Complete Payroll Guide for California Organizations

If you’re running payroll in California, you know the rules can feel overwhelming. The state has some of the strictest laws in the country, and getting them right matters for your team and your business. Employers often struggle with the sheer complexity of staying compliant. One small mistake can mean penalties and disputes.

The State of California enforces daily overtime after eight hours and double time after twelve. It also enforces strict pay date schedules for semi-monthly and monthly payrolls, along with mandatory electronic filing and payment of payroll taxes.

On top of that, employers must register with the Employment Development Department (EDD) soon after they start paying wages. These rules go beyond what many other states require. Getting payroll right protects your team and your company. Miss a payroll tax deadline, and you’re looking at a 15 percent penalty plus interest, not something any business owner wants to deal with

Late final pay can lead to waiting time penalties of up to thirty days of wages. This guide shows a step-by-step path to set up payroll in California. You will see the legal, administrative, and strategic actions that keep you compliant and efficient.

Understand California Payroll Laws and Requirements

Payroll in California comes with more rules than in most other states. Employers are expected to understand and follow them to stay compliant and protect their workforce. Below are the main laws that make California stand out:

Minimum Wage

California sets a higher minimum wage than the federal rate, which is $7.25 per hour. Some cities like San Francisco and Los Angeles enforce even higher local rates. As of 2025, the statewide minimum wage is $16.50 per hour, but local ordinances can raise that floor further.

Pay Frequency

The businesses must pay employees at least twice per month, on regular, designated paydays. Wages earned between the 1st and 15th must be paid no later than the 26th of that month, while wages earned between the 16th and the end of the month must be paid no later than the 10th of the following month. This is stricter than many other states that only require monthly or semi-monthly pay.

Overtime Rules

Think paying overtime only kicks in after 40 hours a week? In California, the bar is set much lower. Employees in California earn overtime pay at one and a half times their regular rate after working more than 8 hours in a single day, and double their regular rate after 12 hours in a day. They also qualify for overtime if they work more than 40 hours in a week. Federal law, by contrast, only requires overtime after 40 hours in a week, which makes California’s rule much stricter. 

Meal and Rest Breaks

The California employees must receive a 30-minute meal break if they work more than 5 hours, and a second meal break if they work more than 12 hours. They also earn a 10-minute rest break for every 4 hours worked. Skip a required meal or rest break, and it costs you an extra hour of pay per day. The state takes employee breaks seriously.

Payroll Records

Businesses must maintain detailed payroll records, including hours worked, pay rates, deductions, and net wages. These records must be kept for at least three years, and employees have the right to request access.

Wage Statement (Paystub) Requirements in California

When an employee resigns or is terminated in California, the employer must issue the final paycheck without delay. If payment is late, the employer may be liable for a waiting time penalty equal to the employee’s daily wage for each day the paycheck is withheld, up to a maximum of 30 days. Failure to provide accurate paystubs can trigger lawsuits under California’s Private Attorneys General Act (PAGA), exposing employers to significant penalties. Even small errors like missing the employer’s address or not breaking out overtime separately can create compliance risks.

As payroll complexities grow, businesses need more than just accuracy; they need a reliable, compliant, and scalable solution.

Ajay Mehta

CEO of IBN Technologies.

‍

‍

‍

Step-by-Step: How to Set Up Payroll in California

Setting up payroll involves a series of legal and administrative tasks that ensure employees are paid correctly and taxes are handled on time. Each step builds the foundation for compliance.

Step 1: Apply for an Employer Identification Number (EIN)

An Employer Identification Number, or EIN, is a unique nine-digit number issued by the Internal Revenue Service. Every business that hires employees must have an EIN to report taxes and other documents to the federal government. It acts like a Social Security number for a company.

How to Apply for an EIN

The IRS allows businesses to apply for an EIN online, by fax, mail, or phone (phone is only for international applicants). The online application is the fastest, and once submitted, the EIN is issued immediately.

Step 2: Register with the California Employment Development Department (EDD)

‍

This step is a critical part of California payroll setup, as it ensures your business can handle unemployment insurance, disability insurance, and payroll taxes properly.

Once you have your EIN, the next step is registering your business with the California Employment Development Department (EDD). This registration is mandatory for all employers who pay wages, as it allows the state to track unemployment insurance, disability insurance, and payroll taxes.

How to Register

• Go to the EDD e-Services for Business portal.
  
• Provide business details, EIN, and entity type.
  
• Identify the first payroll date and the expected number of employees.
  
• After processing, EDD issues a state employer account number used for all tax filings.
  

