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California LLC Business Tax Requirements
Your LLC will need to pay a variety of taxes to both the state and federal governments, but does it make sense to go it alone or hire a pro? Find out what exactly is involved from tax forms, filing deadlines, and basic strategies to reduce your total tax liability.
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In addition to annual and quarterly filing deadlines, California businesses with employees or sales or use tax liability must determine how often they need to make tax deposits. See below.
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:
1.
Owners pay self-employment tax on some or all business profits.
2.
Owners pay federal income tax on any profits, less allowances and deductions.
3.
Most LLCs pay California franchise tax.
4.
Some LLCs pay California sales tax on products or services.
5.
Employers pay payroll tax on wages paid to employees.
6.
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: Types, Rules, and Rates
You'll need to pay three main types of California LLC taxes: franchise, income, and sales. Depending on how your business is set up, you may also need to pay use tax. The Franchise Tax Board administers franchise and income taxes, while the California Department of Tax and Fee Administration (CDTFA) administers the sales and use taxes. Sounds simple enough, right? Check out the full list.
California LLC Franchise Tax
Like many states, California levies 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 or privilege tax. In California, it's most commonly called a franchise 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, or April 15th.
Use the state's LLC Tax Voucher form to make your payments directly to the California Franchise Tax Board.
California LLC Franchise Fee
If your LLC has a gross income of 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. These income-based fees range from $900-$11,790. If you fail to make your estimated payment, you'll be subject to penalties and interest.
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. Unlike the franchise fee, this tax is based on your net income. 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 State Payroll Taxes
In addition to federal payroll taxes (below), there are a few state-specific payroll taxes you need to know about. First, you’ll need to withhold your employees’ estimated income tax, which is calculated using Form DE 4, and their SDI tax contribution (1.2% for 2025). Secondly, you’ll need to pay the state unemployment insurance (UI) tax and Employment Training Tax (ETT).
State Employee Income Withholding
You must file and fully account for your payroll contributions and employee income withholding on a quarterly basis using Form DE-9, but many California businesses must also make regular tax deposits using Form DE-88 based on the accrued tax liability. This can occur on a daily, semi-weekly, monthly, quarterly, or annually based on the accrued tax liability.
State Unemployment Insurance Tax
Your UI tax rate is based on your employee retention track record. For the first 2-3 years, new employers are taxed at a rate of 3.4% for the first $7,000 of income paid per employee. The maximum UI tax rate is 6.4% (or $434) per employee. This is in addition to your federal unemployment tax contribution.
The Employment Training Tax
This ETT rate is 0.1% for the first $7,000 of income ($7) per employee and, with few exceptions, is paid by every business in the state with employees. Payroll tax rates, limits, and the value of deductible meals and lodging are updated by California with the DE 3395 worksheet. Those taxes paid by the employer are done so through the state’s online filing system.
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.
Is California a Tax-Friendly State for LLCs?
You may not know how much income your LLC will make its first year, or even what tax structure you should elect. Nevertheless, estimating your franchise taxes and total tax burden is an important part of estimating how much it costs to own an LLC in California.
Here is a breakdown of California’s corporate and total tax rankings compared to other states.
California businesses have access to the biggest state economy and consumer purchasing power in the country, along with one of the most highly skilled workforces. But few would call the state’s tax policies business-friendly. Infographic from Tax Foundation.
Federal Taxes for LLCs
As the owner of a California LLC, there is also a range of federal tax liabilities you may face. Moreover, the required filing forms and optimal tax strategies are subject to change right from the start, based on how you choose your tax structure. Then, there is another set of tax forms and filing deadlines once you hire an employee.
Unless you want to sift through federal tax form instructions and still feel lost, we recommend signing up for our free tax consultation.
Types of Federal Taxes for LLCs
Self-Employment Tax: This tax is administered by the Federal Insurance Contributions Act (FICA) and covers Social Security, Medicare and other benefits.
Income Tax: You must pay regular federal income tax on any earnings you take out of your LLC.
Payroll Tax: In addition to withholding employment and estimated income taxes, most LLCs must pay federal unemployment insurance tax. Assuming you pay your California unemployment insurance tax on time and in full, your federal UI tax is only 0.6% on the first $7,000 of income per employee.
Estimated Tax: If your LLC makes significant income and/or if you have employees, you’ll need to file and pay estimated taxes on a quarterly basis. California also requires these types of quarterly estimated tax payments.
Duties: Whether it’s a gas tax, liquor tax, or tariff, there is a wide range of potential duties on specialty products and niche industries.
LLC Tax Election
Here is an overview of why and how LLCs commonly choose various tax structures to minimize their tax liability. Some LLCs in California may have additional factors to consider, so again, it’s often best to at least talk to a tax professional.
Tip: If you didn’t get an EIN from the IRS, your LLC can’t elect to be taxed as a corporation until you do so. Avoiding this last-minute headache is a big reason why we include an EIN service as part of our standard and premium LLC formation packages.
Sole Proprietor or Partnership: Most common for LLCs with minimal income that fails to significantly surpass the owners’ potential salary.
S-Corp: Most common for LLCs with moderate income who can take advantage of distributions to reduce federal self-employment tax. Though still commonly beneficial, this election is a little more complicated in California, due to the state’s S corp tax rate of 1.5%. Use Form 2553 to file an S corp election.
C-Corp: Less common, but still potentially used for LLCs with a large amount of net income and plans to reinvest a significant amount of income back into the business. The state’s C corp tax rate is 8.84%. Use Form 8832 to file a C corp election.
Common Questions and Strategies
Filing Deadlines: Partnership and S corp tax filings are due March 15th (or the first business day when this falls on a weekend). Sole proprietors and C corp tax filings are due April 15th (or on the first business day). California uses the same filing deadlines as the IRS for business entities and state tax returns.
LLCs with No Income: If your LLC has no income at all, it probably isn’t required to file federal tax returns. However, it’s beneficial to do so if you have operating expenses. While the IRS isn’t going to reimburse the losses directly, most expenses can be carried forward to future years. California also allows LLCs to carry forward their operating losses.
Reduce Self-Employment Tax: If your LLC has more net income than the value of the services provided by the members, you may be able to save on self-employment taxes. It’s often best to talk to a tax professional to determine what your salary should be, but here’s one scenario to help you understand the potential tax savings in California even after paying for a professional tax service.
Federal Self-Employment Tax
Total Net Income: $350,000
Social Security Tax (based on income limit): $21,836
Medicare Tax (2.9%): $10,150
Self-Employment Taxes: $31,986
With a Salary Determination of: $100,000
Self-Employment Taxes (15.3%): $15,300
Potential Tax Savings: $16,686
State-Level Tax Consequences
For LLC taxed as sole proprietor or partnership
Franchise Tax: $800 + $900
Franchise Fee: $900
State Taxes (not counting sales tax, use tax, etc.): $1,700
For LLC taxed as an S corp with salary determination
S Corp Tax Liability ($250,000 x 1.5%): $3,750
Total Tax Benefit: $14,636
Still trying to decide if you need to hire an accountant in the first place, or if you go it alone with just a little help at tax time?