How to Choose a Payroll Company or PEO in California

Payroll software, payroll services, and PEOs

California runs payroll through one tax agency and four separate state taxes, on a progressive income tax that each employee elects withholding against. Daily overtime, an exempt salary floor tied to the minimum wage, and dozens of local wage ordinances sit on top.

There are three kinds of companies to choose from, and what separates them is how much of the work they take on and whether they become a co-employer.

• Payroll software. You register with the Employment Development Department, then run the system yourself. More on payroll and HR software
• A payroll service. Files under your own EIN and handles the state returns for you. More on payroll services
• A PEO. Carries workers’ compensation, bundles benefits, and takes on HR administration. Requires co-employment. More on PEOs

California is the one state on this site with no PEO statute. Section 606.5 of the Unemployment Insurance Code applies a six-part test to decide whether a company supplying workers is the employer, and where the test fails, the client is the employer and the supplier pays wages as the client’s agent.

Payroll and PEO companies based in California

A company based here files quarterly returns with the Employment Development Department and works the same e-Services for Business portal you do.

Payroll and HR providers based in California 26 results

Organization	Type	Headquarters	Coverage	Description
	PEO	Pleasanton, California	50 states	Full-service PEO providing payroll, benefits administration, and workers’ compensation to small and mid-sized employers.
	Payroll service	Sacramento, California	CA, NV, OR	Regional payroll bureau handling processing, tax filing, and time tracking for multi-state employers.
	Software	San Francisco, California	50 states	Cloud payroll and HR platform covering onboarding, time tracking, and benefits enrollment.
	PEO	Irvine, California	34 states	PEO offering co-employment, group health benefits, and HR compliance support across the West.
	PEO	San Diego, California	11 states	PEO serving small employers with bundled payroll, benefits, and risk management.
	Payroll service	Los Angeles, California	CA only	Payroll bureau focused on California employers, including daily overtime, local wage rates, and premium pay tracking.

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What California costs an employer in 2026

Four state payroll taxes apply. Unemployment insurance and the Employment Training Tax are paid by the employer. State Disability Insurance and personal income tax are withheld from wages.

New employers pay a 3.4% unemployment rate for two to three years. The 2026 rate schedule is Schedule F+, which is Schedule F plus a 15% emergency surcharge rounded to the nearest tenth, and it runs from 1.5% to 6.2% for experience-rated employers.

Take an employee earning $60,000 a year at a California employer on the new employer unemployment rate.

Social Security and Medicare are excluded because they are federal and identical in every state. The federal unemployment figure uses the 2025 credit reduction rate, which is the most recent one the Internal Revenue Service has finalized.

The employee side is larger than the employer side before income tax is counted at all, because State Disability Insurance applies to every dollar of wages with no ceiling.

The four state payroll taxes

The Employment Development Department administers all four and issues one employer account number covering them.

Unemployment insurance

New employers are assigned a 3.4% rate for two to three years. After that the rate is set by experience and drawn from the schedule in force, which for 2026 is Schedule F+.

The taxable wage base is $7,000 per employee per year. At the top rate of 6.2% the maximum is $434 per employee per year. An employer subject to section 977(c) of the Unemployment Insurance Code for state unemployment tax avoidance pays the highest rate provided by law plus an additional 2%.

The Notice of Contribution Rates and Statement of UI Reserve Account, form DE 2088, is mailed by December 31 for the following year and is also available in e-Services for Business.

Employment Training Tax

The Employment Training Tax is 0.1% on the same $7,000 wage base, which comes to $7 per employee per year. An employer with a negative unemployment reserve account balance pays 0.0% instead, and that rate cannot be protested.

State Disability Insurance

State Disability Insurance is withheld from employee wages at 1.3% for 2026, up from 1.2% in 2025. It funds both disability benefits and Paid Family Leave.

Senate Bill 951 removed the wage ceiling effective January 1, 2024. Every dollar of wages is now subject to the rate, and an employee earning $200,000 pays $2,600 across the full year.

