payroll tax deposits to the Employment Development Department.

Employer and Employee Payroll Taxes in California

California's payroll tax structure runs on two parallel tracks: federal obligations under the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA), and four state programs administered by the EDD. Both tracks are mandatory and calculated independently.

Employer Taxes and Contributions

For 2026, the Social Security taxable wage base increased to $184,500. The Social Security withholding rate remains at 6.2%, up to the maximum taxable amount.

Regarding FUTA: normally, California employers receive a 5.4% state tax credit against the gross 6.0% federal rate, producing a net FUTA rate of 0.6% on the first $7,000 per employee. California has an outstanding federal loan balance, which means employers will have to pay a higher FUTA tax.

The credit was reduced by 1.2 percent to a 4.2 percent credit for the 2025 tax year, and the EDD notes the reduction increases by 0.3% each year until the loan is repaid. Verify your current FUTA effective rate on Form 940 instructions each November when the IRS publishes final credit reduction figures.

The UI rate schedule for 2026 is Schedule F+, which is Schedule F plus a 15 percent emergency surcharge, rounded to the nearest tenth, providing for UI contribution rates from 1.5 percent to 6.2 percent. The taxable wage limit is $7,000 per employee per calendar year. The ETT rate for 2026 is 0.1 percent.

The total employer burden varies for three reasons: your UI rate moves annually based on your claims experience (called experience rating); workers' compensation premiums depend on the class code assigned to each job function; and the FUTA credit reduction means California employers pay a higher effective federal unemployment rate than employers in states that have repaid their federal UI loans.

Companies comparing payroll tax costs globally will find California's combined employer burden sits at the high end of U.S. states.

Employee-Side Taxes and Withholdings

Individuals with earned income of more than $200,000 ($250,000 for married couples filing jointly) pay an additional 0.9 percent in Medicare taxes. The FICA tax rate combining the Social Security tax rate and the 1.45 percent Medicare tax rate remains at 7.65 percent.

For 2026, the SDI withholding rate for employees increases to 1.3 percent (up from 1.2 percent in 2025). Effective January 1, 2024, all wages are subject to SDI contributions with no cap. SDI now applies to the full salary of high earners, which increases the cost for employees in senior roles.

The employer withholds all employee-side taxes from gross pay and remits them to the appropriate agencies; the employee never handles these payments directly.

What Makes Rates Vary in California

Your California UI rate is experience-rated: it starts at 3.4% for new employers and then adjusts annually based on UI benefits charged to your account versus the reserves you have built up. An employer with a history of layoffs can reach the 6.2% top rate; one with stable headcount can fall below 2%.

Workers' compensation rates are determined by class codes, a software engineer carries a different rate than a field technician or a warehouse worker. A tech-industry employer with only professional employees will have a combined state tax burden considerably below a manufacturer with physical roles.

California does not have a personal local income tax, so there are no city- or county-level payroll tax surcharges beyond local minimum wage obligations.

Income Tax Withholding in California

How the Withholding System Works

Every California employee completes two withholding certificates: the federal Form W-4 (which determines federal income tax withholding) and the California Form DE 4 (the Employee's Withholding Allowance Certificate, which determines state PIT withholding). New hires and existing employees making changes to their withholdings must submit both the Form W-4 and the Employee's Withholding Allowance Certificate (DE 4).

If an employee provides no DE 4, the EDD instructs employers to withhold as if the employee is single with zero allowances.

The federal deposit schedule is determined by your lookback period, the 12-month period from July 1 of the second preceding year through June 30 of the prior year. If you reported $50,000 or less in taxes during the lookback period, you're a monthly schedule depositor. Report more than $50,000, and you become a semiweekly depositor.

A special rule overrides both: if you hit $100,000 in payroll taxes on any day, you must deposit by the next day, no matter your regular schedule. New employers with no lookback history default to monthly.

California withholding (SDI and PIT) is remitted through EDD e-Services for Business.

