Unemployment and Disability Insurance Taxes (FUTA/SUTA/SDI): California
Federal law and guidance on this subject should be reviewed together with this section.
Author: Vicki M. Lambert, The Payroll Advisor
- California uses the Internal Revenue Service's Common Law Test to determine who is an employee for employment tax purposes. However, the ABC Test applies to those employed under Industrial Welfare Commission Wage Orders. See Common Law Test.
- California law defines wages for state unemployment insurance (SUI) purposes as all compensation paid for an employee's personal services, whether paid by check or cash, or the reasonable cash value of noncash payments such as meals and lodging. The method of payment, whether by private agreement, consent or mandate, does not change the taxability of wages paid to employees. Wages are withheld for SUI up to the annual taxable wage base. See SUI Taxable Wages; Taxable Wage Base.
- The SUI tax rates are based on one of seven tax rate schedules established by law. Each employer's SUI rate is calculated annually based on the individual employer's previous experience as reflected by SUI contributions, taxable wages, benefit charges, and prorated charges and credits to their reserve account. This method of determining contribution rates is called experience rating. California employers must also pay the quarterly Employment Training Tax at a percentage of employees' UI taxable wages to fund the training of workers in targeted industries. See Contribution Rates; Experience Rating Method.
- California was one of the first states to enact legislation as a result of the federal SUTA Dumping Prevention Act. The California law requires employers that are caught illegally lowering their UI rates to pay at the highest rate provided by law plus an additional 2%. It also provides for a substantial penalty. See SUTA Dumping.
- In years when certain contribution rate schedules are in effect, eligible employers may voluntarily pay an additional UI contribution to obtain a lower rate. Whenever there is a change in the employer's legal entity or when two or more related businesses have a common ownership and purpose, the Employment Development Department (EDD) must determine if the new legal entity constitutes a new and separate employing unit for UI experience rating purposes, or if there is a single, continuing employing unit. See Voluntary Contributions; Joint or Combined Accounts.
- Employers must file the Quarterly Contribution Return and Report of Wages (DE 9), along with the Continuation (DE 9C), to report employee wages subject to SUI. Penalties are imposed for noncompliance. See Quarterly Reporting Requirements.
- The California Department of Labor Standards Enforcement will not register or renew the business registration of an employer subject to the Property Service Workers Protection Act if the employer has failed to remit the proper amount of unemployment insurance contributions or has not fully paid a final assessment for the delinquent amount. See Property Service Workers Protection Act.
- An employer's account may be charged for overpayments resulting from the employer's failure to properly respond to requests for information about benefit claims. See Benefit Overpayments.
- Employers are required to keep payroll records for SUI purposes that provide a true and accurate account of all workers and all payments made for at least four years. Records must include certain required information for each employee. See Recordkeeping Requirements.
- Completing and submitting a Multiple Worksite Report (BLS 3020) is mandatory for California employers that operate businesses from more than one location under one Unemployment Insurance Account Number. See Multiple Worksite Reporting.
- California requires all employers, other than public agency employers, to provide short-term disability coverage. The State Disability Insurance (SDI) program is a state-run plan administered by the Employment Development Department (EDD). The program is funded by taxes withheld from employees' wages up to the annual SDI taxable wage base. SDI due dates are based on an employer's federal deposit schedule. Employers have the option of establishing a Voluntary Plan (VP) for the payment of disability insurance, or paid family leave insurance benefits, to their employees in lieu of the mandatory state plan coverage. See Disability Insurance.