Finance · Payroll
Small business payroll, from gross to net
What you withhold, what you pay on top, when the money is due and which forms close each quarter, with 2026 rates from the IRS, the EDD and the Department of Labor.
Small business payroll is the process of paying employees and handling the taxes that ride along with every paycheck: what you withhold from workers, what you pay as the employer, and the deposits and returns that report it all to the IRS and California’s Employment Development Department (EDD). Payroll is where good intentions meet hard deadlines. Get it right and it runs quietly in the background; get it wrong and the penalties can follow the owner personally.
This guide uses IRS Publication 15 for 2026, the EDD’s California Employer’s Guide 2026 (DE 44) and its 2026 rate table, and the Department of Labor’s final 2026 FUTA credit reductions published Nov. 10, 2026, all checked Nov. 13, 2026. If you are about to hire, start with our guide to hiring your first employee in California.
How a paycheck goes from gross to net
Gross pay is what the employee earned: hours times rate, or the salary for the period, plus overtime, bonuses and commissions. Net pay is what lands in the bank after withholding. In between, you take out the employee’s share of taxes and any deductions the employee authorized, such as health premiums or retirement contributions, and you hold the tax portion in trust until you deposit it.
Taxes withheld from a $2,000 California paycheck (before income tax)
Illustrative example with 2026 rates. Federal and California income tax withholding then depend on the employee’s Form W-4 and DE 4.
Income tax withholding is set by the employee’s forms. The federal Form W-4 drives federal withholding through the tables in IRS Publication 15-T. California withholding comes from the state’s DE 4, which the EDD says is no longer optional. Bonuses and other supplemental wages can be withheld at a flat 22% federal rate in 2026, or 37% on supplemental pay above $1 million.
What the employer pays on top of wages
This is the part new owners underestimate. Besides wages, you pay a matching share of Social Security and Medicare and three unemployment-related taxes. None of these come out of the employee’s check.
2026 payroll taxes for a California employer
| Tax | Who pays | 2026 rate and base |
|---|---|---|
| Social Security | Employer and employee | 6.2% each on wages up to $184,500 |
| Medicare | Employer and employee | 1.45% each, no wage limit; employees also pay 0.9% above $200,000 |
| Federal unemployment (FUTA) | Employer only | 6.0% on the first $7,000, minus up to a 5.4% credit; California’s credit is cut 1.5% for 2026 |
| California Unemployment Insurance (UI) | Employer only | 1.5% to 6.2% on the first $7,000; 3.4% for new employers |
| Employment Training Tax (ETT) | Employer only | 0.1% on the first $7,000 |
| State Disability Insurance (SDI) | Employee only (withheld) | 1.3%, no wage limit |
| Federal and California income tax | Employee only (withheld) | Based on Form W-4 and DE 4 |
California’s FUTA bill deserves a closer look. Normally employers who pay state unemployment tax in full and on time get the full 5.4% credit and pay 0.6%, or $42 per employee. California still owes federal unemployment loans, so on Nov. 10, 2026, the Department of Labor set a 1.5% credit reduction for 2026. That raises the effective FUTA rate to 2.1%, or $147 per employee earning $7,000 or more. IRS Publication 15 says the extra amount is due with the fourth-quarter deposit, by Jan. 31, 2027.
Employer payroll taxes on one $50,000 salary in 2026
- 73.5%Social Security, $3,100
- 17.2%Medicare, $725
- 5.6%California UI at 3.4%, $238
- 3.5%FUTA at 2.1%, $147
- 0.2%ETT, $7
Illustrative example using 2026 rates from IRS Publication 15, the EDD and the DOL final 2026 FUTA credit reductions; shares of the $4,217 total. Workers’ compensation premiums are extra.
When payroll taxes are due
Federal deposits
The IRS assigns one of two deposit schedules based on a lookback period from July 1 two years back to June 30 of last year. If you reported $50,000 or less in employment taxes in that window, you are a monthly depositor and deposit each month’s taxes by the 15th of the next month. Above $50,000, you are a semiweekly depositor. New employers are monthly depositors for their first calendar year. Any day you pile up $100,000 or more in tax, the next-day deposit rule applies.
