I recently discussed the difference between independent contractors and employees with the employment taxes associated with the hiring of employees. For federal taxes, this includes FICA (Federal Insurance Contributions Act) taxes, which are comprised of Social Security and Medicare taxes.
California has its own set of payroll taxes, including unemployment insurance (UI), employment training tax (ETT), state disability taxes (SDI) and personal income tax (PIT). UI and ETT are paid by the employer. SDI and PIT are paid by the employee but the employer is required to withhold these amounts and forward them to the state.
Failure to collect and pay these taxes (which can result from mis-classifying employees) can result in serious fines, penalties and in the worst case scenarios you may find yourself out of business until issues are resolved.
This article at Accounting Web discusses 7 things small businesses should know about payroll taxes. The article discusses IRS practices, but San Diego (and California) businesses can apply these items to California as well.