Taxes 101: The Ins and Outs of California’s Business Tax Requirements

Updated: Dec. 4, 2024

Businesses in California enjoy numerous advantages, including a thriving metropolitan economy, access to a diverse and talented workforce, and year-round pleasant weather.

While setting up a corporation in California offers significant benefits, it also imposes some of the highest and most complex business taxes in the country. Business owners must navigate a unique and challenging regulatory environment.

Don’t know where to start? This guide covers the ins and outs of California’s business tax requirements.

Why Is It Important to Be Tax-Compliant in California?

Being tax-compliant is a must for businesses in any state, but especially in California, where the tax laws for businesses are more stringent and the rates are higher. 

If the California Franchise Tax Board flags your business for not paying the right taxes, it could penalize your company. When these fees and penalties accumulate and get higher over time, thanks to interest, it can hurt your business’s finances.

The board can even take legal action if your business has serious tax violations. In the worst-case scenario, tax evasion can lead to the suspension of your business license and the closure of your business.

Being tax-compliant gives your California business access to plenty of tax perks and benefits. These include tax incentives and credits that you can use against your taxes to reduce what you have to pay. Companies that don’t stay on top of paying their taxes completely miss out on opportunities like these and end up paying higher amounts.

What Business Taxes Do Companies Pay in California?

California state income tax is composed of three types. Businesses operating within the state must pay at least one of these taxes.

1. Corporate tax: This is your tax on your business’s profits after expenses. It mostly affects companies that elect to be treated as corporations. The corporate tax rate for Californian businesses sits at 8.84%, which is higher than most states in the U.S.
2. Franchise tax: Also called privilege tax, this tax is a flat rate that companies must pay for the privilege of doing business in California. It affects business entities like S corporations, limited liability companies (LLCs), and limited liability partnerships (LLPs). In California, the franchise tax is set at $800.
3. Alternative minimum tax (AMT): This tax is paid by companies that might excessively lower the tax they’re required to pay through deductions and exemptions. That way, no business can abuse their tax credits, even if it’s legal to use them. In California, the current AMT rate is 6.65% of taxable income. Any company should pay either the AMT rate or their regular taxes, whichever is higher.

What Taxes to Pay, Depending on Your Corporation Type

C Corporations

C corporations—or traditional corporations—must pay the 8.84% corporate tax or the 6.65% alternative minimum tax, whichever is higher after deductions and tax credits. Shareholders of these corporations also need to file taxes on any income they get individually from the business.

S Corporations

S corporations are pass-through business entities. That means their income taxes are passed on directly to their business owners. So, the only tax an S corporation must pay is the franchise tax, which today is $800 in California. These businesses must pay the franchise tax even if they report zero or negative net income.

Limited Liability Companies

Like S corporations, LLCs are pass-through businesses that only pay California’s franchise taxes. However, instead of a flat rate of $800, LLCs may pay a certain amount depending on the income bracket of the business. Depending on your net income, your LLC can pay taxes that amount to anywhere between $800 and almost $12,000.

What is Double Taxation in California?

Double taxation occurs when the state taxes a corporation and its owners twice for the same business income. It’s a huge risk and headache for business owners everywhere. In California, avoiding it is even harder, as it’s one of the few states that taxes business owners twice—once as individuals and another as business owners.

This mostly happens for business owners with pass-through business entities, such as S corporations and limited liability companies. These types of entities avoid federal taxes because the income they earn passes through to the business owners directly. The federal government taxes only the owners at their personal income tax rate. 

In a nutshell, the double taxation laws in California are good for many businesses. However, their respective business owners will likely take the hit. 

Worried about tax compliance for your business, given California’s unique double taxation rules? Speak to one of our tax experts who can prepare your business and personal taxes for you!

Who Do You Pay California Business Taxes To?

When tax season rolls around, businesses need to pay their income taxes to the California Franchise Tax Board (FTB). However, you shouldn’t forget to pay your regular federal taxes to the Internal Revenue Service as well.

There are many ways to pay your taxes to the FTB. You can do so online through their Web Pay services or even through credit card payment with a small transaction fee.

Make Sure Your California Company is Tax-Compliant with Inc Authority!

While the state of California boasts easy living for residents, this is not necessarily the case for small business owners. Business taxes in the Golden State are sky-high and some of the highest of any U.S. state. With numerous tax types to stay on top of and burdensome business regulations, many California business owners might be tempted to leave in search of more business-friendly states.

Getting taxed on your business income in California might be overwhelming, but don’t let it keep you from making your small biz dreams a reality. We at Inc Authority are ready to assist you. Learn more about business tax compliance and forming your LLC by talking to our business formation experts today!

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