How does California state income tax and unemployment insurance work in 2026?
A 13.3 percent top rate, an uncapped 1.3 percent disability line on every dollar of wages, and a Schedule F+ UI rate no national payroll system applies by default.
· California, United States guide
Photo: Rihards Sergis via Unsplash · Los Angeles, California
If you set California payroll the way you set Texas payroll, you will miss a deposit, under-withhold a senior hire, or both. The state runs on its own forms, its own cadence, and the only uncapped state disability line in the country.
A California executive earning $1.5 million pays the state $199,500 in income tax in 2026 before federal. The same person pays a further $19,500 in State Disability Insurance because the wage cap was removed on 1 January 2024.
Most US employers have heard California is the high-tax state. Fewer understand that the unique pieces, the 13.3 percent top rate, the uncapped 1.3 percent SDI, and the Schedule F+ unemployment rate, are not a federal overlay. They are a separate payroll regime.
This page covers the four California payroll-tax lines (UI, ETT, SDI, PIT), the DE 4 day-one withholding form, the DE 9 + DE 9C + DE 88 filing cadence, and the ABC test that pulls misclassified contractors into the same stack.
What is California's income tax rate in 2026?
California charges a nine-band income tax ladder running from 1.0 percent to 12.3 percent. On every dollar of taxable income above $1,000,000, a further 1.0 percent Mental Health Services Act surcharge applies, for an effective top rate of 13.3 percent. That is the highest state rate in the United States.
An engineer at a Bay Area startup earning $250,000 pays roughly $22,800 in California income tax for 2026, at a 9.3 percent marginal bracket that starts at about $71,000 of single taxable income. The same person in Texas pays zero state tax.
| Bracket | Single (2026, estimated) | MFJ (2026, estimated) | Rate |
|---|---|---|---|
| 1 | $0 to $10,756 | $0 to $21,512 | 1.0% |
| 2 | $10,756 to $25,499 | $21,512 to $50,998 | 2.0% |
| 3 | $25,499 to $40,245 | $50,998 to $80,490 | 4.0% |
| 4 | $40,245 to $55,866 | $80,490 to $111,732 | 6.0% |
| 5 | $55,866 to $70,606 | $111,732 to $141,212 | 8.0% |
| 6 | $70,606 to $360,659 | $141,212 to $721,318 | 9.3% |
| 7 | $360,659 to $432,787 | $721,318 to $865,574 | 10.3% |
| 8 | $432,787 to $721,314 | $865,574 to $1,442,628 | 11.3% |
| 9 (standard top) | Above $721,314 | Above $1,442,628 | 12.3% |
| MHSS surcharge | Above $1,000,000 (same threshold regardless of filing status) | +1.0% → 13.3% effective | |
The 13.3 percent top rate isn't the whole story
The extra 1.0 percent is the Mental Health Services Act surcharge, enacted by voters in November 2004 as Proposition 63 and reaffirmed in March 2024 by Proposition 1. The surcharge applies to taxable income above $1,000,000 regardless of filing status, so joint filers do not get a doubled threshold the way they do on the standard ladder.
For a sales lead in San Diego closing a $1.5 million comp year, the surcharge alone adds $5,000 in state tax on top of the 12.3 percent already due.
How California compares to the west coast
California sits well above the rest of the western United States on income tax. Oregon tops out at 9.9 percent, Arizona is a 2.5 percent flat rate, Nevada and Washington levy no individual income tax at all, and Texas has no state income tax. The 13.3 percent California effective top rate is roughly five times Arizona's and more than double Oregon's.
For a $750,000 California compensation package, state income tax alone runs to roughly $63,000 versus zero in Texas. That gap is the single largest line driving California-to-Texas relocation decisions for senior earners.
What this means for offer letters
A California employee earning $150,000 pays roughly $11,200 in state income tax for 2026 at the 9.3 percent marginal bracket; the same offer in Texas pays zero state tax and in Arizona costs roughly $3,750. Bake the full California ladder into your offer-letter take-home calculator before the first 2026 hire.
The 13.3 percent figure only triggers above $1,000,000 of taxable income, but the 9.3 percent bracket starts at about $71,000 of single taxable income, well within the range of most senior individual-contributor offers.
California stacks four payroll taxes, not one
New California employers pay 3.4 percent on the first $7,000 of each employee's annual wages in unemployment insurance, capped at $238 per employee per year. After two to three full calendar years of benefit-charge history, the rate moves into the experience-rated band of 1.5 percent to 6.2 percent.
The $7,000 wage base matches the federal FUTA floor and is one of the lowest in the United States. So even though California has a reputation as the most expensive payroll state, the headline UI bill is small.