California deposits
The EDD collects UI, ETT, SDI and state income tax through the Payroll Tax Deposit (DE 88), filed electronically. UI and ETT are paid quarterly. SDI and state income tax follow your federal schedule and the amount withheld: under the EDD’s 2026 table, an employer that has accumulated less than $350 in state income tax withholding can deposit quarterly, while larger amounts move to monthly, semiweekly or next-day deposits.
The payroll calendar for 2026 and early 2027
- Every paydayCalculate pay, withhold taxes, give an itemized wage statement and track hours.
- By the 15th of each monthMonthly federal depositors deposit the prior month’s federal taxes.
- QuarterlyFile IRS Form 941 by April 30, July 31, Oct. 31 and Jan. 31, and the EDD’s DE 9 and DE 9C by the last day of the month after the quarter (for example, Feb. 1, 2027, for the fourth quarter of 2026).
- By Jan. 31, 2027Give employees their 2026 Form W-2, give contractors Form 1099-NEC, file Form 940 for FUTA and make the fourth-quarter FUTA deposit, including California’s credit reduction.
- Keep recordsHold payroll and employment tax records for at least four years, as both the IRS and the EDD require.
The EDD says the quarterly DE 9 and DE 9C must be submitted even if you had no payroll during the quarter. Seasonal businesses miss this more than anyone.
Pay schedules and wage statements in California
California sets the minimum pay frequency. Most employees must be paid at least twice a month on regular paydays: work from the 1st through the 15th is paid by the 26th, and work from the 16th through month end is paid by the 10th of the next month. Exempt executive, administrative and professional staff may be paid monthly. Final paychecks are due immediately when you let someone go, and within 72 hours when an employee quits without notice. Late final pay can trigger a waiting-time penalty of up to 30 days of wages.
What changed for 2026
- Higher Social Security wage base. $184,500 for 2026, according to IRS Publication 15.
- SDI at 1.3%. Up from 1.2% in 2025, still with no wage cap since Senate Bill 951 took effect in 2024.
- New 1099 threshold. Forms 1099-NEC and 1099-MISC are required for payments of $2,000 or more made in 2026, up from $600. California’s separate DE 542 contractor report still uses $600.
- Tips and overtime. Workers may deduct up to $25,000 of qualified tips and up to $12,500 of qualified overtime pay ($25,000 if married filing jointly) for tax years through 2028, and employers follow updated reporting procedures.
- Larger FUTA bill. California’s credit reduction rose from 1.2% for 2025 to 1.5% for 2026.
How to run payroll: four options
Ways to run small business payroll
| Option | Best for | Watch out for |
|---|---|---|
| Do it yourself | One or two employees and an owner who enjoys details | Every rate, deposit and form is on you; one missed deposit adds penalties |
| Payroll software | Most small teams | You still approve the data; check that it files California returns and new hire reports |
| Accountant or bookkeeper | Owners who want a person to review | Agree in writing who files what, and when |
| Professional employer organization (PEO) | Owners who want benefits and HR bundled | A certified PEO (CPEO) can take on federal tax liability; others usually cannot |
Whatever you choose, the responsibility stays with you. IRS Publication 15 says using a third-party payer generally does not relieve the employer of making sure returns are filed and taxes are paid on time, with an exception for certified professional employer organizations. Ask any provider for its complete fee schedule, including year-end forms, new state registrations and off-cycle runs.
Taxes you withhold from employees are trust fund taxes. If they are not deposited, the IRS can assess the trust fund recovery penalty, equal to 100% of the unpaid tax, against the people responsible for paying it, including owners and officers. Never use withheld payroll taxes to cover a cash shortfall.
Payroll is usually a business’s largest recurring cost, so plan for it in your cash flow. Our cash flow statement guide and business savings guide show how to keep a payroll cushion, and our California small business taxes guide puts payroll next to income and sales taxes.