Personal income tax withholding

Personal income tax is withheld under the schedules the Employment Development Department publishes each year, against the allowances an employee claims on form DE 4. It is progressive, and there is no flat rate for regular wages.

Federal unemployment tax

California began borrowing from the federal government on June 3, 2020. The Employment Development Department states the loan balance is expected to reach about $21.3 billion by the end of 2027, based on the January 2026 UI Fund Forecast.

Employers normally take a 5.4% credit against the 6.0% federal unemployment tax, leaving 0.6%. For the 2025 tax year that credit was reduced by 1.2%, to 4.2%, which puts the effective rate at 1.8%.

In dollars, that is $126 per employee for 2025 against $42 in a state with no reduction. The Employment Development Department puts the additional cost at $84 per employee.

The credit reduction increases by a further 0.3% for each year the loan stays outstanding. The 2026 figure is not set until after the November 10, 2026 repayment deadline, and it is reported on Schedule A of federal Form 940.

For a 50-person California employer, the 2025 reduction added $4,200 to the federal unemployment bill. No payroll provider changes that number.

Minimum wage

California’s minimum wage is $16.90 an hour for 2026, up from $16.50, and it applies to employers of every size. The Labor Commissioner’s Office announced the increase on December 5, 2025.

The state allows no tip credit. Tipped employees receive the full applicable minimum wage and keep their tips on top of it.

Two industries carry their own statutory minimums. Fast food restaurant employers fall under Part 4.5.5 of Division 2 of the Labor Code, beginning with section 1474, effective April 1, 2024. Healthcare facility employers fall under Labor Code section 1182.14, effective October 16, 2024.

Local ordinances

Dozens of California cities and counties set a minimum wage above the state rate. The highest applicable rate governs, and the rate that applies is the one for the place where the employee is physically working.

That means a remote employee sets the rate by their own address, and an employee sent to a client site or a conference in another city can be owed that city’s rate for those hours. The state rate changes on January 1. Many local rates change on July 1, and some change on January 1 alongside the state.

The Labor Commissioner’s Office maintains the reference list of local minimum wage ordinances on its minimum wage page.

Overtime and the exempt salary threshold

California has the most demanding overtime rules in the country, and they run on the day rather than the week. Under Labor Code section 510, a non-exempt employee is owed 1.5 times the regular rate after 8 hours in a workday, after 40 hours in a workweek, and for the first 8 hours on the seventh consecutive day of work in a workweek.

Double time applies after 12 hours in a workday, and after 8 hours on that seventh consecutive day.

The regular rate used for those calculations includes nondiscretionary bonuses, commissions, and piece-rate earnings.

The exempt salary floor

The exempt salary threshold is twice the state minimum wage for full-time employment, which works out to $70,304 a year, $5,858.67 a month, or $1,352 a week for 2026. It cannot be pro-rated for part-time work.

The threshold moves every January 1 with the minimum wage. An employer who does not raise an exempt salary on that date loses the exemption from that date forward, and every overtime hour after it becomes payable.

Salary is one part of the test. A California exempt employee must also spend more than half of working time on executive, administrative, or professional duties, which is a stricter duties standard than the federal one.

Computer software professionals have their own threshold under Labor Code section 515.5, set at $58.85 an hour or $122,573.13 a year for 2026.

Pay frequency and wage statements

Labor Code section 204 requires all earned wages to be paid at least twice a month, on days designated in advance by the employer.

Work performed between the 1st and the 15th is paid between the 16th and the 26th of the same month. Work performed between the 16th and the last day is paid between the 1st and the 10th of the following month. A weekly or biweekly payroll is paid within seven days of the end of the pay period.

Exempt executive, administrative, and professional employees can be paid once a month, on or before the 26th, provided the entire month’s salary including the unearned portion between the payment date and the last day of the month is paid at that time.

Overtime is the one exception to the timing rule. Wages for hours beyond the normal work period can be paid no later than the payday for the next regular payroll period.

Labor Code section 226 requires an itemized wage statement with each payment, covering nine categories of information. Section 226(e) sets damages at $50 per employee for an initial violation and $100 per employee for each subsequent one, capped at $4,000 per employee.

