The Small Business Owner's Guide to California State Taxes

  • Accracy
  • 26th Nov, 2023

If you're starting a business in California, in addition to paying federal taxes to the IRS, you'll also have to pay California state taxes to the California Franchise Tax Board (FTB).

The Small Business Owner's Guide to California State Taxes
Tax Tips

Most businesses are charged a California corporate tax, a California alternative minimum tax (AMT), and/or a California franchise tax, depending on what kind of business entity they're operating. Income that passes through your business is also subject to the California state income tax.

Here's how to figure out which California state taxes you need to pay.

California Corporate Taxes

The California corporate tax rate is 8.84% (flat rate). This tax rate applies to C corporations and LLCs that elect to be treated as corporations and report net taxable income (i.e. a profit). Without a profit, they pay a flat alternative minimum tax (AMT) of 6.65%.

If you're paying either of the above taxes, you'll have to file a California Corporation Franchise or Income Tax Return (Form 100) with the FTB.

Your California corporate tax return is due on the 15th day of the 4th month after your fiscal year end if you follow a fiscal year, and on March 15th if you don't. You have until the next business day to file and pay if the due date happens to fall on a weekend or holiday.

California Franchise Taxes

C corporations that don't report a net income as well as pass-through entities must also pay a California franchise tax.

Examples of pass-through entities include:

  • S corporations
  • LLCs
  • Limited partnerships (LPs)
  • Limited liability partnerships (LLPs)

In some states franchise taxes are also called privilege taxes—as in, you're paying for the privilege of doing business in that state. In California, they're calculated differently depending on your business entity type.

S corporations in California must pay a franchise tax of 1.5% of their net income or $800, whichever amount is larger.

LLC franchise taxes are based on net income and are determined by the following schedule:

LLC Net Income California Franchise Tax
Less than $250,000 $800
$250,000 - $499,999 $900
$500,000 - $999,999 $2,500
$1,000,000 - $4,999,999 $6,000
$5,000,000 or more $11,790

LPs and LLPs pay a flat franchise tax of $800 a year, while general partnerships and sole proprietors do not pay the franchise tax.

Paying state business taxes in California: a summary

Here's a summary of which California state taxes apply to which business entity type.

Keep in mind this table doesn't include the income taxes that sole proprietors, general partners and pass-through entity owners must pay on their share of business income, which we'll cover in the next section.

What kind of business do you have? Did it report a net income (Y/N)? What state taxes do you have to pay?
C Corporation Y Corporate tax (8.84%)
C Corporation N AMT (6.65%), $800 Franchise Tax
LLC taxed like a corporation Y Corporate tax (8.84%)
LLC taxed like a corporation N AMT (6.65%), $800 Franchise Tax
S Corporation Y 1.5% Franchise Tax
S Corporation N $800 Franchise Tax
LLC Y Franchise Tax (see table above)
LLC N $800 Franchise Tax
Limited Partnership (LP) Y or N $800 Franchise Tax
Limited Liability Partnership (LLP) Y or N $800 Franchise Tax
General Partnership Y or N No business taxes
Sole Proprietorship Y or N No business taxes

California State Income Tax

Self-employed workers, independent contractors and unincorporated businesses in California might not have to pay state corporate or franchise taxes, but most still have to pay state income taxes. Same goes for people who earn income from pass-through entities like S Corporations and LLCs.

The California state income tax rate ranges from 1 to 12.3 percent. Your income tax rate is based on which of the nine California tax brackets you fall into, and also your filing status.

If your filing status is "Single" or "Married Filing Separately," you'll calculate your 2020 California income tax based on the following schedule:

Over But not over Enter on Form 540, line 31
$0 $8,932 $0.00 + 1.00% of the amount over $0
$8,932 $21,175 $89.32 + 2.00% of the amount over $8,932
$21,175 $33,421 $334.18 + 4.00% of the amount over $21,175
$33,421 $46,394 $824.02 + 6.00% of the amount over $33,421
$46,394 $58,634 $1,602.40 + 8.00% of the amount over $46,394
$58,634 $299,508 $2,581.60 + 9.30% of the amount over $58,634
$299,508 $359,407 $24,982.88 + 10.30% of the amount over $299,508
$359,407 $599,012 $31,152.48 + 11.30% of the amount over $359,407
$599,012 And over $58,227.85 + 12.30% of the amount over $599,012

Consult the FTB's schedules here if you're filing your taxes jointly with a spouse, are a qualifying widow(er), or are using the "Head of Household" filing status.

Californians file their income taxes using FTB Form 540, the California Resident Income Tax Return. The filing and payment deadline for your California state tax return is normally April 15th, but this gets moved to the next business day if it falls on a weekend or holiday. This year, your California state tax return is due on April 18, 2022.

Quarterly state tax payments

Similar to the quarterly estimated tax payments you must make to the IRS for federal taxes, you must also make quarterly payments to the FTB for state taxes. This only applies if you expect to owe at least $500 in California state taxes this year (or $250 if filing jointly with a spouse).

You can calculate your estimated state taxes for the year using the worksheet on the bottom of FTB Form 540-ES, which you can request a PDF copy of using this page.

For 2022, quarterly state tax payments are due on the following dates. Unlike IRS payments, which split your estimated taxes into four even amounts across the year, the FTB follows a 30%, 40%, 0%, 30% scheme:

Payment Amount of tax due Due date
1 30% April 18, 2022
2 40% June 15,2022
3 0% September 15, 2022
4 30% January 17, 2023

Tax deductions

The standard deduction amount available to every Californian filing their 2022 state tax return is $4,803 for single filers and $9,606 for those filing jointly.

If you have lots of business expenses that you've kept track of using bookkeeping software or a ledger, you might be better off not using the standard deduction. Claiming your business expenses as tax deductions might lower your taxable income even more than the standard deduction does.

Any money you spend on miscellaneous, unreimbursed business expenses counts towards your business deduction. Some examples expenses include:

  • Certain medical expenses
  • Home office costs
  • Real estate taxes
  • Advertising
  • Insurance
  • Legal and professional fees

The 2% rule

The catch here is that you can only start deducting your business expenses when their total amount exceeds 2% of your adjusted gross income (AGI).

For example, let's say you're a single filer and your 2022 AGI is $50,000.

You spend $6,000 on business expenses.

You now face a choice:

  • You could claim the standard $4,601 deduction
  • Or you could claim a $5,000 deduction from your business expenses

How did we get the $5,000 deduction?

2% of $50,000 is $1,000. According to the 2% rule, we can only start deducting business expenses after the $1,000 total. This means we have to ignore the first $1,000. So we subtract $1,000 from the total amount of business expenses ($6,000), which equals $5,000.

Just remember that to claim these deductions, you'll need to have the correct documentation to back them up.

How Accracy can help

Wondering what deductions you can claim? Could you save on taxes by switching to an S corporation status? Bench provides small businesses with year round tax advice from a team of experts inside our easy-to-use platform.

With Accracy, you receive a dedicated bookkeeper to do your monthly bookkeeping and ensure your financials are organized and up-to date for tax filing. You'll have an on-going, accurate view of the health of your business and the most stress-free tax season yet.

How do I file and pay my California state taxes?

Eligible businesses and tax preparers can use the FTB's e-filing system, CalFile. You'll need to create a MyFTB account before using CalFile. The state recommends signing up for direct deposit to ensure the "fastest refund possible."

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