How do I set up payroll for employees?

How to Set Up Payroll for Employees in California

Setting up payroll in California involves several important operational steps to ensure compliance with state and federal requirements. Proper payroll management helps avoid penalties and supports smooth business operations.

Step 1: Register for Employer Accounts

• Obtain an Employer Identification Number (EIN): Register with the IRS to get your federal EIN, which is necessary for payroll tax reporting.
• Register with the California Employment Development Department (EDD): You must register for a payroll tax account to handle state unemployment insurance (UI), employment training tax (ETT), and state disability insurance (SDI) withholding.

Step 2: Classify Your Employees Correctly

Ensure proper classification of workers as employees or independent contractors. Misclassification can lead to compliance issues and penalties. California uses strict criteria for classification, including the ABC test under AB-5 as of 2026.

Step 3: Collect Employee Information and Forms

• Have employees complete Form W-4 for federal tax withholding.
• Have employees complete Form DE 4 for California state tax withholding.
• Collect I-9 forms for employment eligibility verification.

Step 4: Choose a Payroll System

Select a payroll solution that fits your business size and needs. Options include payroll software, online payroll services, or outsourcing to a payroll provider. Automation can reduce errors and streamline tax filings.

Step 5: Calculate Payroll and Deductions

• Calculate gross wages based on hours worked or salary.
• Withhold federal and state income taxes, Social Security, Medicare, UI, SDI, and any other applicable deductions.
• Account for California-specific requirements like paid family leave contributions.

Step 6: Pay Employees and File Payroll Taxes

• Distribute paychecks or direct deposits on your scheduled pay dates.
• Deposit withheld taxes and employer contributions to the IRS and California EDD on time.
• File required payroll tax returns quarterly or annually, including IRS Form 941 and California DE 9/DE 9C.

Step 7: Maintain Payroll Records

Keep accurate payroll records for at least four years as required by California law. This includes wage statements, tax filings, and employee time records. Proper recordkeeping supports compliance and simplifies audits.