In addition to federal income taxes, California business owners are subject to many types of state taxes. Unlike the federal government, California has no problem with double taxation. This means your business may be subject to both business taxes and personal taxes if you have pass-through income.
According to the Tax Foundation, California ranks second to last in the nation as of 2021 for overall business tax burden. In addition to the high cost of living, this makes California a difficult state to open a new business.
What types of business taxes do you have to pay in California?
The main types of taxes you will encounter while operating a business in California are the corporate tax, corporate alternative minimum tax (AMT), and franchise tax. Depending on the formation of your business, you may be subject to one or more of these types of taxes.
Corporate tax
C corporations and limited liability companies (LLCs) that elect taxation as a C corp pay a flat 8.84% corporate tax rate, as long as they have net taxable income.
Corporate alternative minimum tax
If a C corp. or LLC does not have taxable income under the standard tax system, it must recalculate its income without certain deductions and credits. The new figure is multiplied by the flat California corporate AMT rate of 6.65%.
Franchise tax
Certain pass-through entities, whose income passes to owners prior to federal income taxation, and C corporations without a net taxable income are also required to pay a California franchise tax. The pass-through entities subject to the franchise tax include LLCs not taxed like a C corp, S corporations, limited partnerships (LPs), and limited liability partnerships (LLPs). Sole proprietorships and general partnerships are not subject to the California franchise tax.
The franchise tax is a flat $800 for LPs and LLPs. An LLC's franchise tax is based on net income. It ranges from a minimum of $800 for LLCs with a net income less than $250,000 up to $11,790 for LLCs with a net income over $5 million. An S corp's franchise tax is either $800 or 1.5% of their net income, whichever is larger. For a C corp without net taxable income, the minimum $800 franchise fee applies. It is in addition to the corporate AMT.
State income tax
All pass-through business owners in California pay the state income tax. This includes independent contractors, sole proprietors, and other unincorporated businesses, as well as members of LLCs, partners in a partnership, and shareholders of an S corporation. The California tax rate varies based on your filing status and tax bracket.
California Tax Rates for 2021
For 2021, the California tax rate for state income taxes are as follows.
Single filer or married filing separately
- 1% on taxable income from $0 to $9,324
- 2% on taxable income from $9,325 to $22,106
- 4% on taxable income from $22,107 to $34,891
- 6% on taxable income from $34,892 to $48,434
- 8% on taxable income from $48,435 to $61,213
- 9.3% on taxable income from $61,214 to $312,685
- 10.3% on taxable income from $312,686 to $375,220
- 11.3% on taxable income from $375,221 to $625,368
- 12.3% on taxable income from $625,369 to $999,999
- 13.3% on taxable income above $1,000,000
Married filing jointly or qualifying widow(er)
- 1% on taxable income from $0 to $18,662
- 2% on taxable income from $18,650 to $44,213
- 4% on taxable income from $44,214 to $69,783
- 6% on taxable income from $69,784 to $96,869
- 8% on taxable income from $96,870 to $122,427
- 9.3% on taxable income from $122,428 to $625,371
- 10.3% on taxable income from $625,372 to $750,441
- 11.3% on taxable income from $750,442 to $1,250,737
- 12.3% on taxable income from $1,250,738 to $1,999,999
- 13.3% on taxable income above $2,000,000
Head of household
- 1% on taxable income from $0 to $18,662
- 2% on taxable income from $18,663 to $44,216
- 4% on taxable income from $44,217 to $56,998
- 6% on taxable income from $56,999 to $70,541
- 8% on taxable income from $70,542 to $88,323
- 9.3% on taxable income from $83,324 to $425,250
- 10.3% on taxable income from $425,251 to $510,302
- 11.3% on taxable income from $510,303 to $850,502
- 12.3% on taxable income from $850,503 to $999,999
- 13.3% on taxable income above $1,000,000
