In California, in accordance with the federal Social Security act, employers pay federal unemployment insurance to protect employees against being laid off. It is an expense that is based on the gross wages paid by the business. It is not an expense that is deducted from employee’s wages. The amount employers pay each quarter is between 1.5 and 6 percent of the gross wages of their employees. This is a federal charge, and the percent paid varies based on the claims filed against a business.
Set Yourself up as an Employee
In California, if you want to be eligible for unemployment, you must be set up in your business as an employee and withhold all applicable taxes. These include Social Security, federal and state income tax, and disability insurance. Some claims for unemployment for business owners have been denied in cases where the owner/employee had the power to fire himself but keep other employees on the payroll. In California, If your business is a corporation, you automatically must withdraw profit in the form of wages, which will be subject to all withholding taxes including unemployment insurance.
Quarterly Payroll Tax Return
In California, each quarter, businesses with employees must file a payroll tax return. On this form, employers pay all taxes that were withheld including California state disability, California state income tax, federal income tax and federal Social Security. California owners must also pay their own contribution toward federal Social Security (matching the employee's contribution) as well as federal unemployment.
Keep Payroll Records
As a California business owner, if you are going to treat yourself as an employee, you must keep accurate records that include wages paid to you and all withholdings. Sole-proprietor owners typically take income in the form of draws where no withholding is required. At year's end, sole proprietors pay Social Security tax based on the net profit of the business. As an employee, you must pull income in the form of wages. California law is the same as all states concerning Social Security withholding and federal unemployment withholding.
In California, if you treat yourself as an employee, you’ll have some extra business expenses that you wouldn’t have as a sole proprietor. For example, the total Social Security taxes on self-employment income is a based on 92.35 percent of your gross wages multiplied by 15.3 percent. As an employee, the business will have to withhold 6.2 percent for Social Security and 2.9 percent for Medicare, and then match this amount (paid by the employer). This is a total of 18.2 percent, which is higher than the 15.3 percent you pay for Social Security as a self-employed person.