Common mistakes
- Treating withheld taxes as working capital. They belong to the government from the moment you withhold them.
- Ignoring the California FUTA credit reduction. Budget $147 per employee for 2026, not $42.
- Missing the DE 4. California withholding needs the state form, not the federal W-4.
- Skipping zero-payroll quarters. The DE 9 and DE 9C are still due.
- Misclassifying workers. Paying an employee on a 1099 leads to back taxes, interest and penalties.
Key terms
- Gross pay: total earnings before any taxes or deductions.
- Net pay: what the employee receives after withholding and deductions.
- FICA: Social Security and Medicare taxes, 7.65% each for employer and employee on wages up to the Social Security wage base.
- Lookback period: the 12 months the IRS uses to decide whether you deposit monthly or semiweekly.
- DE 9 and DE 9C: the EDD’s quarterly contribution return and the employee wage detail that goes with it.
The bottom line: small business payroll in California costs about 8% to 9% of wages in employer taxes in 2026 for most new employers, before workers’ compensation. Withhold Social Security, Medicare, SDI and income tax from every check; deposit on your federal and EDD schedules; file Form 941 and the DE 9 every quarter; and close the year with W-2s, Form 940 and the larger FUTA payment by Jan. 31, 2027.
Free help in the Sacramento region
You do not have to work through these decisions alone. SCORE Sacramento pairs owners with volunteer mentors, many of them retired executives, bankers and accountants, at no cost. The Sacramento Valley Small Business Development Center offers free one-on-one advising on financing, budgeting and financial statements. The SBA’s Sacramento District Office can explain loan programs and connect you with lenders, and community lenders such as California Capital and Opening Doors serve owners who need smaller loans or extra support. Browse our Business Resources and the free business help guide for more.
Key takeaways
- Employers pay 7.65% for Social Security and Medicare plus FUTA, California UI and ETT on top of wages.
- California’s FUTA credit reduction is 1.5% for 2026, about $147 per employee, due by Jan. 31, 2027.
- Employees have 1.3% SDI withheld in 2026, with no wage cap.
- New employers deposit federal payroll taxes monthly in their first year; file Form 941 and DE 9 quarterly.
- Withheld taxes are trust funds; unpaid amounts can bring a 100% personal penalty.
Frequently asked questions
How much does payroll cost a small business in California?
Beyond wages, a new California employer pays about 8 to 9 percent of wages in 2026 for most employees: 7.65 percent for Social Security and Medicare, plus FUTA, UI and ETT on the first 7,000 dollars of each employee’s wages. Workers’ compensation premiums and any payroll service fees are extra.
What is the FUTA credit reduction for California in 2026?
The U.S. Department of Labor set California’s 2026 credit reduction at 1.5 percent on Nov. 10, 2026. California employers pay an effective FUTA rate of about 2.1 percent on the first 7,000 dollars of wages, with the extra amount due with the fourth-quarter deposit.
How often do I have to deposit payroll taxes?
Federal taxes are deposited monthly or semiweekly based on a lookback period; new employers start as monthly depositors. California SDI and income tax deposits follow your federal schedule and the amount withheld, while UI and ETT are paid quarterly.
When are W-2 forms due?
Employers must furnish Form W-2 to employees and file it with the Social Security Administration by Jan. 31. For 2026 wages, that is Jan. 31, 2027.
Can I pay employees once a month in California?
Most non-exempt employees must be paid at least twice a month on regular paydays. Exempt executive, administrative and professional employees may be paid monthly if the full month’s salary is paid by the 26th.
Sources
- IRS Publication 15 (Circular E), Employer’s Tax Guide (2026)
- U.S. Department of Labor: Final 2026 FUTA Credit Reductions (updated Nov. 10, 2026)
- EDD: California Employer’s Guide 2026 (DE 44)
- EDD: Tax Rates, Wage Limits, and Value of Meals and Lodging (2026)
- California DIR: Paydays, Pay Periods, and the Final Paycheck FAQ
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