Every business pays a variety of taxes to the federal government and the state of California. The type of tax, the structure of the business, and the amount of money received or earned dictates the amount of the tax.
The following post outlines the various taxes collected by the state and federal governments, the tax rates, and how often the taxes must be paid. The information is provided by business structure since that is the main dividing point for finding tax information.
The federal government collects the following types of business taxes:
The state of California collects the following business taxes:
In each case, the tax rate is based on the type of business you operate, the earnings and income from that business, and the structure of your business.
All businesses except partnerships must file income tax returns annually. There is a different federal return for each type of business structure.
Corporations or C-Corporations pay income tax and take the same deductions as a sole proprietorship to determine taxable income; the corporation as a whole is treated as a separate and individual entity. It is even eligible for special deductions. However, it cannot get a tax deduction when it distributes dividends to its shareholders.
Corporations must file an income tax return by the 15th day of the fourth month after the end of its tax year. Exceptions to that schedule include corporations that have dissolved and those with a fiscal year ending on June 30; in these cases, special filing dates apply.
Tax rates for corporations start at 15% for those businesses with a taxable income of zero to $50,000 up to 35% for taxable income of $18,333,333 and over.
Per the IRS, S-corporations pass through business income and losses to the personal income tax returns of the shareholders. The income is then assessed at the individual income tax rate and the S-corporation or LLC avoids double-taxation on corporate income.
However, the State of California imposes both business and personal income taxes on small business owners who set up businesses as pass-through entities such as S-corporations and LLCs.
LLCs are regulated by state law. In California, the net income from an LLC passes through to the business owners just as with an S-corporation. See S-Corporations above regarding double taxation and the State of California.
A Sole Proprietorship is not considered a corporation. All income is reported on the individual’s personal income tax return.
Sole proprietors, partnerships, C-corporations, S-corporations, and Limited Liability Companies must pay employment taxes if they have people working for them. Employment taxes are collected by both the IRS and the Employee Development Department of the State of California and are only paid by businesses with employees working for a wage or salary.
By default, the IRS considers a Sole Proprietorship as both employee and employer; therefore the individual must pay both the employee and employer share of Social Security and Medicare taxes, also known as the Self-Employment Tax.
All employment taxes are filed quarterly.
Federal employment taxes include:
State employment taxes in California include:
In addition to income and employment taxes, the State of California also collects the following:
While the federal government and the state of California collect business income and employment taxes, California imposes higher average income tax rates on both business and personal income. Also, the state does not consider collecting income tax on both the business income of a pass-through business and its owner’s personal income tax as double-taxation.
In California, both the business income and the personal income derived from the pass-through S-corporation or LLC are taxed. California also charges C-corporations corporate tax or AMT depending on whether taxable income is claimed as well as taxing the personal income of shareholders at marginal tax rate of 33%. Pass-through marginal income tax rates range from 1% to 12.3% depending the individual’s tax bracket, of which there are nine.
Doing business in California can be an expensive proposition for small businesses and entrepreneurs. Consulting with an experienced California tax attorney can help you determine your best path to success.
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IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, I must inform you that any U.S. federal tax advice contained in this website is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter contained in this website.