California LLC Taxes
In order to make sure your California limited liability company (LLC) is meeting all its tax obligations, it’s essential to have an understanding of the local, state and federal taxation laws that are in play.
This article covers the main types of California LLC taxes to look out for in addition to a step-by-step guide on the process of filling your taxes as an LLC in California.
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Recommended: Schedule a free consultation with 1-800Accountant to stay on top of your taxes.
How Is an LLC Taxed in California?
Taxation in California isn’t applied in the same way to all LLCs – instead, it varies depending on a number of factors, such as an LLC’s nature, locality, and tax status.
While LLCs typically benefit from pass-through taxation by default, they can elect to be taxed as one of the following:
- C Corporations: The LLC is treated as a separate entity to its owners, paying corporate income tax rates on its total profit while the owners also pay personal income tax on any distributions they take.
- S Corporations: In return for paying owners a “reasonable salary,” the LLC’s remaining profits are distributed among members without a need to pay FICA or self-employment taxes on them.
The following sections go into the various tax responsibilities of your LLC at local, state, and federal levels in California to help you ensure your LLC navigates them effectively.
California Local Taxes
The local laws and tax regulations differ greatly between different localities in California, where there are currently a number of unique taxes in place at county and city levels.
Below is a list of the main local taxes and permits found in California.
Sales and Use Taxes
Cities, counties, and other special districts can add additional local sales taxes to the statewide rate of 7.25% imposed across California. Each locality decides whether or not to impose its own local sales tax, which typically ranges from 0.10% to 1.0%.
However, since some areas are affected by multiple local rates, sales tax in California can vary from 7.25% (where there are no additional local sales taxes) to 10.75%. For example, six cities are currently subjected to this 10.75% sales tax rate – all of which are located within Alameda County, while more than 60 local jurisdictions have opted to impose no additional sales taxes at all.
Note: To find the sales and use tax rate that’s in effect in your locality, use the California Department of Tax and Fee Administration’s lookup tool.
If your LLC owns real property in California, it will need to pay property taxes. In California, each county will assess the value of each individual and business’s real property and apply a general property tax rate of 1% to this figure in order to calculate your tax bill.
For more information on how property tax works in your local area, get in contact with your local officials using the Listing of County Assessors on the California State Board of Equalization’s website.
Recommended: Schedule a free consultation with 1-800Accountant to ensure your business remains legally compliant.
California State Taxes
Every state has its own regulations and rules that dictate how it taxes individuals and businesses – below are the most relevant state-level taxes for LLCs in California.
The California franchise tax is an annual tax your LLC must pay for the privilege of doing business in California. It doesn’t apply to franchises specifically but rather to any businesses that operate primarily in California.
This tax rate is set at $800 and must be paid by all businesses based in the state, whether or not they generated a profit that year. Newly-formed businesses don’t need to pay franchise tax during their first year of operation but will be required to do so every year subsequent to this.
Your LLC will typically need to pay its franchise tax bill by the 15th day of the fourth month of the current taxable year, regardless of whether your business is active or not.
Most businesses that operate in California will not be able to get out of paying this Franchise Tax, even if they were inactive or lost money, though some charities qualify for a California Franchise Tax Exemption.
Note: If you’re thinking about canceling your LLC within its first year, be sure to file a Short Form Cancellation Certificate (Form LLC-4/8) with the Secretary of State so that you don’t need to pay this $800 annual tax.
This group of taxes refers to the charges imposed by the state on the earnings of individuals and entities operating within California. Outside of franchise tax, this includes:
- Personal Income Tax: A gradual tax that increases from a rate of 1% up to 12.3% across nine tax brackets. The thresholds for these brackets change each year, so it’s best to use the Franchise Tax Board’s Tax Calculator to find out how much your LLC owes.
- Corporate Income Tax: A flat tax of 8.84% on any net taxable income from business activity within California conducted by LLCs that have been classified as C corps.
In order to limit the extent to which LLCs taxed as C corps can reduce their tax bill with deductions, the California Secretary of State has introduced an Alternative Minimum Tax.
This allows corporations to deduct a maximum of $40,000. The leftover income, known as your Alternative Minimum Taxable Income (AMTI), is then taxed at a rate of 6.65% in order to calculate your Tentative Minimum Tax (TMT).