A designer at a Sacramento agency on $80,000 hits the UI cap by late January. After that, UI is zero on every paycheque for the rest of the year. The whole annual UI line for that hire is concentrated in Q1.
| Stage | Rate | Max per employee / year | Source |
|---|---|---|---|
| New employer (first two to three years) | 3.4% | $238.00 | California EDD, Schedule F+ 2026 |
| Experience-rated, lowest step | 1.5% | $105.00 | California EDD, Schedule F+ 2026 |
| Experience-rated, top step | 6.2% | $434.00 | California EDD, Schedule F+ 2026 |
California EDD calculates each employer's experience rate annually from a reserve-account formula: cumulative contributions paid in, minus benefits paid out to former employees, divided by average taxable payroll. Schedule F+ is the current 2026 contribution schedule. It has been in effect since 2004 because the UI Trust Fund balance has remained below the statutory threshold.
A stable California employer with few separations settles near the 1.5 percent floor. A high-turnover employer trends toward the 6.2 percent ceiling. The annual rate notice arrives in December for the following calendar year.
The early-year cash-flow point
Because the $7,000 wage base is so low, a full-time California employee earning $80,000 hits the UI cap in late January. After that, UI is zero on every paycheque for the remainder of the year. The whole annual UI bill is concentrated in Q1, not spread evenly. Teamed's payroll engine forecasts the cap-date per employee so the Q1 cash spike is on your books before the first January payroll runs, not a surprise on the Q1 close.
FUTA credit interaction
Federal Unemployment Tax (FUTA) is 6.0 percent on the first $7,000. A California employer that pays state UI in full and on time receives a FUTA credit of 5.4 percent, leaving an effective FUTA of 0.6 percent ($42 per employee per year).
California has historically been subject to FUTA credit reduction in years where the state UI Trust Fund carried outstanding federal loans. Verify the current-year status via IRS Schedule A (Form 940) each January. Late or partial state UI payment also erodes the federal credit independently of the loan-based reduction.
SDI is the only uncapped state payroll tax in the country
State Disability Insurance (SDI) is an employee-paid payroll tax funding California's short-term disability and Paid Family Leave benefits. The 2026 rate is 1.3 percent on all wages with no wage cap. The rate is up from 1.2 percent in 2025; the wage cap was permanently removed on 1 January 2024 under Senate Bill 951.
A sales lead in San Diego earning $500,000 pays $6,500 a year in SDI. A founder earning $1,000,000 pays $13,000. The money comes out of the employee paycheque, not the employer's payroll cost, but it shows up in every senior salary-negotiation the same way the 13.3 percent income rate does.
California is one of only five US states, with Hawaii, New Jersey, New York, and Rhode Island, that operate a state-run disability scheme. It is the only one with no wage cap at all.
| Year | SDI rate | Wage cap | Authority |
|---|---|---|---|
| 2022 | 1.1% | $145,600 | EDD |
| 2023 | 0.9% | $153,164 | EDD |
| 2024 | 1.1% | None, SB 951 removed cap effective 1 January 2024 | SB 951, EDD |
| 2025 | 1.2% | None | EDD |
| 2026 | 1.3% | None | EDD (announced 18 December 2025) |
The uncapped SDI is the math change most employers miss
Before 2024, SDI was a small line for high earners because the wage cap (about $153,000 in 2023) limited annual SDI to roughly $1,400 per employee. SB 951 removed the cap entirely.
An engineer at a Bay Area startup earning $400,000 now pays $5,200 a year in SDI at the 2026 rate, against $1,400 four years ago. The amount comes out of the employee paycheque, not the employer's payroll cost, but it materially affects gross-to-net for senior California hires.
What SDI actually pays out
SDI funds two benefit lines for California employees: Disability Insurance (DI) for short-term non-work-related disability up to 52 weeks, and Paid Family Leave (PFL) for bonding with a new child, caring for a seriously ill family member, or qualifying military exigency for up to 8 weeks.
The 2026 maximum weekly benefit is $1,765 (up from $1,681 in 2025), calibrated against a 2026 state average weekly wage of $1,789. Both benefits are administered by EDD and accessed through the same SDI portal.
Remittance mechanics
SDI is withheld by the employer from each paycheque, pooled with PIT withholding, and deposited via Form DE 88 on the same cadence as PIT (federal schedule when the $350 quarterly threshold is crossed, otherwise quarterly with the DE 9). The DE 9 reports SDI total alongside UI and ETT contributions; the DE 9C breaks it down by employee. There is no separate SDI return.
