If you’re a small business owner living in California, you already know the state is ripe with opportunities to grow your company’s bottom line. But there’s also a dark downside to operating there – the tax laws that result in steep taxation of small businesses and double taxation. This guide answers the most common questions you’ll likely have as a small business owner in California.
What is California Small Business Tax?
Most businesses in California pay an 8.84 percent flat tax on earnings. So, if your company earns a profit of $100,000, you can expect to pay $8,840 in taxes. Some entities are also subject to a franchise tax, so it’s possible you could owe more. More on this type of tax shortly.
Who is Mandated to Collect Taxes in California?
S corporations, C corporations, limited partnerships (LPs), limited liability partnerships (LLPs) and limited liability companies are required to pay small business taxes in California.
What Types of California Small Business Taxes Do You Need to Pay?
Corporate Tax
C corporations and LLCs that elect corporate tax treatment are subject to a corporate flat tax of 8.84 percent. The amount you owe is based on your net taxable income from business operations.
Corporate Alternative Minimum Tax (AMT)
C corporations and LLCs treated as corporations for tax purposes must also pay an alternative minimum tax (AMT) of 6.65 percent. The AMT is assessed to prevent these entities from avoiding corporate taxation through write-offs.
Franchise Tax
If you operate as an S corporation, LLC, LP or LLP, you’ll be on the hook for a franchise tax. But if you’re a C corporation with a negative net income, you’ll pay the franchise tax instead of the corporate tax.
State Income Tax
If you’re a shareholder in a C corporation, California assesses a state tax of 13.3 percent on dividend income.
Other Small Business Taxes You May Have to Pay
It’s also important to be aware of these additional state tax obligations that are payable quarterly or annually.
Unemployment Insurance Tax
If you have employees, you’ll need to pay unemployment insurance tax. It’s calculated by multiplying the first $7,000 of each employee’s wages by 3.4 percent annually. You’ll pay this rate for the first two to three years. After that, the state will let you know what your new rate is in December of each year if it increases.
Employment Training Tax
As the name implies, this tax is used to cover the cost of employee training.
State Disability Insurance Tax
This tax is used to cover the wages for employees who are unable to work because they are disabled as a result of an illness, non-work related injury or other physical condition. It’s also used to cover paid family leave benefits.
California Personal Income Tax
Public services in California, including parks, schools, health and human services and roads, use these funds to acquire the resources they need to operate.
Who Needs to Pay California Small Business Taxes?
Below is a breakdown of taxes small business owners pay in California categorized by business type:
C Corporations
Here’s what you can expect to pay in small business taxes if you’re a C corporation:
- Corporate tax: 8.84 percent of the company’s net taxable income
- Franchise tax: $800 (only if the C corp did not generate earnings)
- Alternative Minimum Tax (AMT): 6.65 percent if the company does not claim net taxable income
- State tax: 13.3 percent on dividend income
S Corporations
S corporations are on the hook for the following small business taxes:
- Franchise tax: 1.5 percent of net income (minimum of $800 regardless of earnings)
- Personal income tax: S corp owners pay between 1 percent and 12.3 percent in personal income tax
LLCs
If you’re an LLC, here’s what you’ll pay in small business taxes:
- Franchise tax: $800 (if your gross income is below $250,000)
- Franchise tax: $900 (if your gross income is $250,000 to $499,999)
- Franchise tax: $2,500 (if your gross income is $500,000 to $999,999)
- Franchise tax: $6,000 (if your gross income is $1 million to $4,999,999)
- Franchise tax: $11,790 (if your gross income is $5 million or higher)
- Personal income tax: members pay between 1 percent and 12.3 percent in personal income tax
Partnerships
Partnerships have the following tax liabilities:
- Franchise tax: $800 for LPs and LLPs
- Personal income tax: partners pay between 1 percent and 12.3 percent in personal income tax
Sole Proprietorships
There’s only one type of tax sole proprietors have to worry about:
- Personal income tax: sole proprietors pay between 1 percent and 12.3 percent in personal income tax
How to Pay California Small Business Taxes
Navigating taxation in California can be challenging. Fortunately, you can follow these steps to simplify the process of paying California small business taxes.
Determine Your Corporate Income Tax Obligations
Refer to the corporate tax guidelines for your type of business. If you’re a corporation, you’ll need to file and pay any tax you owe by the 15th day of the third month following the end of your tax year. That’s unless you’re required to pay estimated quarterly taxes.
Payment can be remitted in person, by mail or electronically via the CalFile system.
Establish Your Withholding Taxes
You’ll also need to account for any payroll and withholding taxes. Like income taxes, they can also be paid online.
Find Out If You Have Other Additional State Taxes
Calculate the amount you’ll need to pay for unemployment insurance tax, employment training tax, state disability insurance tax and California Personal Income Tax.
Prepare the Files and Pay
Be sure to file your tax returns and remit payment for amounts owed in a timely manner. In addition, consider keeping adequate records throughout the year to simplify the process and work with an accountant or reputable tax preparer to ensure your business remains compliant with federal and state tax regulations at all times.