California provides two methods for determining the withholding amount from wages and salaries for state personal income tax: Method A (Wage Bracket Table) and Method B (Exact Calculation), with 2026 withholding schedules published by the EDD. The federal record retention rule requires keeping payroll records for at least four years from the date the tax is due or paid; California's EDD requires payroll tax records to be retained for a minimum of four years as well, though retaining records for six to seven years is common practice given the EDD's audit look-back window.

California State Income Tax Brackets (2025 Tax Year, Filed in 2026)

California has the most progressive income tax of any state, nine brackets running from 1% to 12.3%, plus a 1% mental-health surcharge on income over $1 million that lifts the effective top rate to 13.3%, the highest in the nation.

The brackets below are for single filers. The 9-bracket structure and the rate ladder (1% / 2% / 4% / 6% / 8% / 9.3% / 10.3% / 11.3% / 12.3%) are statutory and do not change year to year. The California Franchise Tax Board (FTB) adjusts bracket dollar thresholds annually for inflation and publishes final numbers each November.

For withholding purposes, the employer applies the current EDD withholding schedule to each employee's annualized wages using Method A or Method B, then divides the annual withholding by the number of pay periods. Federal income tax brackets follow a separate IRS schedule with a 37% federal top marginal rate.

The Payroll Filing Cycle in California

The Recurring Payroll Cycle

Each pay period runs through a fixed sequence. Deviating from the order, depositing taxes before correctly calculating gross pay, creates reconciliation errors that compound across quarters.

1. Calculate gross pay. Include base wages, overtime (1.5x for hours over 8 in a day or 40 in a week; 2x for hours over 12 in a day or any hours on the seventh consecutive day of the workweek, per California Labor Code §510), bonuses, commissions, and any taxable fringe benefits. Expense reimbursements at or below the IRS rate are not wages and are not taxable.
2. Calculate employer taxes per scheme. Apply FICA (Social Security at 6.2% up to $184,500; Medicare at 1.45% uncapped), FUTA at the current effective rate on the first $7,000, California UI at your assigned rate on the first $7,000, and ETT at 0.1% on the first $7,000. These are employer costs, not deducted from employee pay.
3. Withhold employee-side taxes. Deduct FICA employee share (6.2% Social Security, 1.45% Medicare, +0.9% Additional Medicare for wages above $200,000) and California SDI at 1.3% on all wages.
4. Apply income tax withholding. Use the employee's W-4 and the current IRS Publication 15-T withholding tables for federal income tax. Use the employee's DE 4 and the EDD's 2026 withholding schedules for California PIT. The result is the employee's net pay.
5. Issue a compliant pay statement. Under California Labor Code §226, the statement must show gross wages, total hours worked (for non-exempt employees), all deductions itemized separately, net wages, the inclusive pay period dates, the employee's name and last four digits of their Social Security number, and the employer's full legal name and address, plus the accrued paid sick leave balance.
6. Pay the employee on schedule. Wages must be paid in USD on the predetermined payday established under Labor Code §204. Direct deposit requires employee consent; the employer must provide access to the pay statement on or before payday.
7. Deposit federal taxes on your schedule. Monthly depositors must deposit by the 15th of the following month. Semiweekly depositors must deposit by the Wednesday or Friday following the pay date, depending on which day of the week wages were paid. All deposits go through EFTPS.
8. Remit California taxes. Deposit California PIT withholding and SDI via EDD e-Services for Business. UI and ETT are also remitted through the same portal with the quarterly DE 9 return. The remittance frequency mirrors your federal deposit schedule.
9. File quarterly returns. Federal Form 941 (Employer's Quarterly Federal Tax Return) is due by the last day of the month following the end of each quarter (April 30, July 31, October 31, January 31). California's equivalent is the DE 9 (Quarterly Contribution Return) and DE 9C (Quarterly Wage and Withholding Report), due on the same dates.
10. Reconcile annually. Federal Form 940 (FUTA) is due January 31. W-2s must be furnished to employees and filed with the Social Security Administration by January 31. Employers must send Copy A of each W-2 and the W-3 form to the SSA by January 31. ACA reporting (Form 1095-C) is required for employers with 50 or more full-time equivalent employees.