Step 3: Collect Employee Payroll Documentation

Before paying employees, you must collect all required documentation to ensure proper tax withholding, eligibility verification, and compliance with California law.

Step 4: Choose a Payroll Schedule and Frequency

Selecting a payroll schedule is essential for both compliance and employee satisfaction. California law sets minimum standards, but you can choose a schedule that fits your business operations.

Step 5: Select a Payroll System or Provider

Choosing the right provider is central to California payroll compliance since generic software may not account for overtime, meal breaks, or city-specific rules.

Payroll Provider Options

1. Manual Payroll: Manual payroll works if you’ve got two or three people. Beyond that, it’s a headache waiting to happen. It requires careful calculation of gross pay, taxes, deductions, and overtime. High risk of error and compliance issues.
2. Payroll Software: Automates calculations, tax filing, and reporting. Many solutions are California-compliant and can handle city-specific rules, overtime, and benefits.
3. Outsourced Payroll Services: A third-party provider manages the entire payroll process, including tax deposits, finance and accounting services, and compliance updates. Best for businesses that want to reduce administrative burden.

So what happens if your payroll system isn’t set up to handle split shifts or daily overtime? That’s where errors creep in, and fines follow.

Step 6: Calculate Gross Pay, Taxes, and Deductions

Accurately calculating payroll is one of the most critical steps. Miss one payroll deadline in California, and the penalties can stack up fast. That’s why many call it the toughest state in the country for payroll compliance.

Calculating Gross Pay

Gross pay is the total amount earned by an employee before any deductions. This includes:

• Regular wages or salary
• Overtime pay
• Bonuses and commissions
• Paid time off

Withholding Taxes

After gross pay is calculated, you must deduct the correct amounts for:

1. Federal income tax is based on the employee’s W-4.
2. Social Security and Medicare (FICA) standard rates apply.
3. State income tax based on the DE 4 form in California.
4. State Disability Insurance (SDI) is mandatory for California employees.
5. Unemployment insurance contributions: both state (SUI) and federal (FUTA).

Step 7: Pay Employees Accurately and On Time

Paying employees correctly and on schedule is crucial in California, where labor laws are strict, and penalties for late or inaccurate payments are significant.

Step 8: File and Remit Payroll Taxes

Filing and remitting payroll taxes is a legal requirement for all employers. California enforces strict deadlines and penalties, so accurate and timely filings are essential.

Key Tax Responsibilities

1. Federal Taxes

• Income Tax Withholding: Submit withheld federal income taxes to the IRS.
• Social Security and Medicare (FICA): Both employer and employee portions must be deposited.
• Federal Unemployment Tax (FUTA): Employer pays annually.
  
  

2. California State Taxes

• State Income Tax Withholding: Based on DE 4 forms, submit to the California Employment Development Department (EDD).
• State Disability Insurance (SDI): Employee contributions must be reported and remitted.
• State Unemployment Insurance (SUI): Employer contributions must be filed regularly.

California’s expansive pay equity law applies to employers with 15-plus employees. Covered employers must establish pay scales and pay ranges for each position and furnish that information to job applicants and employees upon request.

Richard S. Rosenberg

Partner at Ballard Rosenberg Golper & Savitt, LLP

Should You Outsource Payroll to a Professional Partner?

With so many moving parts, even seasoned payroll teams struggle to stay compliant. That’s why more businesses are turning to outsourced payroll support. Not to offload responsibility, but to reduce risk and free up time.

Running payroll in-house means juggling tax filings, overtime calculations, wage statements, and compliance with state-specific labor laws. For growing businesses, this becomes a heavy burden that takes time away from strategic work. Errors in calculations or missed deadlines can also lead to penalties and employee dissatisfaction.

This is where outsourcing makes sense. A reliable payroll partner ensures employees are paid accurately and on time while keeping you fully compliant with both federal and California regulations. Outsourcing payroll has multiple benefits, and you no longer need to worry about tracking every update to California wage laws or correcting manual errors. 

‍

Final Thoughts

Payroll processing in California requires more attention to detail than in many other states. The state enforces strict rules on minimum wage, overtime, pay frequency, meal and rest breaks, and payroll taxes. Missing even a single requirement can trigger penalties, employee claims, or government audits.

A trusted payroll outsourcing service takes care of compliance, automates calculations, and ensures employees are paid accurately and on time. By choosing the right partner, you reduce risks, save valuable time, and give your HR team the freedom to focus on growing your business. On the administrative side, maintaining organized records, using compliant payroll systems, and staying alert to regulatory changes will keep your business ahead of California payroll compliance challenges.

Frequently Asked Questions