How to File Business Taxes in California

Navigating business tax obligations in California presents a distinct challenge. The state maintains its own comprehensive tax regulations, which operate in addition to federal tax requirements. Understanding these unique state-specific rules is essential for any business operating within California. This guide clarifies California business tax obligations, helping businesses maintain compliance.

Identifying Your California Business Tax Obligations

The specific taxes a business owes in California depend significantly on its legal structure and operational activities. Most businesses will encounter at least one of the primary state taxes, which are administered by different agencies.

The Franchise Tax Board (FTB) oversees California’s franchise and income taxes. Corporations, including C-corporations and S-corporations, are subject to an annual franchise tax for the privilege of doing business in California. C-corporations pay a flat corporate tax rate of 8.84% on their net taxable income, or an alternative minimum tax of 6.65% if they do not have a profit. S-corporations, while often considered pass-through entities federally, are still subject to a 1.5% franchise tax on net income in California, with a minimum annual payment of $800. Newly incorporated or qualified corporations are exempt from the minimum franchise tax in their first taxable year.

Limited Liability Companies (LLCs) also face an annual minimum franchise tax of $800. LLCs with gross incomes exceeding $250,000 are subject to an additional annual LLC fee, which scales with income. For example, an LLC with income between $250,000 and $499,999 pays an additional $900 fee, while those with income from $1,000,000 to $4,999,999 pay $6,000. Sole proprietorships and partnerships generally do not pay franchise tax; instead, their income passes through to the owners, who report it on their individual California income tax returns (Form 540). Partnerships file an informational return, Form 565, and may pay a minimum franchise tax of $800 if structured as Limited Liability Partnerships (LLPs) or Limited Partnerships (LPs).

Businesses selling tangible personal property in California must collect and remit sales tax, which is administered by the California Department of Tax and Fee Administration (CDTFA). This tax is imposed on the retail sale of goods, with the seller acting as a collection agent for the state. Use tax applies to purchases of tangible personal property from out-of-state vendors for use in California, where sales tax was not collected by the seller. Local district taxes can also apply, leading to varying combined rates across different locations.

Businesses with employees are responsible for state payroll taxes, overseen by the Employment Development Department (EDD). These taxes include Unemployment Insurance (UI), Employment Training Tax (ETT), State Disability Insurance (SDI), and California Personal Income Tax (PIT) withholding. Employers must withhold PIT from employee wages and remit it to the EDD, along with their contributions for UI, ETT, and SDI. These taxes fund unemployment benefits, job training programs, and disability insurance for workers.

Beyond these primary taxes, some businesses may encounter other specific taxes or fees. These can include industry-specific fees, local business licenses, and property taxes on business-owned real estate or certain personal property. These obligations vary based on the specific nature and location of operations.

Preparing Your Business for California Tax Filing

Preparation involves securing necessary identification numbers, establishing online accounts with state agencies, and diligently maintaining financial records.

Businesses must obtain a Federal Employer Identification Number (EIN) from the Internal Revenue Service (IRS), which serves as a unique identifier for federal tax purposes. This nine-digit number is crucial for all businesses with employees, or those structured as corporations or partnerships. In addition to the federal EIN, California requires specific state identification numbers depending on the type of tax obligation. For franchise and income taxes, the Franchise Tax Board (FTB) automatically assigns an account number when a business registers with the California Secretary of State. Businesses subject to sales and use tax need a seller’s permit from the California Department of Tax and Fee Administration (CDTFA), which can be obtained through their online registration system. Employers must register with the Employment Development Department (EDD) to receive an employer account number for state payroll tax purposes.

Setting up online accounts with the relevant state tax agencies significantly simplifies the filing and payment processes. The FTB offers MyFTB, an online portal allowing businesses to view tax information, file returns, and make payments. Similarly, the CDTFA provides Online Services for managing seller’s permits, filing sales and use tax returns, and remitting payments. The EDD offers EDD Online, which enables employers to report wages, file payroll tax returns, and make electronic deposits.

Businesses should keep detailed records of all income, expenses, assets, and liabilities. This includes sales invoices, purchase receipts, bank statements, payroll records, and depreciation schedules for assets. Proper record-keeping supports the accurate preparation of tax returns, provides documentation in case of an audit, and helps in tracking financial performance.