For international context on how these global payroll obligations compare across borders, California's quarterly-plus-annual filing structure is more layered than many single-tier national systems.

Late Filing and Payment Penalties

Missing a deposit date carries immediate financial cost at the federal level. The IRS charges a percentage of the taxes you did not deposit on time, in the right amount, or in the right way. The IRS applies a four-tier structure:

• 2%, deposit is 1-5 calendar days late
• 5%, deposit is 6-15 calendar days late
• 10%, deposit is 16 or more calendar days late, or deposited within 10 days of the first IRS notice
• 15%, amounts still unpaid more than 10 days after an IRS notice demanding immediate payment

The penalty amounts do not add up: if your deposit is more than 15 calendar days late, the charge is 10%, not the 2% and 5% charges combined. On top of the deposit charge, a late payment charge of 0.5% of unpaid tax applies for each month or part of a month the tax remains unpaid, up to a maximum of 25% of the unpaid amount.

On the California side, the EDD imposes a 15% penalty for late UI and ETT contributions, with interest accruing on all delinquent balances. PIT and SDI penalties range from 2% to 10% depending on how late the remittance is. The EDD publishes the current interest rate, which was 7% for the first half of 2026.

The most severe exposure arises from misclassifying employees as independent contractors. The EDD is particularly vigilant about this, and if it determines you have misclassified workers, it can trigger an audit. A worker claiming unemployment or disability benefits can trigger an EDD audit. Back employment taxes, penalties, interest, and potential personal liability for responsible parties all result.

Employers in this situation also face federal Trust Fund Recovery Penalty exposure, which can equal 100% of the unpaid trust fund taxes and be assessed personally against company officers. Understanding hiring options without an entity in California is one way foreign employers legally structure their presence to reduce this exposure from the outset.

For companies also assessing international worker classification across multiple markets, California's strict ABC test for independent contractor status makes it one of the hardest states to use contractors compliantly.

Pay Stub Requirements in California

California has one of the most detailed mandatory pay stub statutes in the United States, and foreign employers routinely underestimate its scope.

Under California Labor Code §226(a), an employer must furnish to each employee at the time of each wage payment an accurate itemized statement in writing showing: (1) gross wages earned, (2) total hours worked, (3) the number of piece-rate units earned and applicable piece rate if paid on a piece-rate basis, (4) all deductions, (5) net wages earned, (6) the inclusive dates of the period for which the employee is paid, (7) the name of the employee and only the last four digits of their Social Security number or an employee identification number, (8) the name and address of the legal entity that is the employer.

Employers must also include available paid sick leave balances on the wage statement or in a separate document provided on the same date, as required under California law. For non-exempt hourly employees, all applicable hourly rates and the corresponding hours worked at each rate must be shown separately.

Electronic pay statements are permitted, but if provided electronically, employees must be able to print the statement easily and the employer must maintain records accessible to them. A copy of the statement and the record of the deductions must be kept on file by the employer for at least three years at the place of employment or at a central location within the State of California.

Federal IRS rules also require payroll records to be retained for at least four years.

The exposure runs per employee, per pay period. For non-compliant wage statements, an employee may recover $50 for the first violation and $100 for each subsequent violation, with total damages capped at $4,000. Employers are also liable for court costs and attorney's fees if the employee brings a civil action to recover these damages.

If an employer fails to provide access to records on request, the employer must provide these records within 21 days or face charges of $750 per employee. These are statutory minimums, not maximums, the employee can also recover actual damages caused by the deficient statement.

For foreign employers running payroll across many jurisdictions, this is one area where the remote employee compliance requirements in California are materially stricter than in most other countries.

Additional Payroll Obligations in California

Expense Reimbursements and Allowances

California Labor Code §2802 requires employers to reimburse their workers for business expenses, including anything spent in the discharge of job duties or to follow the employer's instructions. This is a mandatory statute, an employer cannot waive the obligation by contract. Remote workers are entitled to reimbursement for necessary expenses incurred while working from home, such as internet access and cell phone bills.

