Taxes for Business Owners in California
When owning and operating a business, you must understand the business’ taxation structure, which is dedicated by state regulations and the legal entity of the business. The latter is especially important to keep in mind as it decides whether the business’s income is submitted to corporate and/or personal income taxes. Thus, the business owner operating in California must be privy to how their revenue is taxed by the state.
Businesses that are required to pay corporate taxes will be required to pay a combination of three different taxes, which may include: corporate income tax, franchise tax, and alternative minimum tax. The taxes and associated rate to be paid is determined by the legal form of business.
For instance, if the business is a sole proprietorship, the income that is given to the owner will be taxed in their personal tax return. As there is a single member of the enterprise, this form of business (pass-through entity) is not subject to corporate taxes. This is also true for general partnerships. Alternatively, a limited liability partnership (LLP) does not have pass-through taxation and must also pay a franchise tax, which starts at $800.
In the case of a corporation, taxation will depend on whether it is an S or C corporation. A C corporation must pay a corporate state tax on net taxable income at a rate of 8.84%. Additionally, the shareholders will also be taxed at the personal income level. On the other hand, an S corporation does not require the business to pay corporate taxes, but it is still subject to two levels of taxation. First, 1.5% of the business’s net income will be subject to a franchise tax. Furthermore, the income paid to the owners is also taxed on the owner’s personal income tax returns.
Limited liability companies (LLCs) face a more complex taxation scheme. The income of an LLC is similarly taxed at different levels. Foremost, the LLC is to pay a flat fee determined by their gross income tier. The tier range includes businesses earning less than $250,000 to businesses earning over $5 million. At the lowest level, an LLC is required to pay an $800 franchise tax. At the highest income tier, the LLC must pay $11,790. Additionally, the owners must pay personal taxes on any income earned.