California Income Tax: Rates, Deadlines, and Key Rules

California’s income tax system is notoriously complex. As an employer or payroll manager, understanding how it works ensures your withholdings and reports stay accurate. For employees, it clarifies what shapes their take-home pay and how deductions and credits can work in their favor.

The state uses a progressive income tax system with rates of up to 12.3% plus a surcharge on high-income earners. California also defines deductions, credits, and taxable income differently from federal law.

These differences influence how you structure compensation and manage payroll compliance as a business operating in the state.

This guide explains California’s rules on state income tax, what you need to do to maintain compliance, and the role of payroll solutions like Deel in managing multi-state payroll taxes in the US.

How income tax works in California

The California Franchise Tax Board (FTB) administers the state’s income and franchise taxes for individuals and businesses. The Department of Tax and Fee Administration (CDTFA) manages sales, use, and excise taxes, along with special fees.

California taxes nearly all income unless it’s specifically exempt under state law. This includes:

• Wages and salaries
• Tips
• Business income
• Rental income
• Capital gains
• Interest
• Dividends

How California calculates adjusted gross income (AGI) and taxable income

California begins with the federal adjusted gross income (AGI) reported on IRS Form 1040, which is then adjusted for California-specific differences. These adjustments account for income taxed differently under state and federal rules.

• Additions include income that California taxes, but the federal government excludes
• Subtractions include income that California exempts, but the federal government taxes

After these adjustments, the result is the California AGI. From this amount, taxpayers subtract either the standard deduction or itemized deductions to determine California taxable income.

The standard deduction is a fixed yearly amount, while itemized deductions cover qualifying expenses like mortgage interest and real estate taxes.

How federal income tax differs from the California state taxes

See also: What Are California’s Paid Sick Leave Laws in 2025?

California residency rules and filing status

California recognizes three types of residency, each with different tax rules.

• Resident: Lives in California permanently or is domiciled in the state but away temporarily. Residents must report and pay tax on all income earned worldwide
• Non-resident: Lives outside California and is in the state for short visits, temporary work, or specific transactions. Nonresidents pay tax only on income earned from California sources
• Part-year resident: Lived in California for only part of the year. They pay tax on all income earned while residing in California, and on California-source income earned while living elsewhere

For filing status, California uses the same five categories as the federal tax system. The correct status depends on the taxpayer’s situation on the last day of the tax year. It should match the one used on the federal return.

As a taxpayer, your filing status also determines which form you use:

• Single filers: Form 540 or 540 2EZ
• Married or registered domestic partnership (RDP) filing jointly: Form 540 or 540 2EZ
• Married or RDP filing separately: Form 540
• Head of household: Form 540 or 540 2EZ + Head of Household Filing Status Schedule (FTB 3532)
• Qualifying surviving spouse or RDP: Form 540 or 540 2EZ

See also: What is California’s Paid Family Leave (PFL)? A 2025 Guide

California state income tax rates and brackets (2025 tax year)

California uses a progressive income tax system. The applicable rate depends on taxable income and filing status.

An additional 1% surtax applies to taxable income over 1 million under the Mental Health Services Act (MHSA), commonly known as the “millionaires’ tax.” It brings the top marginal rate to 13.3%.

California employees also contribute to the State Disability Insurance (SDI) program. The 2025 SDI rate is 1.2%, applied to all wages with no income cap.

California does not levy local income taxes, but there’s a sales tax and use tax:

• Sales tax: The base California sales tax rate is 7.25%. Additional local district taxes can raise the total to about 10.25%
• Use tax: Applies to out-of-state purchases brought into California for use, storage, or consumption when sales tax wasn’t charged. The rate matches the combined local sales tax

See also: Step-by-Step Guide to the US Payroll Process

California income tax deductions and credits

California allows a mix of deductions that lower taxable income, along with several tax credits that reduce the tax owed.

Tax deductions

For single or married/RDP individuals filing separately, the standard deduction is USD 5,706. For married/RDP individuals filing jointly, head of household, or qualifying widow(er), the amount is USD 11,412.

If a taxpayer can be claimed as a dependent, their standard deduction is the greater of USD 1,300 or their earned income plus USD 450, up to the standard deduction limit for their filing status.

In addition to the standard deduction, California allows several itemized deductions, such as:

• Full deduction of state and local taxes
• Medical and dental expenses exceeding 7.5% of adjusted gross income (AGI)
• Home mortgage interest and property taxes on up to USD 1 million
• Charitable contributions to qualified organizations
• Certain job expenses or miscellaneous deductions allowed under California law
• Unreimbursed employee expenses exceeding 2% of AGI
• Casualty and theft losses from federally declared disasters

California’s deductions largely follow federal rules but differ in key areas. The state has no SALT cap, allows a higher mortgage interest limit, and permits some deductions disallowed federally, which reduce taxable income.

Applicable tax credits in California

California also provides several tax credits that reduce the tax owed after taxable income is calculated.

