Payroll & Tax Compliance: Pointers for Businesses in California

Payroll & Tax Compliance: Pointers for Businesses in California

SmallBizTrends.com says as of 2020, some 4,203, 260 small businesses operate in California. When it comes to state tax legislation, employers must be knowledgeable about payroll and tax compliance.

PCS, which specializes in Professional Services in California and nearby states, advises small business operators to study carefully the state’s tax laws. This is important for employers to avoid any fines and accountabilities.

Payroll Taxes

Payroll taxes refer to duties that federal, state, and local governments collect from companies. These are withheld from employees’ compensation and wages either monthly or bi-weekly. Failure to remit the payroll tax on time can lead to significant penalties.

California State’s Employment Development Department (EDD) oversees California’s payroll taxes.

  • Unemployment Insurance Tax (UI)
  • Employment Training Tax (ETT)
  • State Disability insurance (SDI)
  • California Personal Income Tax (PIT)

All California employers must report information regarding new hires to the California New Employee Registry within 20 days after their first day of reporting for work. This is a prerequisite that must not be overlooked by small enterprises.

Tax Rates

The payroll tax rate is the total of the four individual tax rates. The EDD divides the actual percentage paid by employers and employees.

PAID BY EMPLOYER
PAID BY EMPLOYEE

UI – It is computed as a percentage of the employee’s first $7,000 wage. The employer pays 3.4% from the first to the third year of operations. This increases over time with a ceiling of 6.3%.

SDI – This program supports workers who cannot work for a temporary period. Employees pay this tax. However, employers withhold it from the paycheck of their employees. The tax is at 0.9%.

ETT – Employers are obliged to pay this payroll tax on their first year of operations. However, those with positive reserve accounts continue to pay the UI after the first year. It is also computed based on the employee’s first $7,000 wage. It is only 1% or around $7 for each employee annually.

PIT – Like the SDI, employers withhold this tax from the paychecks of their employees. The tax rate varies. However, the basis is the form DE 4 or Withholding Allowance Certificate that employees fill out. Unlike other taxes, the PIT does not have a maximum amount.

Common Compliance Issues

PCS reminds small business owners to watch out for possible payroll tax compliance problems that may arise.

There is always the probability of late payments. Deadlines or due dates can be a headache. Hence, it is vital to maintain a timetable that highlights these obligations. Failure to pay or remit payroll taxes on time can result in an automatic fine. In addition, improper filing of monthly or quarterly returns may generate additional fees.

Another challenge is the misclassification of employees and contractors. It is also important to understand the correct categorization of workers. Employees are different from contractors. A regular employee is qualified to receive relevant benefits. At the same time, their wages should be reported to the EDD or proper agency.

Data should be accurate. Thus, employers must avoid obsolete tools such as manual spreadsheets in managing payroll information. There is always the likelihood of high margin of error with this approach.

Then, the lack of an efficient audit system for proper controls. Small businesses that fail to comply with local and state laws often discover discrepancies or irregularities once it is too late. On the other hand, companies with processes for compliance are better prepared if an audit is conducted. Hence, they can prevent costly lapses ahead of time.

Consider Outsourcing

Ideally, a small business should outsource its payroll and tax compliance requirements to expert service providers. This will allow them to focus on their core operations and stay away from the tedious procedures involved. PCS is one of the more capable agencies that offer this service and make it easier for small enterprises in California.

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