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How Your LLC Will Be Taxed
This guide will teach you about the main California business taxes you'll be responsible for, including sales, self-employment, payroll, and federal taxes. Profits from an LLC aren’t taxed at the business level the way they are in C Corporations. Instead, they're as follows:
- Owners pay self-employment tax on business profits.
- Owners pay federal income tax on any profits, less allowances and deductions.
- Most LLCs pay California franchise tax.
- Some LLCs pay California sales tax on products or services.
- Employers pay payroll tax on wages paid to employees.
- Employees pay federal income tax on their earnings.
Items 1 and 2 fall under pass-through taxation for LLC owners, managers and members who profit from the business. Profits are reported on personal federal tax returns.
State Taxes for LLCs
You'll pay three main types of tax to the California Department of Tax and Fee Administration (CDTFA): income, sales and franchise. You must also pay an annual LLC fee. Depending on how your business is set up, you may also need to pay use tax.
California Income Tax
As a business owner, you'll need to pay California state income tax on any money you pay to yourself. These earnings flow through to your personal tax return. You'll be taxed at the standard California income tax rate, and you'll be able to apply regular allowances and deductions.
The California income tax rate ranges from 1 percent to 12.3 percent, depending on your income. You can use the tax calculator provided by the California Franchise Tax Board to determine how much you'll have to pay.
California Sales Tax
If you sell physical products or certain types of services, you may need to collect sales tax and then pay it to the CDTFA. Sales tax is collected at the point of purchase and is made up of three rates: state tax, local tax and any district tax that may be in effect.
You’ll typically need to collect California sales tax on:
- Tangible, personal property and goods that you sell like furniture, cars, electronics, appliances, books, raw materials, etc.
- Certain services your business may provide
Most states, including California, don't levy sales tax on necessities such as food, medications, clothing or gas. Use our sales tax calculator to see how much you'll need to pay.
We also highly recommend you check with your accountant and the CDTFA to confirm whether your business is required to collect California sales tax and to ensure you're paying the correct amount.
California Use Tax
If you purchase physical products outside the state for use in California, you may need to pay use tax.
For example, if you buy furniture for your LLC from a company in a state that either doesn't have a sales tax or has a sales tax that is lower than the California sales tax, you'll be responsible for paying the use tax.
The California use tax rate varies according to the city and county where you live.
California Franchise Tax
Some states — including California — levy a tax on certain businesses for the right to exist as a legal entity and do business in the state. This is usually called a transaction tax, privilege tax or franchise tax. In California, it's also called an annual tax.
Every LLC in the State of California must pay an annual tax of $800. This is required even if you're not actually conducting business until you dissolve your LLC.
Your first-year annual tax is due by the 15th day of the 4th month from the date you file your LLC paperwork. Subsequent annual tax payments will continue to be due on the 15th day of the 4th month of your taxable year. Use the state's LLC Tax Voucher form to make your payments directly to the California Franchise Tax Board.
If your LLC will make more than $250,000, you'll have to pay a fee in addition to the annual tax. You must estimate and pay the fee by the 15th day of the 6th month of the current tax year. If you fail to make your estimated payment, you'll be subject to penalties and interest.
Use the state's Estimated Fee for LLCs form to remit payment.
Federal Taxes for LLCs
As the owner of an LLC, you must pay self-employment tax and federal income tax, both of which are levied as “pass-through taxation."
Federal taxes can be complicated, so speak to your accountant or professional tax preparer to ensure that your California LLC is paying the correct amount.
Federal Self-Employment Tax
All members or managers who take profits out of the LLC must pay self-employment tax. This tax is administered by the Federal Insurance Contributions Act (FICA) and covers Social Security, Medicare and other benefits. The current self-employment tax rate is 15.3 percent.
You’ll be able to deduct some of your business expenses from your income when calculating how much self-employment tax you owe. Here are some examples of how much self-employment tax you may need to pay, depending on your earnings:
Here are some examples of how much self-employment tax you may need to pay, depending on your earnings:
- On profits of $60,000, you would pay self-employment tax of $9,180.
- On profits of $100,000, you would pay self-employment tax of $15,300.
- On profits of $140,000, you would pay self-employment tax of $21,420.
- On profits of $160,000, you would pay self-employment tax of $24,480.
Pay Less Self-Employment Tax by Treating Your LLC As an S Corporation
The Internal Revenue Service allows an LLC to be treated as an S Corporation for tax purposes, provided your business meets certain requirements. This can help you reduce the amount of self-employment tax you pay by allowing you to declare some of your income as salary and other income as distributions or withdrawals.
Speak to your accountant or professional tax preparer for more information on reducing your LLC self-employment tax with an S Corporation tax election.
Federal Income Tax
You must also pay regular federal income tax on any earnings you take out of your LLC. The amount of income tax you pay depends on several factors, including your earnings, current income tax bracket, deductions and filing status.
You only pay federal income tax on profits you take out of the business, minus permitted deductions and allowances. This includes your tax-free amount, plus business expenses and other deductions for areas such as healthcare and some retirement plans.
Speak to your accountant for more information.
Employee and Employer Taxes
If you pay employees, there are some slightly different tax implications.
Speak to your accountant to get clear guidance for your unique situation.
Employer Payroll Tax Withholding
All employers are required to withhold federal taxes from their employees’ wages. You’ll withhold 7.65 percent of their taxable wages, and your employees will also be responsible for 7.65 percent, adding up to the current federal tax rate of 15.3 percent.
Speak to your accountant for more information.
Employees May Need to File Tax Returns
Regardless of whether you withhold federal and California state income tax, your employees may need to file their own tax returns.
Employee Insurance and Other Requirements
You may also need to pay insurance for any employees, such as employee compensation insurance or unemployment tax.
Other Taxes and Duties
Depending on your industry, you may be liable for certain other taxes and duties. For example, if you sell gasoline, you may need to pay a tax on any fuel you sell.
Likewise, if you import or export goods, you may need to pay certain duties.Speak to your accountant about any other taxes or duties you may need to withhold or pay.
Most LLCs must pay estimated taxes throughout the year, depending on the amount of profit and income they expect to make. The most common types of estimated tax are:
- Federal income tax
- Federal self-employment tax
Most LLCs will pay estimated taxes on a quarterly basis. Learn more on the IRS website, and speak to your accountant for more information.
FAQs on California Business Taxes
Does California Have a Sales Tax?
Yes. California does have a sales tax, which may vary among cities and counties. You can find more information above.
Is There a California Income Tax?
Yes, there is a California state income tax. You can find more information above.
Does California Have a Franchise Tax?
Yes. California does have a franchise tax. You'll find more information above.
Do I Need to Pay Estimated Taxes?
Yes. In most cases, you must pay estimated taxes to the state and federal governments. You'll find more information above.