If this provisional amount exceeds how much you’d need to pay under the regular corporate income tax rate of 8.84%, your LLC will need to pay the difference.
In California, a sales tax rate is applied at a flat rate of 7.25% that’s added to the price of tangible goods and services sold within the state and paid by consumers – though it can increase up to a maximum of 10.75% depending on the locality your LLC is based in.
Most physical goods (i.e., personal property such as clothes, electronics, and furniture) are taxable – though there are some sales tax exemptions, including prescription drugs and prepared food.
In addition to this general sales tax, there are a number of special taxes and fees that are applied to the sale of specific products sold in California, including the:
- Alcoholic Beverage Tax
- California Electronic Cigarette Excise Tax
- Cannabis Taxes
- Hazardous Waste Fees
- Fuel Taxes
Note: You can find a full list of these special state taxes, as well as more information on how they work in practice, on the California Department of Tax and Fee Administration's Special Taxes and Fees page.
Regardless of where your business is located, if you run an LLC in the US, there are a number of federal taxes you’ll need to pay. Below are some of the main types your LLC may be required to pay for federal tax purposes:
By default, the IRS will not treat single and multi-member LLCs as separate entities from you for tax purposes. What this means is that you’ll need to report your share of your LLC’s profits on your individual tax returns and pay federal income tax on them at the personal rate of your tax bracket.
Having said that, keep in mind that LLCs can also elect to be taxed as C corps or S corps, which changes how these taxes are levied in different ways.
In addition to income tax, members of single and multi-members LLCs will need to pay self-employment tax on the share of the business’s profits that they report on their personal tax return at the end of the year.
This tax is levied at a flat rate of 15.3% against businesses with net earnings that exceed $400, though it is applied slightly differently to LLCs that have elected to be taxed as S corps or C corps.
If your LLC hires any employees, it will need to withhold a portion of their salaries to cover various types of taxes on your employees’ behalf – including Social Security, Medicare (FICA), and payroll taxes.
Furthermore, the members of any LLCs that have elected to be taxed as an S corp will be required to pay employment taxes on their salaries. However, in return for this, the remainder of the business’s profit after these salaries have been distributed will be safe from both self-employment and FICA taxes.
If your LLC engages in certain types of business (such as the sale of alcohol and tobacco or operating a heavy highway vehicle, among others), it may need to pay federal excise taxes in order to do so legally. Each excise tax comes with its own set of rules, rates, and filing obligations you’ll need to be aware of.
Understanding and fulfilling these federal tax obligations is crucial for keeping your LLC compliant and avoiding unnecessary financial penalties and/or fines.
How to File LLC Taxes in California
Below, we’ve outlined the general process an LLC in California will need to follow in order to file their tax return correctly. Note that the specificities of each step will vary slightly depending on how your LLC is organized and the specific locality it’s based in.
Step 1: Gather Your Documentation
To ensure accurate tax filing, thorough record-keeping is essential. Begin by collecting your personal information, including:
- You and your partner’s Social Security number, date of birth, and residential address
- The previous year’s tax returns
- Your LLC’s Employer Identification Number (EIN)
Then, you’ll need to gather all documentation related to your business’s income, such as:
- Invoices you’ve issued
- Sales transaction logs
- Electronic payment reports from services like PayPal or Stripe
Lastly, assemble all records pertaining to your business expenses, which should cover:
- Lease receipts for your business premises
- Bills for utilities
- Records of office supplies purchases
- Documentation of business-related travel
- Payroll records for employees
Note: Depending on how your LLC is organized and its tax election, you may need different information for your tax return.
Step 2: Find The Right Tax Forms
Once you've gathered all necessary documents, the next step is to select the correct tax forms for your LLC based on its organization:
- Single-Member LLCs: The business’s total income and expenses are reported on a Schedule C form, which is attached to the owner’s personal tax return and due by April 15 or the following business day if it lands on a weekend or holiday.
- Multi-Member LLCs: File an information return using Form 1065. Members must fill out a Schedule K-1 showing their individual earnings or losses by March 15 or the next business day.
- C Corporations: File a corporate tax return using Form 1120 by the April 15 deadline or on the next business day if it's a weekend or holiday.
- S Corporations: Use Form 1120-S for the corporate tax return and distribute Schedule K-1 forms to shareholders for reporting their shares of profits or losses. The deadline for filing taxes is March 15 or the following business day.