What is the California Employment Training Tax (ETT)?
ETT is an employer-only payroll tax of 0.1 percent on the first $7,000 of wages per employee per year, capped at $7.00 per employee annually. It funds the California Employment Training Panel, which awards workforce-training grants.
ETT only applies when the employer's UI reserve account balance is positive. If the reserve is negative, ETT shows as 0.0 percent on that year's rate notice and the employer pays nothing.
ETT is the smallest of California's four payroll-tax lines (UI, ETT, SDI, PIT) and the only one most employers forget to factor into their cost model. The math is simple: $7 per employee per year, capped after the first $7,000 of wages. A 50-person California payroll generates $350 in ETT annually. It is a trivial cost but a real one, and the rate notice arrives bundled with the UI rate notice in December, on the same EDD letter.
When ETT switches off
ETT only applies when your employer UI reserve account is in positive balance. New employers always start with a zero or positive reserve, so ETT applies from day one. Long-established employers with heavy benefit-charge histories can run a negative reserve; for those, the December rate notice shows ETT at 0.0 percent for the upcoming year and the line disappears from the DE 9. The on-off switch is automatic, so you don't need to opt in or out.
The four California payroll-tax lines on one page
| Tax | Who pays | 2026 rate | Wage base | Max per employee / year |
|---|---|---|---|---|
| UI (Unemployment Insurance) | Employer | 3.4% new / 1.5%–6.2% experienced | $7,000 | $238 new / $434 top |
| ETT (Employment Training Tax) | Employer | 0.1% (when UI reserve positive) | $7,000 | $7 |
| SDI (State Disability Insurance) | Employee | 1.3% | None, all wages | Uncapped |
| PIT (Personal Income Tax withholding) | Employee | 1.0% – 12.3% (+ 1% MHSS above $1M) | All wages | Uncapped |
All four lines remitted via Form DE 88 and reported on Form DE 9 + DE 9C.
The DE 4 is a separate form from the federal W-4
Form DE 4 is California's Employee's Withholding Allowance Certificate. Every California new hire completes one, separate from the federal W-4. The forms ask different questions because California did not adopt the post-2020 federal redesign that removed allowances.
If the employee does not file a DE 4, the employer must withhold at single status with zero allowances. That is the most aggressive rate on either of the two EDD-published withholding tables. For a designer at a Sacramento agency earning $90,000, that means roughly $4,200 a year withheld against $3,500 if she had filed a DE 4 claiming one allowance.
The employee gets a refund instead of accurate take-home. Worse, they often don't know why their California paycheque is smaller than they expected.
The mechanics differ from the post-2020 federal W-4. California kept the allowance-count model. DE 4 still asks for:
- Filing status. Single, head of household, or married. The employer applies a different withholding table to each.
- Number of allowances. Calculated from the worksheet on the DE 4 itself: one allowance for the employee, one for the spouse, one per dependent claimed for California purposes. Each allowance reduces the wage base that the table is applied to.
- Additional dollar amount per pay period. A flat-dollar over-withholding line for employees who want to over-pay (often used to cover side income or bracket changes the W-4 cannot capture).
- Itemised deductions estimate. California-specific worksheet for employees who itemise on state return rather than take the standard deduction.
The employer looks up the gross taxable wage on the California Withholding Schedules using filing status and allowance count, applies either Method A (wage-bracket table) or Method B (exact calculation), and withholds the table figure plus any DE 4 additional dollar amount. Both methods are published annually in the EDD DE 44 California Employer's Guide.
Why employees often file a DE 4 even after a W-4
The 2020 federal W-4 removed allowances and switched to a dollar-amount-of-deductions model. California kept the allowance-count model on the DE 4. An employee with a complex California situation, itemised deductions, multiple jobs, or joint filing with a non-working spouse, often files a DE 4 even when they did not file a state-specific W-4 in the past, because the federal allowance count no longer feeds into California withholding.
The "highest rate" default
An employee with no DE 4 on file is treated as single with zero allowances, which is the most aggressive withholding combination on the California table. For a $90,000 California employee that's roughly $4,200 a year withheld, against $3,500 if the same employee filed a DE 4 claiming themselves as one allowance with single status. The gap accumulates across pay periods and the employee gets a refund instead of accurate take-home.
Teamed's onboarding flow captures DE 4 alongside Form I-9 and federal W-4 on day one in a single digital signing session, so the highest-rate default never fires.
Quarterly returns with a federal-cadence deposit overlay
California uses a quarterly return cadence with a federal-schedule deposit overlay. Every California employer files Form DE 9 (the Quarterly Contribution Return) and Form DE 9C (per-employee wage detail) by the last day of the month after each quarter.
