Small business owners can be subject to several different types of state taxes in California in addition to federal income taxes. Unlike the federal government, California has no problem imposing double taxation, meaning a business could be subject to both business taxes and personal taxes when it has pass-through income.
Independent tax policy 501(c)(3) nonprofit organization the Tax Foundation reports that California ranks second to last in the country ahead of only New Jersey in terms of overall business tax burden. Any small business owner concerned about tax implications should be certain to work with an experienced small business lawyer.
California Franchise Taxes
C corporations that do not report a net income and certain pass-through entities, such as S corporations, limited liability companies (LLCs), limited partnerships (LPs), and limited liability partnerships (LLPs) must also pay a California franchise tax. Some states call franchise taxes privilege taxes meaning a company is paying for the privilege of doing business in a state.
In California, franchise taxes are calculated a bit differently depending on the business entity type. S corporations in California have to pay a franchise tax of 1.5 percent of their net income or $800, whichever amount is larger.
LLC franchise taxes will be based on net income and are determined as follows:
|LLC Net Income||California Franchise Tax|
|Less than $250,000||$800|
|$250,000 – $499,999||$900|
|$500,000 – $999,999||$2,500|
|$1 million – $4,999,999||$6,000|
|$5 million or more||$11,790|
LPs and LLPs will pay flat franchise taxes of $800 per year. General partnerships and sole proprietors will not pay franchise taxes.
California State Business Taxes
State business taxes are separate from income taxes, which will be discussed later. Business taxes by structure are as follows:
|C Corporation with net income||8.84 percent corporate tax|
|C Corporation without net income||$800 franchise tax and 6.65 percent alternative minimum tax (AMT)|
|LLC taxed like corporation with net income||8.84 percent corporate tax|
|LLC taxed like corporation without net income||$800 franchise tax and 6.65 percent alternative minimum tax (AMT)|
|S Corporation with net income||1.5 percent franchise tax|
|S Corporation without net income||$800 franchise tax|
|LLC with net income||Franchise tax listed above|
|LLC without net income||$800 franchise tax|
|LP||$800 franchise tax|
|LLP||$800 franchise tax|
|General Partnership||No business tax|
|Sole Proprietorship||No business tax|
California State Income Taxes
Self-employed business owners, independent contractors, and unincorporated businesses do not always have to pay state corporate or franchise taxes, but many still must pay state income taxes. This is also true for people earning income through pass-through entities such as S Corporations and LLCs.
The California state income tax rate can range from 1 to 12.3 percent, and an income tax rate will be based on which California tax bracket a person falls into as well as their filing status. If a person’s filing status is “Single” or “Married Filing Separately,” they will calculate their 2020 California income tax based on the following schedule:
|More than||Less than||Enter on Form 540, line 31|
|$0||$8,932||$0.00 + 1.00 percent of any amount over $0|
|$8,932||$21,175||$89.32 + 2.00 percent of any amount over $8,932|
|$21,175||$33,421||$334.18 + 4.00 percent of any amount over $21,175|
|$33,421||$46,394||$824.02 + 6.00 percent of any amount over $33,421|
|$46,394||$58,634||$1,602.40 + 8.00 percent of any amount over $46,394|
|$58,634||$299,508||$2,581.60 + 9.30 percent of any amount over $58,634|
|$299,508||$359,407||$24,982.88 + 10.30 percent of any amount over $299,508|
|$359,407||$599,012||$31,152.48 + 11.30 percent of any amount over $359,407|
|$599,012||Anything over||$58,227.85 + 12.30 percent of any amount over $599,012|
Quarterly State Taxes
Similar to quarterly estimated tax payments business owners make to the IRS for federal taxes, they also need to make quarterly payments to the California Franchise Tax Board (FTB) for state taxes. This will only apply if a business owner owes at least $500 in California state taxes for the year, or $250 when filing jointly with a spouse.
In 2022, the first quarterly state tax payment required 30 percent due by April 18, the second quarterly state tax payment required 40 percent due by June 15, the third quarterly state tax payment required 0 percent due by September 15, and the fourth quarterly state tax payment required 30 percent due by January 17, 2023.
Speak with an Experienced Mountain View Small Business Attorney
Small business owners also need to be aware of countless tax deductions for expenses such as office costs, advertising, and insurance. Kalia Law P.C. knows how to help small businesses with all of their tax concerns.
Do not wait to get help with whatever tax issues your small business is dealing with. Call (650) 701-7617 or contact us online to take advantage of an initial appointment.