California Personal Income Withholding Tax Set to Increase by 10%

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Come November 1, 2009, Californians will be receiving smaller paychecks, and it’s not because of a pay cut. To help solve the state’s $24 billion budget deficit, payroll withholding taxes will increase by 10%. Increases have also been set for supplemental wages, pensions, stock options and bonus payments. This increase will be in effect through December 31 of 2009.

Not a Tax Increase

It’s easy to misunderstand this change as a tax increase. The new withholding rates do not increase an individual’s state tax liability. All that happens is that the state is collecting the same tax amount from wages ahead of time to accelerate tax revenues. Additional withholding means that when Californians file taxes the following April, those who normally receive a refund should receive a larger one, and those who pay taxes will pay less. California personal income tax rates will not be affected.

To put it into numbers, if you currently have $20 withheld for state income taxes per check, you will now have $22 for the remaining 2009 pay periods beginning on November 1st.

Offsetting the Increase

With some planning, it's possible to adjust withholdings through the use of exemptions and through other tactics. The idea is to try to withhold exactly as much as the taxpayer will owe. Withholding too much means you're giving the government an interest-free loan, but withhold too little may result in you owing taxes come April 2010.

If you want to change your state tax withholdings, you can fill out a DE-4 form Employee’s withholding Allowance Certificate and submit it to your payroll representative.  Adjusting from single 2 to single 3 will not change your federal exemptions, just your state exemptions.  The form is available on the EDD website

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