Meal and rest breaks

Meal and rest premiums land on the paycheck, which makes them a payroll configuration question as much as a scheduling one.

An employer may not employ someone for a work period of more than five hours without providing a meal period of at least 30 minutes. A second meal period of at least 30 minutes is required past ten hours, and it can be waived by mutual consent where the total is no more than 12 hours and the first meal period was not waived.

Rest periods run at ten paid minutes for each four hours worked or major fraction of four hours, taken as near the middle of the segment as is practical. An employee working three and a half hours or less is owed no rest period.

Where a meal or rest period is not provided, the employer owes one additional hour of pay at the employee’s regular rate of compensation for each workday it was missed. That hour is not counted for overtime purposes. In Murphy v. Cole the California Supreme Court held that the additional hour is a wage, which carries a three-year statute of limitations.

Time punches for meal periods cannot be rounded. In Donohue v. AMN Services the California Supreme Court held that rounding erases short meal periods that the statute treats as violations.

Workers’ compensation

Labor Code section 3700 requires every California employer to secure the payment of compensation, either by insuring with an insurer authorized to write compensation insurance in the state or by obtaining a certificate of consent to self-insure from the Director of Industrial Relations.

Coverage is required from the first employee, including part-time employees, and it reaches an out-of-state employer whose workers regularly perform services in California.

Coverage comes from a private carrier or from the State Compensation Insurance Fund, which operates as a competitive carrier of last resort. Employers must also post the Notice to Employees poster in a conspicuous place.

Can you run California payroll yourself?

Yes, and it’s hard here. Four state taxes, progressive withholding schedules, daily overtime, a salary floor that moves every January, and dozens of local wage ordinances that follow the physical location of the work.

Payroll software handles the filings and the withholding schedules for $6 to $25 per employee per month.

Find payroll software that fits your business

Three things trip people up. Daily overtime needs a system that evaluates hours per workday and per consecutive day worked, alongside the weekly total. Local minimum wage keys off the work location. And the exempt salary floor needs a January calendar reminder, because the exemption lapses on the date the minimum wage rises.

Full-service software files the quarterly returns for you. You stay legally responsible for the taxes either way.

A 20-person company in Oakland

A 20-person design studio in Oakland pays twelve staff on salary, six hourly, and two part-time.

The studio owes the Oakland minimum wage for its hourly staff, and the state rate of $16.90 sets the floor beneath it. A designer working from home in a different city is owed that city’s rate for those hours.

Its four salaried managers must each earn at least $70,304 to stay exempt, and each must spend more than half their time on managerial work. A manager at $68,000 is non-exempt, and every 9-hour day owes an hour of overtime.

On the tax side, twelve of the twenty earn more than $7,000, so unemployment insurance and the Employment Training Tax cap out early in the year. Federal unemployment tax at the 2025 reduced credit ran $126 a head, or $2,520 across the company.

State Disability Insurance runs 1.3% on every dollar of wages with no ceiling, so the studio withholds $780 on a $60,000 salary and $1,950 on a $150,000 one.

PEO rules specific to California

California has no professional employer organization statute. There is no licensing act, no registration requirement, and no election about whose account reports your wages.

What governs instead is section 606.5 of the Unemployment Insurance Code, which decides who the employer is for payroll tax purposes.

The six-part test

A company that supplies workers is a leasing employer or a temporary services employer only where it performs all six of the following.

• Negotiates with clients on time, place, type of work, working conditions, quality, and price of the services
• Determines assignments and reassignments of workers, even though workers retain the right to refuse a specific assignment
• Retains the authority to assign or reassign a worker to other clients when a client finds that worker unacceptable
• Assigns or reassigns the worker to perform services for a client
• Sets the rate of pay of the worker, whether or not through negotiation
• Pays the worker from its own accounts

What follows from it

Section 606.5(c) sets the consequence. Where a supplier performs all six functions, the supplier is the employer of the workers. Where it does not, the client is the employer, and a supplier that pays the wages does so as the agent of the employer.

