California is a great place to settle down, start a family, and of course, start a business. Whether you’re interested in starting a small business or something larger, the state of California offers many benefits that can make starting your business a breeze.
For example, businesses started in 2024 don't have to pay the $800 minimum franchise tax for the first year (applies to LLCs, LLPs, and corporations). Furthermore, this state allows you to deduct things from your business’ revenue to further reduce your tax bill and boost your California business tax return.
That said, it's important to understand how taxes work for businesses in California. You need to understand how they work for sole proprietorships, LLCs, corporations, and other legal structures to see which option is right for you.
Thankfully, we’re here to help. Read on to learn everything you need to know about California business tax.
California Business Tax: Everything You Need to Know
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Types of California Business Tax
You may be wondering “How much is business tax in California?” There are many types of California business tax that you need to be aware of. Many of these taxes apply to all businesses, but this isn’t the case for each tax. For example, California business tax for LLCs can include the minimum franchise tax, sales and use tax, and special taxes.
So, it’s important to learn about each type of business tax in California. This ensures that you’re prepared each tax season. Learn more about the types of California business tax below.
Sales and Use Tax
California has a sales and use tax that has to be paid. In fact, this tax accounts for about 80% of the state’s tax revenue. The sales and use tax isn’t something you have to think about too much once you get it set up. You’ll need a license, seller’s permit, and sometimes other licenses depending on county or city regulations.
There are three parts of this tax that you need to know about; the state, local, and district tax. These rates may vary based on the district as well, so keep this in mind when paying your taxes. This tax applies to the use, storage, and consumption of goods purchased in California.
There are some goods and services that are exempt from this tax, so make sure you keep that in mind.
California State Income Tax
California state income tax is another tax that small businesses in California have to pay.
If you don’t have an LLC or a corporation, but still do business in California as a sole proprietor, self-employed individual, or DBA, you’ll have to pay this tax. If you own an LLC or corporation and receive income from that corporation, you also have to pay state income taxes.
The California state income tax rate varies based on how much money you make – it can be anywhere from 1 to 12.3%. Ultimately, it depends on the tax bracket that you fall into. These brackets are updated each year.
To file these taxes you’ll have to use the Form 540. If you’re filing jointly or with a spouse, this can make the process more complex, so we recommend working with an accountant.
For most self-employed individuals, the filing and payment deadline is April 15th. If the 15th falls on a holiday or weekend, it’s the next business day. There are also some exceptions the government can make, but these are rare. For example, during the COVID-19 Pandemic, people had until May to file their taxes.
There is also an extension you can file for that allows you to file your taxes in October. While you can file an extension, you still have to pay taxes on April 15th to avoid penalties.
California Corporate Taxes
Corporations in California have to pay a corporation tax. In California, the corporate tax rate is 8.84%. This is a flat rate that needs to be paid annually on the profits that a corporation makes. You can file these taxes by filling out Form 100 with the Franchise Tax Board.
If your corporation doesn’t make a profit in a calendar year, that doesn’t mean you’re off the hook. You still have to pay the alternative minimum tax (AMT). The minimum tax rate comes out to a flat rate of 6.65%.
California Franchise Tax
The California franchise tax is set by the Franchise Tax Board. This is a tax that corporations, LLCs, LLPs, and LLCs taxed as corporations have to pay. Essentially, if you have a legal entity that’s anything more than a sole proprietorship or basic partnership, there’s a good chance you have to pay the franchise tax.
Typically, the minimum franchise tax that has to be paid in California is $800, and you have to pay this tax every year. There are some grace periods for first-year businesses, but these programs aren’t guaranteed to stick around forever. Also, the way these programs are handled will vary based on the type of business you have.
For example, LLCs have to pay a minimum of $800 every year. However, if that LLC makes more than $250,000, an additional fee is added. The LLC tax rate in these cases varies based on the amount of income, but there are some limits.
On the other hand, S corporations have to pay the franchise tax of 1.5% of their income, or the minimum $800 – it depends on which one is higher.
Special Taxes and Fees
We covered a lot of information about taxes and what you might have to pay. Unfortunately, it doesn’t stop there. California also has more than 30 special taxes and fees that are administered by the California Department of Tax and Fee Administration.
These taxes cover a wide range of activities that apply to specific industries. Many of these special taxes and fees apply to industries that have federal regulations.
