New Taxes in California for Individuals & Businesses

California’s tax landscape is in a continual state of flux, with new laws frequently being introduced that carry implications for both individual residents and business entities. The state’s legislature and municipal bodies regularly enact fiscal policies that can alter payroll deductions, create new transactional taxes, and modify the framework for business taxation. Understanding these shifts is important for proper financial planning and ensuring compliance.

New Payroll Tax Withholding Rules

A change in California’s payroll tax system took effect on January 1, 2024, directly impacting employees through their paychecks. This change centers on the State Disability Insurance (SDI) program, which provides short-term disability and paid family leave benefits. The alteration, brought about by Senate Bill 951, involves the complete removal of the wage ceiling for the SDI tax.

Previously, the SDI tax was calculated as a percentage of an employee’s wages only up to a certain annual limit. For example, in 2023, the SDI tax rate of 0.9% was applied to wages up to a maximum of $153,164. Any earnings above this threshold were not subject to the SDI tax for the remainder of the year.

Under the new rule, this wage limit has been eliminated. As of the start of 2024, all of an employee’s annual wages became subject to the SDI tax. The rate was 1.1% for 2024 and is 1.2% for 2025. The purpose of this legislative change was to increase the funding for the SDI program, allowing for an increase in benefit amounts paid to claimants.

The financial consequences of this change are most pronounced for high-income earners. For an individual earning $200,000 annually, the removal of the cap results in an increase in their total SDI contribution. An employee with a salary of $500,000 will experience a more substantial rise in their payroll tax withholding. Because this is a direct payroll tax, the impact is immediate, appearing as a higher deduction on employee pay stubs.

New Statewide Excise Tax on Specific Goods

California has introduced a statewide excise tax that targets the sale of particular products, with the regulation taking effect on July 1, 2024. This tax, established by Assembly Bill 28, applies to firearms, firearm precursor parts, and ammunition. An excise tax is a levy applied to the sale of specific goods, and in this case, it is collected from the retailer at the point of sale.

The law imposes an 11% tax on the gross receipts from the retail sale of the specified items. The responsibility for collecting this tax from the consumer and remitting it to the state falls upon licensed firearms and ammunition retailers in California.

The revenue generated from this excise tax is specifically earmarked for a dedicated purpose. The funds are directed to programs aimed at preventing gun violence and enhancing safety measures in schools throughout the state.

This 11% tax is in addition to any state and local sales taxes that already apply to the transaction. This creates a cumulative tax effect on the final purchase price for consumers of these goods.

Key Changes for California Businesses

California has recently implemented several tax law adjustments that have direct consequences for business entities operating within the state. A notable area of focus has been on the state’s Pass-Through Entity (PTE) elective tax.

The PTE elective tax is a workaround to the federal limitation on the state and local tax (SALT) deduction for individuals, which is capped at $10,000 per household. By allowing partnerships and S-corporations to pay state income tax at the entity level, the business can claim a federal deduction for those taxes, and the owners then receive a credit on their California income tax returns. Recent legislative updates have clarified aspects of the PTE tax, including the treatment of the credit and the specifics of making the annual election, making it a continued area of focus for business tax strategy.

Another area of change for California businesses involves the state’s conformity to federal tax provisions. California has not conformed to the federal bonus depreciation rules, which allow businesses to deduct a large percentage of the cost of certain assets in the year they are placed in service. This means businesses must maintain separate depreciation schedules for federal and state tax purposes.

California continues to offer various tax credits to incentivize specific business activities, such as the Research and Development (R&D) credit. While the fundamental structure of the R&D credit remains, legislative adjustments can alter the calculation or carryforward provisions.

Significant New Municipal-Level Taxes

In addition to statewide tax changes, several of California’s major cities have enacted their own tax measures, creating an additional layer of fiscal regulation. A prominent example of this trend is a special tax implemented in the City of Los Angeles.

This measure, often referred to as a “mansion tax,” is formally a special real property transfer tax. It is a one-time tax applied to the sale or transfer of real estate within the city limits of Los Angeles. The tax is structured in tiers based on the value of the property being transferred.

The first tier imposes a 4% tax on properties that are sold or transferred for a value greater than $5 million but less than $10 million. For properties valued at $10 million or more, a higher 5.5% tax rate is applied to the entire sale price. This tax is in addition to the existing real estate transfer taxes that are already in place.