Payroll Rules Small Businesses Must Follow in California (2026 Guide)

Running payroll in California isn’t just about cutting paychecks — small business owners must navigate a complex set of state rules and requirements designed to protect workers and ensure accurate tax reporting. Below is a comprehensive overview of the most important payroll regulations California employers must follow.

1. Registering as an Employer

Once you hire employees, you must register with the California Employment Development Department (EDD) to obtain payroll tax accounts. You’ll use these accounts to withhold and remit taxes like state income tax, unemployment insurance, and disability insurance.

Additionally, employers must report all new hires (and rehires) to the California New Employee Registry within 20 days of the employee’s start date.

2. Minimum Wage and Pay Rates

California’s statewide minimum wage is annually updated; effective in 2026, the rate is $16.90 per hour for all employees regardless of employer size. Cities and counties may require higher local rates.

If your business has multiple wage-setting jurisdictions (e.g., San Francisco or Los Angeles), you must track which minimum wage applies. Local rates can be higher than the state minimum.

3. Pay Frequency and Payday Rules

California law requires most employees to be paid at least twice per month on regular, established paydays. Employers must:

• Provide a predetermined pay schedule (e.g., every Friday or the 1st and 16th of the month).
• Notify employees in writing of payday dates.
• Pay wages on time within required timelines after the pay period ends.

For semi-monthly pay, employers must pay wages earned between the 1st and 15th by the 26th; wages earned from the 16th to the end of the month by the 10th of the following month.

4. Overtime and Wage Computation

California’s overtime rules are among the strictest in the U.S.:

• Hourly workers must be paid 1.5× their regular rate for hours worked over 8 in a day or 40 in a week.
• Double time applies after 12 hours in a day.

These rules also affect how exempt vs. nonexempt employees are classified; misclassification can lead to penalties and back pay.

5. Final Paycheck Rules

When an employee quits or is fired, California law requires employers to pay all final wages promptly — often immediately upon termination — including all earned pay, overtime, and accrued vacation. Employees must also receive a detailed pay statement showing how their final pay was calculated.

6. Payroll Taxes and Withholding

California employers must withhold and remit:

• Personal Income Tax (PIT) from employee wages.
• State Disability Insurance (SDI), which also funds Paid Family Leave.
• Unemployment Insurance (UI) and Employment Training Tax (ETT), both state contributions.

These taxes are reported and paid on regular schedules (often quarterly), and employers must file forms like wage reports with the EDD.

7. Payroll Recordkeeping

Small employers must keep detailed payroll records — including hours worked, wages, deductions, and pay statements — for a minimum period (often three to four years). These records must be accessible for audits and employee requests.

Failure to maintain accurate records can result in penalties if former employees dispute pay. California law allows employees to inspect their records and may impose fines for non-compliance.

8. Worker Classification

A critical payroll issue is correctly classifying workers as employees or independent contractors. Misclassification can lead to unpaid taxes, penalties, and liability for back wages and benefits. California’s strict “ABC test” makes contractors the exception — not the default — unless specific conditions are met.

9. Compliance with Wage Statements and Notices

Every pay period, employers must provide itemized wage statements showing gross wages, all deductions, net pay, and leave balances, among other details. Additionally, required workplace notices (including minimum wage and rights postings) must be displayed in languages common to employees.

10. Penalties and Enforcement Risk

Non-compliance with payroll rules can trigger:

• State audits
• Penalties for missed or late tax filings and wage payments
• Employee lawsuits under the Private Attorneys General Act (PAGA) for Labor Code violations.

Penalties can accumulate, making compliance vital to protecting your business.

Conclusion

California payroll compliance for small businesses is detailed and dynamic. Employers must carefully manage wage rules, pay schedules, tax withholdings, recordkeeping, and worker classification to stay compliant. As labor laws evolve annually, it’s often wise to consult a payroll professional or use payroll software to manage obligations accurately and save time.