Before initiating tax filings, businesses need to gather specific financial data and business information. This includes total gross receipts or sales figures, itemized business expenses, employee wage and withholding information, and details regarding asset acquisitions and disposals for depreciation calculations. Having all relevant financial statements, such as income statements and balance sheets, readily available ensures that the necessary data can be accurately transferred to tax forms.

Filing California Franchise and Income Taxes

The process of filing California franchise and income taxes is primarily managed through the Franchise Tax Board (FTB). Businesses can access the appropriate tax forms directly from the FTB website or through their MyFTB online account.

Corporations typically use Form 100, California Corporation Franchise or Income Tax Return, while S-corporations file Form 100S, California S Corporation Franchise or Income Tax Return. Limited Liability Companies (LLCs) taxed as partnerships file Form 568, Limited Liability Company Return of Income, and sole proprietors report their business income on their individual California income tax return, Form 540, using Schedule C. The MyFTB portal provides an electronic filing system that guides users through the necessary fields for each form.

When completing the tax forms, businesses must accurately transfer their prepared financial data into the designated sections. This involves inputting gross receipts, detailing allowable deductions for business expenses, and calculating net income. For corporations, the corporate tax rate of 8.84% is applied to net taxable income, or the minimum franchise tax of $800 is applied, whichever is greater. S-corporations apply a 1.5% tax rate to their net income, also subject to the $800 minimum. LLCs will also calculate their annual LLC fee based on their total California gross income, in addition to the $800 minimum.

The FTB offers various payment methods for tax liabilities. Businesses can make payments electronically through MyFTB using Web Pay, which allows for direct debit from a bank account. Other electronic options include credit card payments through third-party processors. For those preferring traditional methods, payments can be made by check or money order mailed with the appropriate payment voucher, such as Form 100-ES for estimated tax payments.

Standard filing deadlines vary based on the business entity type. For S-corporations and partnerships, the tax return is generally due on March 15th. C-corporations and LLCs taxed as corporations typically have a due date of April 15th. Sole proprietors’ business income is due with their individual income tax return on April 15th. If the due date falls on a weekend or holiday, the deadline is extended to the next business day.

Businesses unable to file by the original due date can request an extension. An extension typically grants an additional six months to file the return. An extension to file does not extend the time to pay; any estimated tax due must still be paid by the original deadline to avoid penalties. Returns can be submitted electronically through MyFTB, or physical forms can be mailed to the FTB.

Filing Other California Business Taxes

Businesses operating in California must also address sales and use tax and payroll taxes, which are managed by the California Department of Tax and Fee Administration (CDTFA) and the Employment Development Department (EDD), respectively.

Sales and use tax filing with the CDTFA depends on a business’s sales volume, determining the filing frequency. Most businesses file monthly, quarterly, or annually. Businesses with higher taxable sales generally have more frequent filing requirements, such as monthly, while smaller businesses might qualify for quarterly or annual filing. The CDTFA’s online services portal is the primary platform for submitting sales and use tax returns.

Through the CDTFA’s online system, businesses input their total sales, taxable sales, and any applicable deductions or exemptions. The system then calculates the sales tax due based on the statewide rate and any applicable district taxes. Payments can be made electronically through the online portal via direct bank transfer, or by credit card. Sales and use tax returns are typically due on the last day of the month following the reporting period. For example, a monthly return for January would be due by the last day of February.

Payroll tax filing with the EDD involves both regular tax payments and periodic wage reporting. Employers typically make payroll tax deposits weekly or monthly, depending on the amount of tax withheld and accrued. Quarterly returns, such as Form DE 9, Quarterly Contribution Return and Report of Wages, and Form DE 9C, Quarterly Contribution Return and Report of Wages (Continuation), are used to reconcile these deposits and report employee wages.

The EDD Online system is the primary method for employers to submit wage reports and make payroll tax payments. This platform facilitates the electronic filing of required forms and the secure transfer of funds from bank accounts. The quarterly returns are generally due by the last day of the month following the end of the calendar quarter (e.g., April 30 for the first quarter). Timely filing and payment are crucial to avoid penalties and interest charges.