Hiring Your First Employee in California: Tax Obligations and Forms

Before the First Payroll

Employer Identification Number. A business needs a federal employer identification number (EIN) to report employment taxes.

EDD registration. According to the EDD, a business must register as an employer within 15 days after it hires employees and pays more than $100 in wages in a calendar quarter. Registration is done through EDD’s e-Services for Business, and California requires employment tax returns, wage reports, and payroll tax deposits to be submitted electronically.

Withholding certificates. According to the EDD, new employees should complete both federal Form W-4, for federal income tax withholding, and California Form DE 4, for California personal income tax withholding. If an employee does not provide a properly completed DE 4, the employer must withhold California income tax as if the employee were single and claiming zero withholding allowances.

Employment eligibility. Federal law also requires employers to complete Form I-9 to verify each new employee’s identity and authorization to work in the United States.

Federal Payroll Taxes

Federal income tax withholding is based on the employee’s Form W-4 and the IRS withholding tables.

Social Security and Medicare taxes. For 2026, Social Security tax is 6.2 percent for the employee and 6.2 percent for the employer on wages up to $184,500. Medicare tax is 1.45 percent each for the employee and the employer, with no wage limit. The employer must also withhold an additional 0.9 percent Medicare tax from wages paid to an employee in excess of $200,000 in a calendar year; there is no employer match for that additional tax (IRS Publication 15).

Federal unemployment (FUTA) tax is paid by the employer only. For 2026, the rate is 6.0 percent on the first $7,000 of each employee’s wages. Employers can generally take a credit of up to 5.4 percent for state unemployment taxes paid, for a net rate of 0.6 percent. If the state is a “credit reduction state” because it has not repaid federal unemployment loans, the credit is reduced and employers pay additional FUTA tax for that year.

California Payroll Taxes

The EDD publishes these rates for 2026:

• Unemployment Insurance (UI): paid by the employer on the first $7,000 of each employee’s wages. New employers are assigned a 3.4 percent rate for two to three years. Rates for established employers range from 1.5 to 6.2 percent under the 2026 schedule.
• Employment Training Tax (ETT): paid by the employer at 0.1 percent on the first $7,000 of each employee’s wages.
• State Disability Insurance (SDI): withheld from employees’ wages at 1.3 percent. Since January 1, 2024, all wages are subject to SDI.
• California personal income tax (PIT): withheld from employees’ wages based on the DE 4 and the EDD withholding schedules.

Reporting New Employees

California employers must report new or rehired employees to the New Employee Registry, using the Report of New Employee(s) (DE 34) or e-Services for Business, within 20 days of the employee’s start date.

Deposits

Federal income tax withholding and Social Security and Medicare taxes are deposited electronically on a monthly or semiweekly schedule determined by a lookback period. According to IRS Publication 15, a new employer is a monthly schedule depositor for its first calendar year, and monthly depositors deposit taxes on payments made during a month by the 15th day of the following month. A larger next-day deposit rule applies if $100,000 or more of tax accumulates.

California SDI and PIT withholding are deposited with the EDD on a schedule based on the employer’s federal deposit schedule and the amount of PIT withheld. UI and ETT contributions are due quarterly.

Returns and Annual Forms

Form 941 is filed quarterly, by the last day of the month following the end of the quarter (April 30, July 31, October 31, and January 31). If all taxes for the quarter were deposited on time, the return may be filed by the 10th day of the second month after the quarter ends.

DE 9 and DE 9C. California employers file the Quarterly Contribution Return and Report of Wages (DE 9) and the related continuation report of each employee’s wages (DE 9C) every quarter, even for a quarter in which no wages were paid.

Form 940 reports FUTA tax annually and is generally due January 31.

Forms W-2. By January 31, employers must furnish Form W-2 to each employee and file Copy A of the Forms W-2, with Form W-3, with the Social Security Administration.

Penalties

According to IRS Publication 15, the federal penalty for late deposits is 2 percent for deposits made 1 to 5 days late, 5 percent for 6 to 15 days late, 10 percent for 16 or more days late, and 15 percent for amounts still unpaid more than 10 days after the first IRS notice. The deposit penalties do not apply if the failure was due to reasonable cause and not willful neglect. The EDD charges a 15 percent penalty, plus interest, on late payments, along with separate penalties for late or missing reports.

Employee or Independent Contractor

These obligations apply to employees. Classifying a worker as an independent contractor shifts the tax obligations to the worker, but only if the classification is correct. California applies the “ABC test” to many workers for purposes of the Labor Code, the Unemployment Insurance Code, and wage orders, and misclassification can result in liability for unpaid payroll taxes, penalties, and interest.

The Bottom Line

A first hire brings registration, withholding, deposit, and reporting duties at both the federal and state levels. Many small employers use a payroll provider, but the employer remains responsible for the taxes, so it is worth confirming that registrations, deposits, and filings are actually completed on time.