How Much Are Business Taxes in California?

California’s tax system for businesses can be complex. The state’s tax obligations vary significantly based on a business’s legal structure, activities, and location. This article clarifies these different tax components, providing a foundational understanding of what businesses might expect to pay. Several factors influence the exact amounts, which this overview will detail.

Business Entity Tax Structures

A business’s legal structure significantly dictates its California state tax obligations. Different entity types have distinct rules for income recognition and taxation.

Sole proprietorships and partnerships are “pass-through” entities. The business itself does not pay state income tax; instead, income or loss is reported on the owners’ personal California income tax returns. California’s progressive personal income tax rates range from 1% to 12.3%. An additional 1% mental health services tax applies to taxable income over $1 million, bringing the highest marginal rate to 13.3%.

Limited Liability Companies (LLCs) in California are subject to a minimum annual tax of $800, regardless of income or activity. Additionally, LLCs with total California income exceeding $250,000 pay an annual fee that increases with higher revenue tiers. Most LLCs are taxed as pass-through entities, with income reported on the owners’ personal tax returns, unless they elect corporate taxation.

S corporations in California pay an annual minimum franchise tax of $800. They are also subject to a state corporate income tax of 1.5% of their net income. Unlike in many states, California taxes S corporation income at the corporate level before it passes through to shareholders for personal income tax.

C corporations in California pay a minimum annual franchise tax of $800 and a corporate income tax of 8.84% on their net income. They operate under a “double taxation” system: the corporation pays tax on profits, and shareholders then pay personal income tax on dividends received.

Major California State Business Taxes

Beyond entity-specific taxes, California imposes other significant state-level taxes affecting many businesses. These are typically levied on transactions or specific goods and services.

Sales and use tax is a prominent state tax in California. Sales tax is imposed on retailers for the sale of tangible personal property. The statewide base sales tax rate is 7.25%.

Local district taxes are added, leading to varying combined rates across cities and counties, which can range from 0.10% to 2.00%. Total sales tax rates can reach 10.75% or more in some areas. Retailers collect this tax from customers and remit it to the state.

Use tax is a companion to sales tax, applying when sales tax was not collected on a taxable purchase of tangible personal property for use within California. This often occurs with purchases from out-of-state vendors. The use tax rate is the same as the sales tax rate that would have applied. Businesses are responsible for self-reporting and remitting this tax.

California also imposes excise taxes on specific goods or activities, such as fuel, tobacco products, and cannabis. These taxes are typically embedded in the product price or levied on transactions, contributing to state revenue.

Taxes Related to Employment and Property

Businesses employing individuals or owning property in California incur additional tax obligations. These taxes fund state programs and local services.

Employers in California are responsible for several payroll taxes. State Unemployment Insurance (SUI) funds unemployment benefits, with new employers typically starting at a 3.4% rate. The Employment Training Tax (ETT) funds job training programs, with a rate of 0.1% on the first $7,000 of each employee’s wages.

Employers also handle State Disability Insurance (SDI) and Personal Income Tax (PIT) withholding. SDI provides partial wage replacement for eligible workers unable to work due to non-work-related illness, injury, or pregnancy. This program is funded through employee paycheck deductions, which employers withhold and remit. Similarly, employers must withhold California personal income tax from employee wages and remit these amounts to the state.

Property tax is a significant obligation for businesses owning real estate or business personal property in California. This ad valorem tax is based on the property’s assessed value. Real estate is assessed by county assessors, with the tax rate limited to 1% of assessed value and annual increases capped at 2%. Business personal property, including equipment and fixtures, is assessed annually at fair market value.

Local Business Taxes and Fees

Beyond state taxes, businesses in California often encounter taxes and fees imposed by local jurisdictions like cities and counties. These obligations vary significantly by municipality.

Many cities and counties require businesses to obtain a local business license and pay an annual tax or fee. The calculation of these local business taxes differs widely. Jurisdictions may base the amount on gross receipts, number of employees, business activity type, or impose a flat annual fee.

Local governments may levy various other fees, including zoning permits, building permits, and waste management fees. Specific industries might also face specialized local fees. Businesses should consult local government agencies where they operate to understand specific requirements and rates.