Payroll and benefits for Palo Alto startups

The first paycheck changes a startup's paperwork more than any funding round. Before it, the company deals with the IRS, Delaware and the California Secretary of State. After it, the company also answers to the state's Employment Development Department, the Labor Commissioner, the city's minimum wage rules and, often, the CalSavers retirement program. Payroll software handles much of the math. It does not decide whether you registered on time or posted the right notices.

This guide walks through what a Palo Alto employer sets up in the first months. Our separate guide to hiring in Palo Alto covers offer letters, exempt status, pay transparency and contractors. For the bank account that payroll draws from, see our startup banking guide.

Before the first paycheck

1. Get an EIN from the IRS. Your incorporation process usually covers this. See our guide to incorporating.
2. Register with the EDD. The EDD says you must register as an employer within 15 days once you have employees and pay more than $100 in wages in a calendar quarter. You receive a state employer payroll tax account number.
3. Buy workers' compensation insurance. The Department of Industrial Relations says California employers must carry it even with one employee. Our startup insurance guide explains how.
4. Choose a payroll system. Most startups use a payroll provider that withholds taxes, files returns and sends W-2 forms. Some use a professional employer organization, which also handles benefits.
5. Collect forms from each hire, including a federal Form W-4 for tax withholding and Form I-9 for work authorization.
6. Report new hires to the EDD within 20 days of their first day of work, according to the EDD. Payroll providers often do this for you. Confirm that yours does.

California payroll taxes in 2026 and 2027

The EDD publishes rates on its rates and withholding page. Some taxes are paid by the employer and some are withheld from the employee's pay.

The EDD says new employers keep the 3.4 percent UI rate for two to three years. After that the rate depends partly on how much your former employees have drawn in benefits. Since January 1, 2024, all wages have been subject to SDI. SDI funds disability and Paid Family Leave benefits, so the employee pays it, not the company.

Federal payroll taxes come on top: the employer and employee shares of Social Security and Medicare, federal income tax withholding and federal unemployment tax. Young companies that do research can offset part of the employer Social Security and Medicare share with the research credit. Our R&D tax credit guide explains the $500,000 payroll election.

Palo Alto's minimum wage

Palo Alto sets its own rate above the state's. According to the city's minimum wage page:

• $18.70 an hour from January 1, 2026;
• $19.25 an hour from January 1, 2027;
• it covers any employee who works at least two hours in a week in Palo Alto, including part-time workers and workers under 18, for the hours worked in the city;
• tips and fringe benefits cannot count toward it;
• employers must post the city's notice where employees can see it and keep records of hours for four years;
• Palo Alto contracts with the City of San Jose to handle compliance and claims. The city lists daily fines, currently $50.

The California rate for 2026 is $16.90. For salaried exempt staff, the state minimum salary is based on the state rate, not the city's. Our hiring guide has the 2026 and 2027 exempt salary thresholds, including the separate rate for software employees.

Founders often forget that the city rate applies to interns, part-time event help and hourly lab technicians. Remote employees outside Palo Alto are covered by the rules where they work.

Paid sick leave

The Labor Commissioner's paid sick leave FAQ, updated December 31, 2025, sets out the state rules:

• Since January 1, 2024, employers must generally let employees use at least 40 hours or five days of paid sick leave a year, whichever is more.
• Employers can front-load the full amount at the start of a year or let it accrue. The standard accrual is one hour for every 30 hours worked.
• Under accrual, unused leave carries over, but employers may cap total accrued leave at 80 hours or 10 days.
• The Labor Commissioner updated its paid sick leave poster and the wage notice employers give new hires under Labor Code 2810.5.

Many startups offer a more generous paid time off policy. A combined PTO policy can satisfy the sick leave law if it meets the same minimums, but California treats accrued vacation as wages that must be paid out when someone leaves. Ask counsel before you adopt an "unlimited" policy.

Workers' compensation

The Division of Workers' Compensation states that California employers must have workers' compensation insurance even if they have only one employee. Its employer fact sheet adds that going without is a criminal offense and that employees cannot be made to pay for the policy. Coverage is bought from a licensed insurer, usually through an agent or broker, or through approved self-insurance. Payroll providers often offer pay-as-you-go policies that bill premiums with each payroll run.

CalSavers retirement program

CalSavers is California's state-run retirement savings program for workers whose employers do not offer a plan. According to its employer help center:

• Employers that had at least one eligible California employee in the previous calendar year must register or claim an exemption.
• Companies that sponsor a qualified plan, such as a 401(k), SEP or SIMPLE IRA, are exempt but must report the exemption.
• Companies whose only employees are the owners or officers are exempt.
• Registered employers add eligible employees within 30 days, then add new hires within 30 days of their hire date.
• There are no employer fees and the employer does not contribute.
• Penalties under Government Code Section 100033(b) are $250 per eligible employee after 90 days of noncompliance following notice, plus $500 per employee after 180 days.

The state sends a notice to employers that need to act, with a deadline of December 31 of that year. Many venture-backed startups skip CalSavers by starting a 401(k) plan early, often through their payroll provider. Either way, report your status so you do not receive penalty notices.

Benefits startups usually offer

Beyond what the law requires, Palo Alto startups compete with large employers for engineers. Common benefits include:

• Health, dental and vision insurance. Small group plans are sold through brokers, insurers and professional employer organizations. Our page on health insurance in Palo Alto covers individual coverage through Covered California for founders who are not yet on a company plan.
• A 401(k) plan, which also exempts you from CalSavers.
• Stock options, covered in our equity guide.
• Commuter help. Caltrain and bike commuting are common in Palo Alto. Some companies pay for transit passes or bike gear.

Every benefit has tax rules. Pre-tax deductions, stipends and reimbursements are handled differently, so set them up in your payroll system rather than paying them by hand.

Common payroll mistakes

• Paying founders or early staff through personal accounts before payroll is set up.
• Treating employees as contractors to save taxes. California's ABC test is strict.
• Missing the EDD's 15-day registration window or the 20-day new hire report.
• Forgetting the higher Palo Alto rate for hourly workers in the city.
• Late final paychecks. California requires immediate payment, including accrued vacation, when an employee is fired.

Frequently asked questions