California Employer Compliance and Payroll Tax Guide

Overview

This episode provides a comprehensive guide to California's complex payroll tax compliance requirements and employment law obligations, drawing primarily from the 2022 California Employers Guide from the Employment Development Department (EDD). The discussion connects procedural compliance with risk management, demonstrating how meticulous handling of routine administrative tasks serves as a critical defense against catastrophic private enforcement lawsuits under the Private Attorneys General Act (PAGA).

Learning Objectives

After completing this episode, participants will be able to:

1. Identify the four core state payroll taxes (UI, ETT, SDI, PIT) and distinguish which are employer-funded versus employee-funded through withholding
2. Apply the strict three-part ABC test to worker classification decisions and recognize how classification errors trigger cascading labor code violations
3. Navigate mandatory digital filing requirements through the e-Services for Business portal and understand penalty structures for non-compliance
4. Calculate proper deposit frequencies for SDI and PIT withholdings based on accumulation thresholds ($350 monthly, $500 semi-weekly)
5. Execute the two-part adjustment process using the DE9ADJ form to correct wage reporting errors on the DE9C
6. Implement timely responses to EDD claim notices (DE1101CZ) to protect the company's UI reserve account and experience rating
7. Evaluate the financial risks associated with PAGA litigation and understand the economics of average settlements
8. Recognize how procedural compliance failures, including minor pay stub errors, create exponential liability exposure

Key Takeaways

1. Registration threshold is minuscule: Must register with EDD within 15 days of paying $100+ in wages in any quarter

1. Four core taxes have distinct structures: UI/ETT capped at $7,000 per employee (employer-paid); SDI capped at $145,600 (employee withholding at 1.1%); PIT has no cap

1. ABC test is rigorous and unforgiving: Must prove ALL three criteria (freedom from control, work outside usual business, independent establishment) or worker is legally an employee

1. Digital mandate is absolute: Paper filing triggers automatic $50 penalty; all returns, wage reports, and deposits must be electronic

1. Deposit penalties are brutal: 15% penalty plus interest for late SDI/PIT deposits, with frequency determined by accumulation thresholds

1. Independent contractor reporting is immediate: DE542 must be filed within 20 days of contract signing or $600 payment, whichever comes first

1. Wage reporting errors compound quickly: $20 penalty per employee for incorrect/missing SSN or wage data on DE9C

1. UI rate management requires active defense: Must respond to EDD claim notices within ~10 days or waive right to contest charges against reserve account

1. PAGA economics are devastating: Average settlements of $866,134 nationally ($1M+ in LA County), with ~33% to attorneys, minimal amounts to affected employees

1. Minor errors create massive exposure: Technical violations like pay stub typos multiply across pay periods and employees, creating multi-million dollar liability under PAGA

1. Misclassification is a cascade multiplier: One ABC test failure guarantees dozens of continuous violations (overtime, meal breaks, wage statements)

1. Procedural perfection is financial survival: Compliance isn't administrative—it's the primary defense against seven-figure private enforcement lawsuits