Law & Business · Lesson 6 of 8

Your First Employee: the ABC Test, Payroll Taxes, and Deposit Deadlines

"Your First Employee: the ABC Test, Payroll Taxes, and Deposit Deadlines" is lesson 6 of 8 in the Law & Business Learning Hub. It opens with "Employee or Independent Contractor: the ABC Test" and works through 5 short steps, then a worked example you can check yourself against.

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Steps in this lesson

  1. Employee or Independent Contractor: the ABC Test
  2. When You Become an Employer and What You Must Report
  3. The Four California Payroll Taxes
  4. The Federal Side
  5. California Deposits and Returns

The worked example in the course applies this lesson to a realistic job in 6 steps, from "Classify Carlos with the ABC test" through "Employer-paid total".

What you'll be able to do

  • Explain the main idea of "Your First Employee: the ABC Test, Payroll Taxes, and Deposit Deadlines" in plain language you can use on the exam.
  • Apply this step with confidence: "The Four California Payroll Taxes".
  • Apply this step with confidence: "The Federal Side".
  • Apply this step with confidence: "California Deposits and Returns".
  • Test yourself on the worked example and the quick-check quiz inside the classroom.
YOUR FIRST EMPLOYEE: ABC TEST AND PAYROLLABC TEST: EMPLOYEE UNLESSALL THREE ARE SHOWNAFree from control anddirection (contract and fact)BWork is outside the usualcourse of your businessCHas an independent tradeof the same natureCarlos: fails A, B, and C= EMPLOYEE$52,000 wages, first yearAmountUI 3.4% x first $7,000 (employer)$238ETT 0.1% x first $7,000 (employer)$7SDI 1.3% x $52,000 (withheld)$676Social security 6.2% (employer)$3,224Medicare 1.45% (employer)$754Employer-paid total$4,223Register within 15 days of paying over $100 in a quarterNew hire to EDD in 20 calendar days of first day of work (DE 34)Source: EDD Employer’s Guide (DE 44) 2026, ABC test and State Payroll Taxes; IRS Publication 15 (2026)CC
The diagram for this lesson, exactly as it appears in the Learning Hub.

The first steps of this lesson

Step 1: Employee or Independent Contractor: the ABC Test

California Employer's Guide (DE 44), Classifying Employees: a person providing labor or services for pay is an employee, not an independent contractor, unless the hiring business shows all three of these. (A) The worker is free from the hiring entity's control and direction in connection with the work, both under the contract and in fact. (B) The work is outside the usual course of the hiring entity's business. (C) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. Fail any one prong and the worker is an employee. A few situations use the Borello multi-factor test instead, California gives no relief under the federal Safe Harbor, and a misclassified worker can cost you back taxes, penalties, and interest.

Step 2: When You Become an Employer and What You Must Report

DE 44 (Start Here; About Employers): you become a subject employer when you pay wages over $100 in any calendar quarter, and you must register with EDD for an employer payroll tax account number within 15 days. You must report each new hire to the New Employee Registry on the DE 34 within 20 calendar days of the start-of-work date (the first day services were performed for wages, not the date hired). Rehires count after a separation of at least 60 consecutive days. Independent contractor payments of $600 or more, or a contract for $600 or more, must be reported on the DE 542 within 20 calendar days of whichever comes first. California workers' compensation insurance is also required (see the bonds lesson).

The remaining 3 steps, the worked example and the quiz are in the course. This is a preview. The full lesson, with the step-by-step explanations, a worked example and a quick-check quiz, is inside the classroom.

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