Most professional employer arrangements fail at least two of the six, because the client sets pay and directs assignments. Whether a particular arrangement clears the test turns on the facts of that agreement.

The practical question for a California buyer is whose account the wages get reported under and whose unemployment rate applies. Ask for the answer in writing, along with which functions the provider says it performs.

Bills that did not pass

Assembly Bill 2570 in 2010 and Assembly Bill 975 in 2012 would each have added section 606.6 to deem a professional employer organization an employing unit for unemployment insurance purposes. Neither became law. A 2012 Senate committee analysis records the Employment Development Department estimating 1,200 to 1,800 professional employer organizations operating in California.

Registration, filing, and deadlines

An employer registers with the Employment Development Department after paying more than $100 in wages to one or more employees in a calendar quarter. Registration runs through e-Services for Business and produces the employer payroll tax account number that every filing hangs off.

Quarterly reports

Quarterly returns are due January 1, April 1, July 1, and October 1, and they must be filed even in a quarter with no wages paid. Unemployment insurance and Employment Training Tax payments are due quarterly.

New hires and contractors

• New hires are reported on form DE 34 within 20 calendar days of the first day of work, through e-Services for Business.
• Rehires count as new hires where the employee has not worked for you for at least 60 consecutive days, as do employees returning from furlough, separation, or unpaid leave.
• Workers kept on after taking over a business are also new hires and must be reported.
• Employers filing electronically submit two monthly transmissions between 12 and 16 days apart.
• Independent contractors are reported on form DE 542 within 20 days of paying $600 or more, or contracting for $600 or more, whichever comes first.

California payroll reference

Rates and deadlines are current as of August 2026 and change annually. Verify against the linked source before filing.

Frequently asked questions

• How much should a payroll service cost?

  A payroll service generally runs $20 to $50 per employee per month, payroll software $6 to $25, and a PEO $40 to $150 or 3–12% of gross payroll. In California the configuration matters more than the headline price, because daily overtime, local minimum wage rates keyed to the work location, and meal and rest premiums all have to be set up correctly before the first run.

• Is monthly payroll legal in California?

  Generally no. Labor Code section 204 requires all earned wages to be paid at least twice a month on days designated in advance. There is one exception. Exempt executive, administrative, and professional employees can be paid once a month, on or before the 26th, provided the entire month’s salary including the unearned portion is paid at that time. A weekly or biweekly payroll must be paid within seven days of the end of the pay period.

• What is the 7 minute rule in California?

  It is a federal practice under the Fair Labor Standards Act that permits rounding time to the nearest quarter hour. Nothing in California law requires an employer to round, and California has narrowed where rounding is allowed. In Donohue v. AMN Services the California Supreme Court held that meal period time punches cannot be rounded, because rounding hides short meal periods that trigger premium pay. Employees are owed payment for all time actually worked.

• How many hours straight can you legally work in California without a break?

  A rest period of ten paid minutes is owed for each four hours worked or major fraction of four hours, and none is required for a shift of three and a half hours or less. A meal period of at least 30 minutes is owed before the end of the fifth hour of work, and a second one past ten hours. Each missed meal period and each missed rest period costs one additional hour of pay at the regular rate of compensation for that workday.

• What are the new payroll laws in California starting January 1, 2026?

  The state minimum wage rose from $16.50 to $16.90, which lifted the exempt salary threshold from $68,640 to $70,304 a year. The computer software professional threshold moved to $58.85 an hour or $122,573.13 a year. State Disability Insurance withholding rose from 1.2% to 1.3%, still with no wage cap. The unemployment rate schedule for 2026 is Schedule F+, running 1.5% to 6.2% for experience-rated employers.

• Does a PEO report my payroll taxes under its account or mine?

  California has no PEO statute, so the answer turns on section 606.5 of the Unemployment Insurance Code. A company supplying workers is the employer only where it performs all six listed functions, including setting the rate of pay and assigning workers. Where it does not, the client is the employer and the supplier pays the wages as the client’s agent. Ask any California PEO which functions it performs and whose account the wages get reported under, and get the answer in writing.