For vehicle use, under California Labor Code Section 2802, employers must reimburse employees for all necessary and reasonable work-related expenses including the use of a personal vehicle. California does not set a fixed rate; most employers use the 2026 IRS standard mileage rate of 72.5 cents per mile as a benchmark.

That rate is not a legal ceiling: if an employee's actual vehicle costs exceed the IRS rate, the employer must cover the difference. Reimbursements paid at or below the IRS rate, properly documented, are tax-free to the employee and not treated as wages.

Year-End Payroll Obligations

Year-end triggers several overlapping deadlines:

• W-2 / W-3: Furnish to employees and file with the SSA by January 31.
• Form 940 (FUTA): File with the IRS by January 31; deposit any outstanding FUTA balance.
• California DE 9 / DE 9C reconciliation: The fourth-quarter return, due January 31, reconciles the full-year wage and tax figures against each quarterly return.
• ACA Form 1095-C: Applicable large employers (50 or more full-time equivalent employees) must furnish Form 1095-C to employees by March 3 (if not filed electronically; January 31 if filed electronically) and file copies with the IRS by the same deadline.
• California Earned Income Tax Credit (CalEITC) notice: Employers must provide the CalEITC notice to eligible employees, typically distributed with the first pay period of each year and with the W-2.

For teams coordinating global employee benefits across multiple countries, California's year-end cadence requires planning well in advance of December 31 to ensure data is accurate before the W-2 print run. Payroll errors that carry into year-end require retroactive pay corrections that then must reconcile with already-filed quarterly returns, creating cascading corrections.

Local and Industry Variations

California does not have a personal local income tax, so there are no additional payroll tax withholding accounts to open for employees working in specific cities. Minimum wage compliance does vary by city. Many California cities update wages on July 1 rather than January 1, and cities passed their ordinances at different times, setting their own anniversary dates and using different inflation indices than the state.

Employers must track the specific ordinance for every city or county where employees perform work, not just the employee's home location.

Specific industries carry higher minimum wage floors. Fast food workers at qualifying chains earn a minimum of $20.00 per hour under AB 1228, covering employees at national chains with 60 or more U.S. locations. Healthcare wages vary by employer type under SB 525, with current rates ranging from $18.63 to $24.00 per hour depending on facility category.

Prevailing wage obligations apply to public works contracts under the California Department of Industrial Relations.

How Borderless AI Runs Payroll in California

Borderless AI operates as the registered employer through its own U.S. entity, handling the complete California payroll cycle, gross-to-net calculation applying FICA, California UI, ETT, SDI, and state PIT at every correct rate and wage cap, plus federal and California tax deposits and filings on their statutory deadlines.

Every pay statement issued meets California Labor Code §226 requirements, including itemized deductions, hours and rates for non-exempt workers, and paid sick leave balances.

State law monitoring is built into the platform: minimum wage updates, new SDI rates, and changes to leave mandates take effect automatically without manual configuration. For companies that have established their own California entity and need global payroll processing only, Borderless AI can run the payroll function on top of your existing entity.

For companies without a California entity, the employer of record service covers the full employment lifecycle, from compliant hiring through payroll, filings, and termination, with no entity required on your part.

Book a demo to see how Borderless AI handles California payroll end-to-end, from the first tax calculation to the last filing.

This guide is for general informational purposes only and does not constitute legal, tax, or payroll advice. Payroll regulations in California change frequently, rates, thresholds, and filing requirements are updated at least annually. Verify all figures with the relevant authorities or a qualified payroll professional before processing payroll.

More: California Hiring Guides

This guide is part of our complete California hiring series. Learn more about these topics:

• How to Hire Employees in California Without a Legal Entity
• How to Hire Employees in California Using an Employer of Record
• Best Employer of Record Services in California
• How Much Does It Cost to Hire an Employee in California?

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