Deposits run on Form DE 88: quarterly with the DE 9 if accumulated personal income tax (PIT) stays under $350 per quarter, otherwise on the federal-cadence schedule (next-banking-day, semi-weekly, or monthly) once the $350 threshold is crossed. Filing runs through EDD e-Services for Business.
For an engineer at a Bay Area startup earning $200,000, the first paycheque of January alone will trip the $350 PIT threshold. From that quarter on, the employer is on federal-cadence deposits, not the simple quarterly DE 9 schedule.
California is more demanding on cadence than most US states. Quarterly DE 9 and DE 9C cover the contribution and wage-detail reporting, but deposits scale up the moment PIT accumulation crosses $350 per quarter. Above the threshold the employer mirrors the federal Form 941 deposit schedule (next-day for $100,000-day, semi-weekly for >$50,000 lookback, monthly for the rest). Below the threshold, the whole quarterly liability is paid once with the DE 9.
| Form | What it is | Frequency | Due |
|---|---|---|---|
| Form DE 9 | Quarterly Contribution Return and Report of Wages (UI, ETT, SDI, PIT contributions) | Quarterly | 30 April, 31 July, 31 October, 31 January |
| Form DE 9C | Quarterly Continuation, per-employee wage detail | Quarterly | Same as DE 9 |
| Form DE 88 / DE 88ALL | Payroll Tax Deposit Coupon (UI + ETT + SDI + PIT) | Federal cadence above $350 PIT/quarter; quarterly otherwise | Per cadence above the threshold; with DE 9 below |
| Form DE 34 | Report of New Employee(s) | Per new hire | Within 20 days of start date |
| Form DE 542 | Report of Independent Contractor(s) | Per contractor | Within 20 days of paying or contracting for $600+ in services |
The $350 PIT deposit threshold
California uses a per-quarter PIT-accumulation threshold to scale deposits. If you accumulate $350 or more of PIT in one or more pay periods within a quarter, you must move to the federal-schedule deposit cadence for the rest of that quarter and the next.
Below $350 cumulative per quarter, all PIT plus SDI plus UI plus ETT is paid once with the DE 9. Employers running multi-state payroll often cross the California $350 threshold once they have two or three full-time California employees earning at typical California salaries. Teamed's payroll engine flags the crossover at the point you add the headcount that tips the math, so you do not file a quarterly DE 9 and then find a missed-deposit penalty on the Q2 close.
Electronic filing through e-Services for Business
EDD e-Services for Business is the canonical e-file portal for DE 9, DE 9C, DE 88, DE 34, and DE 542. California has mandated electronic filing and electronic payment for all employers since 1 January 2018; paper returns are no longer accepted. The portal handles bulk file upload for DE 9C wage detail and is the registration entry point for new employers.
Zero-filing rule
An employer with no California wages for a quarter still files a zero DE 9 and DE 9C. Otherwise EDD flags a missing return and starts the delinquency clock. The DE 9 is required even in a zero year if the employer is still registered.
The ABC test pulls misclassified contractors into the same payroll stack
California uses a strict three-prong ABC test to decide whether a worker is a contractor or an employee. A worker misclassified as a contractor under the ABC test is retroactively an employee for UI, SDI, ETT, and PIT withholding.
That means the employer owes back contributions, interest, and penalties for the full misclassification period, plus exposure under the Private Attorneys General Act (PAGA).
A Bay Area startup paying a long-running "contractor" $120,000 a year who fails the ABC test owes back UI, ETT, SDI, and PIT withholding on every dollar paid, plus interest and civil penalties of $5,000 to $25,000 per violation.
The ABC test asks three questions about the worker, and all three must be satisfied for the worker to be classified as a contractor:
- Prong A, control. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract and in fact.
- Prong B, usual course. The worker performs work that is outside the usual course of the hiring entity's business. This is the plaintiff-friendly prong that flipped most of the gig-economy classification cases after the 2018 Dynamex decision.
- Prong C, independent business. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
The hiring entity bears the burden of proving all three prongs. Failure on any one prong reclassifies the worker as an employee. For payroll-tax purposes, that retroactive reclassification means EDD will assess back UI, ETT, and SDI contributions on every dollar the misclassified worker earned during the contractor period; the FTB will assess back PIT withholding; and California layers civil penalties of $5,000 to $15,000 per violation for general misclassification, rising to $10,000 to $25,000 for a pattern or practice.
The Borello carve-out
A short list of specific occupations and bona-fide business-to-business contracts uses the older Borello multi-factor test in place of the ABC test. The list includes certain licensed professionals, freelance writers under specific conditions, real estate licensees, and some other categories. All others default to ABC.