Since state and local taxes will have their own individual forms and requirements, we recommend contacting your municipality or hiring an accountant for guidance.
With the appropriate documentation gathered and the correct tax forms for your business entity on hand, you’ll be ready to fill them out and submit them.
Step 3: File Your Taxes
The majority of businesses choose electronic filing for its speed, enhanced security, and reliability compared to paper filing, which can be slower and more prone to errors. Here’s how it works:
- Federal Tax Returns: The IRS provides two electronic services for tax submission: Free File for businesses with an AGI below $72,000 and Free Fillable Forms for those above the threshold.
- State Tax Returns: Submit your taxes online using one of the authorized e-filing providers listed on the California Franchise Tax Board website.
- Local Tax Returns: The filing requirements can vary depending on the specific tax, so be sure to contact the local governing agency in your locality for more information.
Note: These electronic filing tools are best suited for those who are already confident in handling their LLC taxes as if filling out a paper form.
For new business owners, we recommend opting for the expertise of a tax professional in order to ensure both accuracy and compliance in your tax filings.
Recommended: Schedule a free consultation with 1-800Accountant to stay on top of your taxes.
Keep Your California LLC Compliant
While LLCs are generally easier to maintain than corporations, there are certain state and local formalities your LLC must satisfy in order to remain compliant.
California’s Statement of Information
In order to do business in California, your LLC must submit an initial Statement of Information to the Secretary of State within 90 days of completing its Articles of Incorporation. After this, you’ll need to continue to submit a Statement of Information every year in order to keep your LLC in good standing.
This document serves as an annual report updating the state on new information about your LLC, such as:
- Changes in your LLC’s name,
- New LLC owners or members, and
- Updates in your LLC’s business description.
Be sure to submit this statement on time, as failure to do so can result in penalties, fines, and even the dissolution of your LLC.
California LLC Annual Fee
If your LLC generates more than $250,000 in gross receipts from business activities based in California, it will also need to pay a yearly LLC fee in order to remain compliant.
For LLCs exceeding this threshold, the fee amounts are as follows:
|Annual LLC Fee
|$5,000,000 or more
You’ll need to use the Estimated Fee for LLCs (FTB 3536) form in order to pay this fee by the 15th day of the sixth month of the current tax year. Be sure to take care with this due date, as your LLC may be subject to penalties if you don’t pay on time or pay too little.
Note: If your LLC has elected to be taxed as a C corp, it will not need to pay this fee.
Licensure and Tax Requirements
In California, almost all businesses are required to obtain various licenses and permits at the local, state, and federal levels. Below, we’ve broken down three of the most common types your LLC may need:
- Sales Tax Licenses: Any California-based business intending to sell or lease tangible personal property must first obtain a seller's permit (also known as a business tax certificate or sales tax license) in order to pay tax. You can do this by applying online through the California Department of Tax and Fee Administration website.
- Professional Licenses: In order to work in a number of specialist professions, such as accountancy, medicine, and law, your company will first need to obtain a license or permit specific to that industry in order to operate legitimately in California.
- Environmental Permits: Certain permits may be required of your LLC in order to ensure that your business activities comply with environmental regulations. The California Department of Public Health (CDPH) regulates all licenses and permits relevant to environmental safety and public health.
Note: For more information on the specific licenses and permits your LLC may need, visit the CalGold website.
California LLC Taxes FAQs
Limited liability companies (LLCs) in California are subject to a number of state and local taxes. Typically, they’ll be required to pay income tax, franchise tax, and a sales/use tax – though their local taxation requirements can greatly depend on the locality they’re based in.
As a business structure, California LLCs are not inherently tax-exempt since exemption is determined by a business’s activities rather than its structure. For example, if your LLC performs certain non-profit activities, it may be able to qualify for an exemption.
To find out more about this topic, see our LLC Taxes article.
As of right now, newly formed business entities are not required to pay the first-year annual tax of $800. However, after this year, you’ll need to pay annual franchise tax regardless of whether your business generates a profit or not.
At a statewide level, the minimum an LLC in California would need to pay is $800 in franchise tax, which is required regardless of an LLC’s income. Additionally, most LLCs will likely need to pay sales tax, which is required in order to sell most tangible goods.
To find out more about the benefits of an LLC, see our California LLC article.