They include:

• Personal exemption credit: A flat-rate tax credit that reduces tax liability
  • USD 153 for single, separate, or head of household
  • USD 306 for joint filers or surviving spouses
  • USD 475 for dependent exemption credit
• Earned income tax credit: Up to USD 3,644 for qualifying individuals earning USD 31,950 or less
• Child adoption costs credit: Covers 50% of adoption costs, up to USD 2,500 per child per year
• Child and dependent care expenses credit: Covers expenses incurred in taking care of a child, spouse/ RDP, or dependent. A taxpayer can claim up to USD 3,000 for one person and USD 6,000 for two or more people
• Foster Youth Tax Credit (FYTC): Up to USD 1,154 per individual or USD 2,308 for qualifying joint filers, available to former foster youth aged 18–25
• Young Child Tax Credit (YCTC): USD 1,154 per return for taxpayers with a child under 6, earning USD 31,950 or less
• College access tax credit: A tax credit of 50% of the contributions made to the California Access Tax Credit (CATC) Fund
• Other state tax credit: Offsets income tax paid to another state on income also taxed by California

See also: A Guide to California Independent Contractor Laws

Filing and payment details for California tax returns

California uses different forms based on residency and filing complexity:

• Form 540: Full-year residents
• Form 540NR : Part-year or nonresidents
• Form 540 2EZ: Full-year residents with simple tax returns

The FTB offers a free e-file option called CalFile, which will integrate with IRS Direct File beginning January 2026 to allow direct import of federal data.

The option to file by mail is also available, but paper processing can take up to three months.

What are the due dates for filing California tax returns?

The regular due date to file and pay California state income tax is April 15. The FTB provides an automatic filing extension to October 15, but payments are still due by April 15.

Taxpayers outside the US on April 15 have until June 15 to file and pay, with an additional filing extension to December 15.

If a deadline falls on a weekend or bank holiday, it moves to the next business day.

How individual taxpayers should handle estimated tax payments in California

Individual taxpayers expecting to owe a large amount of income tax not covered by withholding or credits must make quarterly estimated payments.

They’re due April 15, June 15, September 15, and January 15 of the following year. If a due date falls on a weekend or bank holiday, it shifts to the next business day.

Payments can be made electronically through the FTB’s Web Pay system or by mailing Form 540-ES with a check or money order.

How employers should handle income tax withholding in California

The Employment Development Department (EDD) handles payroll taxes in California. Employers must withhold Personal Income Tax (PIT) from employee wages and send those amounts to the EDD.

The withholding amount depends on each employee’s Form DE 4 (Employee’s Withholding Allowance Certificate) and the current EDD withholding schedules.

Employers must report and remit PIT regularly. The deposit frequency depends on both the amount withheld and the employer’s federal deposit schedule.

• Quarterly deposits for small employers
• Monthly or semiweekly deposits for larger employers
• Next-day deposits for very large withholdings

How to handle amendments

If there are errors in reporting wages, employers must file an amended report using DE 9ADJ and issue corrected W-2C forms to affected employees. The EDD provides detailed instructions on how to correct a quarterly contribution return and report.

You must pay any underpayment, and you can claim any overpayment as a refund through the EDD.

For individuals, amendments are made by filing Form 540 with Schedule X through the FTB. The state’s “Amend an income tax return” resource provides detailed instructions on how to make an amendment.

If an amended return generates a refund, its status can be tracked using the FTB’s “Where’s My Refund?” tool or the MyFTB account.

See also: A Guide to PEO in California

What employers and workers should know about California income tax

Employers and employees share responsibility for following California income tax rules, especially in multi-state or remote work situations.

California taxes all income earned within the state, regardless of the employer’s location. If an employee moves mid-year, employers should withhold tax only on wages earned while the employee lived or worked in California.

Employees who relocate must file as part-year residents, reporting:

• All income earned while living in California
• California-source income earned after moving out of the state

After a relocation, payroll systems should be updated immediately to reflect the employee’s new address, work location, and state tax setup.

Compliance requirements for California income tax

To maintain compliance, workers should file an accurate Form DE 4 and update it after any relocation or change in residency.

Employers must:

• Register with the EDD
• Withhold and deposit PIT based on California’s sourcing rules and the assigned deposit schedule
• File Forms DE 9 and DE 9C quarterly to reconcile wages and PIT
• Maintain clear documentation of employee work locations, withholding certificates, and multi-state allocations

Payroll automation using Deel Payroll - US helps you maintain tax compliance across states.

Deel automatically calculates and files payroll taxes, along with quarterly and annual reports, to the EDD, FTB, and other federal and state agencies. It also manages all required state forms, and stores them within the platform.

Employees receive digital pay stubs automatically and can access them anytime through a self-serve dashboard. When team members relocate, Deel updates registrations, filings, and deposits to match each new jurisdiction.

Deel’s in-house team of US tax experts provides local guidance and hands-on support, helping your business stay compliant as it expands globally.

How to set pay and expectations around California taxes

California’s income tax rates exceed 12%, meaning employees take home less pay than their peers in low- or no-tax states.

As an employer, factor in these tax differences when setting compensation to keep net pay competitive across locations.

Use Deel’s Take-Home Pay Calculator to estimate how state taxes, benefits, and deductions affect net pay. Share these estimates with the employee to provide a clearer view of their expected take-home pay and help them budget more accurately.

Manage California income taxes with Deel

California’s income tax system is among the most complex in the US. It features progressive rates up to 12.3%, a surcharge on high earners, and unique rules for deductions, credits, and filing deadlines. Employers must also meet strict withholding, reporting, and deposit requirements set by the EDD.

To stay compliant, verify information through official state resources and seek guidance from licensed tax professionals when needed.

Deel Payroll - US simplifies compliance through state-by-state payroll management. It automates salary and tax calculations and provides clear gross-to-net visibility.

The platform offers real-time compliance monitoring to keep filings accurate, while the Compliance Hub keeps your team updated on regulatory changes.

Book a demo to see how Deel streamlines payroll and compliance across all 50 US states.