Liability issues are the same whether the op is an individual or corporation when it comes to employees. The shareholders of a corporation are liable for state taxes. In terms of suits, again, it's much the same. If someone sues the corporation and the OP is the major shareholder, making the decisions, they will sue the OP personally as well.
Still incorporating may be the right financial decision for you. You would need to sit down with an accountant to help you decide that.
Your easiest answer is to ask an accountant to help you set this up correctly. If you aren't going to do that, then call the CA government and ask them to explain to you how to set up the payroll. Yes, you will get another payroll ID number. You may get two - one federal, one state; I'm not sure how that works there.
I also found this page that has a lot of information: For Employers They also provide a link to a workers comp rating page and insurers for workers comp. I'm not 100% sure that WC is mandatorily deducted from paycheques. From the little bit that I read, it looks to me like WC is the employer's responsibility. If there is something being deducted from an employee's cheque that appears to be WC, I would double check it. Some companies might get an insurance plan that covers WC, LTD, Life, Dental, etc. and only a portion of the premium is deducted.
Payroll can be very tricky, Tessa. Please do your homework.
Ah - actually: brainstorm! It may be easier and more efficient for you to call up a payroll service provider. They can walk you through what you have to set up, then they will crunch the numbers, deposit the employees paycheques and remit to the government departments as well as completing the annual returns! Yes, that is probably the best way to go for you.