CA S Corp Tax Rate: What Small Businesses Need to Know

California imposes specific tax rules on S corporations that differ from those in other states. While S corps avoid federal corporate income tax by passing income to shareholders, they still face state-level taxes and fees that impact profitability. Understanding these obligations is essential for business owners looking to minimize costs and stay compliant.

CA S Corp Rate Structure

California S corporations are subject to a tax structure distinct from C corporations and sole proprietorships. While they benefit from federal pass-through taxation, the state imposes its own tax. The primary rate is 1.5% of net income, with no cap. As profits grow, so does the tax liability, making it a key factor in business planning.

Unlike progressive personal income tax rates, the 1.5% S corp tax is a flat rate. This can benefit higher-earning businesses by avoiding steep marginal tax rates. However, even small profits are taxed, which can burden newer or lower-revenue companies.

California does not allow S corporations to deduct state taxes when calculating taxable income, unlike federal treatment, where state taxes are generally deductible. This increases the effective tax rate slightly, as the tax itself becomes a non-deductible expense.

Required Franchise Tax

All California S corporations must pay an annual franchise tax, regardless of profitability. The minimum tax is $800 per year, a fixed obligation even if the business generates no income.

This tax is due by the 15th day of the fourth month after the corporation’s taxable year begins. For calendar-year S corporations, this means an April 15 deadline. Late payments incur penalties and interest. The California Franchise Tax Board enforces this strictly, and failure to pay can result in fines or suspension of the corporation’s ability to operate.

S corporations that cease operations must formally dissolve with the California Secretary of State to avoid ongoing franchise tax liabilities. Simply stopping business activities does not end tax obligations, and failure to file termination documents can lead to unexpected tax assessments.

Minimum Fee Components

Beyond the franchise tax, California S corporations may owe additional fees based on gross receipts. These fees apply regardless of profitability, making them significant for high-revenue, low-margin businesses.

The fee structure starts at $250,000 in gross receipts. For example, an S corporation with $500,000 in gross receipts owes $900, while one generating $5 million or more faces a maximum fee of $11,790. Gross receipts include all revenue, not just taxable income, meaning expenses do not reduce this fee.

S corporations with subsidiaries or related entities should consider aggregation rules. California may require combined reporting, potentially increasing the gross receipts total and moving the business into a higher fee bracket. Proper structuring can help mitigate these costs.

Apportionment Provisions

California uses a single-sales factor apportionment formula to determine how much of an S corporation’s income is subject to state tax when operating in multiple jurisdictions. This formula considers only the percentage of total sales made within California, disregarding property and payroll, which were previously included.

The calculation is straightforward: California sales are divided by total sales, and the resulting percentage is applied to net income. For example, if an S corporation earns $10 million in revenue but only $4 million comes from California-based transactions, 40% of its taxable income is subject to the 1.5% state tax. This approach can reduce tax liability for businesses with significant revenue outside California.

Shareholder Tax Effects

S corporations pass income directly to shareholders, who report it on their personal tax returns. In California, shareholders owe state income tax on their share of earnings, regardless of whether they receive distributions. This can create cash flow challenges, as individuals may owe taxes on income they have not yet received.

California taxes S corporation shareholders based on progressive personal income tax rates, ranging from 1% to 13.3%, depending on total taxable income. High-earning shareholders may face a significantly higher tax burden compared to the 1.5% corporate rate. Additionally, California does not recognize the federal Qualified Business Income (QBI) deduction for S corporation income, eliminating a potential tax-saving opportunity.

Shareholders must also account for self-employment taxes on wages received from the S corporation, though distributions are not subject to these taxes.

Filing Requirements

All California S corporations must file Form 100S, the California S Corporation Franchise or Income Tax Return, reporting income, deductions, and tax liabilities. This form is due on the 15th day of the third month after the end of the tax year, meaning a calendar-year S corporation must file by March 15. Late filings incur penalties of 5% per month, up to a maximum of 25% of the unpaid tax.

S corporations must also make estimated tax payments if their expected annual tax liability exceeds $800. These payments follow a 30%-40%-0%-30% schedule and are due on April 15, June 15, September 15, and December 15. Late payments result in underpayment penalties, accruing interest until settled.

Additionally, shareholders receiving distributions may need to file estimated personal income tax payments to avoid penalties on their individual returns.