Some examples of these industries include:
- Cannabis taxes
- Alcohol beverage tax
- Fire prevention fees
- Childhood lead poisoning prevention fees
- Energy resources surcharge
- Tobacco taxes
- Firearm and ammunition sales taxes
- Fuel taxes and fees
These are only a few examples of industries that have to pay the special tax. You can find all of them here. We always recommend learning about these taxes before you start your business in California. Keep in mind that many of these instances require California business tax renewal.
How to File Business Taxes in California
It doesn’t matter what type of business you have in California; you have to pay your taxes. In most cases, you’ll have to pay quarterly taxes at the right date to avoid penalties, along with your franchise tax and other special tax obligations.
You also have to pay federal taxes quarterly. Learn more about how to file and pay your California business tax below. We break down both state and federal filing requirements.
How to Pay State California Business Tax
Aside from filling out the necessary forms, you also have to pay your taxes quarterly. You should already be paying your estimated quarterly taxes to the IRS, so you can do this around the same time you do your federal taxes. You only have to pay quarterly if your business will make more than $500 in that calendar year.
To pay your estimated taxes, you first need to calculate your estimated taxes. There is a formula attached to FTB Form 540-ES and you can find a PDF version of this form online. Make sure you estimate your state taxes to the best of your ability to avoid fees and penalties.
Unlike the IRS, there are a few dates you need to consider when paying quarterly state business tax in California. These dates include:
- 30% due April 15th
- 40% due June 17th
- 0% due September 15th (you can catch up on payments if you missed any here)
- 30% January 15th
Missing any of these dates will result in a penalty. If you miss all of the dates and choose to pay your taxes at the end of the year, you’ll have to pay a cumulative penalty. There is a minimum and maximum for this penalty, depending on your legal entity.
How to Pay Federal Business Taxes in California
Aside from paying state taxes, you also have to pay federal taxes. You can do so by making quarterly payments to the IRS. These payments need to equal 100% of what you’re expected to owe in taxes for that calendar year. Don’t worry, if you overpay you can get that money back in a tax return.
Depending on your legal entity, the IRS will have different forms for filing your business taxes. For example, if you’re a contractor, you’ll have to fill out a 1040 form. We always recommend consulting with a tax professional to help you fill out the necessary forms.
The IRS also offers free filing resources, so you don’t have to pay high fees that come with resources like TurboTax.
California Business Tax FAQ
Have questions about business taxes in California? Luckily, we have answers to the most common questions below.
What Taxes Do LLC Pay in California?
You may be wondering, “How much does an LLC cost in California?” Aside from your start-up costs like licenses, staff, and insurance, you have to keep tax in mind. While California waives the minimum franchise tax in the first year, you’ll have to pay at least $800 every year after your first.
Aside from the franchise tax, you also have to pay tax on the LLC’s revenue. So, is it worth it to start an LLC in California? Ultimately, it depends on your situation and the type of business you’re trying to start.
Do You Have to Pay the $800 California LLC Fee Every Year?
Yes, you have to pay the California LLC fee every single year. This is known as the minimum franchise tax, and sometimes it can be more than $800.
California does waive the fee for the first year you start your business. This is not permanent, so this program will end. As of right now (in 2024), you can avoid paying the tax for your first year. However, you’ll have to pay the tax every year after your first.
There is also a separate LLC fee for entities that make more than $250,000 in a calendar year. In these cases, you have to pay this fee annually if your company is projected to make that level of income.
Why Is California LLC Fee So High?
The LLC fee in California, also known as the minimum franchise tax, is set based on the Franchise Tax Board’s recommendation. It’s higher than some states because of California’s economy and how it works. Due to the higher cost of living, it makes sense to have a slightly higher minimum franchise tax.
The good news is that many LLCs in California make enough to cover this fee. Plus, depending on your legal structure it can even be a write-off come tax season.
Have Your California Business Taxes in Order
One of the most important things you can do for your business is pay your taxes. While many people try to get around them, taxes are unavoidable, and if you want your business in California to remain compliant, you need to pay them.
While the tax code can be complicated, California has plenty of resources that can help you learn more about your tax obligations. Plus, after reading this article, you should be in a good enough place to pay the necessary taxes.
Still, we always recommend working with an accountant, financial advisor, and tax professional if you’re unsure about how to pay your California business tax. Along with online resources, it’s the best way to make sure you’re paying the necessary taxes and only the necessary amount of tax.