If you are hiring a worker in California outside the Borello list, the safe default is to treat them as a W-2 employee and run them through your full California payroll stack from day one. Teamed handles that automatically through the EOR model so the misclassification risk never sits on your books.
Verification and PAGA exposure
The Ninth Circuit upheld AB 5 against constitutional challenge in 2024 (Olson v. State of California), and the U.S. Supreme Court denied certiorari on 13 January 2025. PAGA lets private plaintiffs sue on behalf of the State for civil penalties on misclassification. 75 percent of the recovery goes to the Labor and Workforce Development Agency; 25 percent to the aggrieved employees. PAGA exposure on misclassification is one of the most active plaintiff-side litigation areas in California right now.
How Teamed runs California payroll end to end
Teamed becomes your legal Employer of Record in California for a flat $599 per employee per month.
You hire the person. We run payroll, file every state return, handle the DE 9 + DE 9C + DE 88 deposit cadence, and apply the ABC test on every contractor engagement. No FX mark-up, no setup fees.
A designer at a Sacramento agency, an engineer at a Bay Area startup, and a sales lead in San Diego all run on the same configured platform, with the work-location flag driving the local tax rules.
What a California hire through Teamed looks like, day to day:
- Day 0: EDD e-Services for Business registration plus the parallel FTB withholding registration. Teamed's US entity (Teamed US Inc., Delaware) is the legal employer of record.
- Day 1: employee onboarded with Form DE 4 (filing status, allowance count, additional withholding), federal W-4, and Form I-9 in a single digital signing session. DE 34 new-hire report filed with EDD within 20 days.
- Ongoing: DE 88 deposits triggered automatically once accumulated PIT crosses the $350 quarterly threshold; SDI withheld at 1.3 percent of every paycheque with no cap; UI, ETT, and PIT all calculated and remitted on the right cadence. Q1 UI cap-date forecast surfaced before the January payroll runs.
- Quarterly: DE 9 and DE 9C filed by the last day of the month after each quarter, with per-employee wage detail reconciled against the deposit history.
- Year end: Federal W-2 plus California reconciliation. ETT/UI rate notice received from EDD in December and applied to the next year's payroll from the first January cheque.
Pricing is one number per employee per month, in any currency you pay us in. No FX mark-up between your billing currency and the US dollars Teamed remits to California EDD and FTB. Statutory employer cost (FICA, FUTA, UI, ETT, workers' compensation insurance) passes through at cost, itemised on the invoice.
Behind the platform sits a named country specialist for the United States and an in-house payroll specialist who knows California's $350 PIT deposit threshold, the DE 4 allowance mechanics, the uncapped SDI math under SB 951, and the ABC test analysis that needs to run on every contractor engagement. When something looks off on a payslip, you message the same person. No support tickets. No chatbot triage.
Contractor onboarding, EOR payroll, and entity graduation live on one platform. A California contractor who converts to W-2 keeps their record. That same employee can graduate from EOR to your own California-registered entity without changing system. Contractor through EOR to entity. One timeline. One platform.
When EOR is the right call (and when it isn't)
EOR works while you're testing the California market, ramping a small remote team, or running one or two California hires alongside a larger US payroll elsewhere. California is the highest-volume US state Teamed runs.
The compliance overhead is real: DE 9 + DE 9C + DE 88 cadence, uncapped SDI, ABC-test analysis on every contractor, MHSS surcharge tracking for high earners, local minimum-wage layering across San Francisco, Los Angeles, West Hollywood, and a dozen other cities. The maths of running your own California entity starts to win earlier than in lighter-touch states, often around 8 to 10 California employees. Teamed's Crossover Calculator shows you the month it flips. The conversation is built into the relationship.
California is the highest-complexity US state we run, but the wage-base structure is counter-intuitive. Top income tax effective rate is 13.3 percent, SDI is 1.3 percent on every dollar with no cap, and yet the UI wage base is still only $7,000, the same as Mississippi. The discipline points are the $350 PIT threshold that flips DE 88 cadence, the DE 4 alongside the federal W-4 on day one, and ABC-test analysis on every contractor before they invoice. We capture all three in onboarding so they never come up on a quarter close.
California payroll is the most demanding in the United States, and the most counter-intuitive.
13.3 percent effective top income tax, 1.3 percent uncapped SDI, $7,000 UI wage base, ABC test on every contractor.
The discipline is matching DE 88 deposit cadence to PIT accumulation and reconciling DE 9 + DE 9C every quarter without a miss.
