California LLC Taxes

FAQ: Three Essential California LLC Tax Questions

Q1: Do I have to pay California's $800 franchise tax in my first year?

Yes. The first-year exemption under AB 85 (2020) applied only to LLCs formed between January 1, 2021 and December 31, 2023. It expired and was not renewed. All LLCs formed in 2024, 2025, and 2026 owe the full $800 in their first taxable year, due April 15 (Cal. Rev. & Tax. Code § 17941(g)). The only exception: if you file a Short Form Cancellation (LLC-4/8) within 12 months of formation and have conducted no business, you may avoid the tax.

Q2: What is California's state income tax rate for LLCs?

California's graduated income tax ranges from 1% to 13.3% on net business income passed through to members (Cal. Rev. & Tax. Code §§ 17001–17039.6). The rate depends on your total taxable income and filing status. Unlike the franchise tax, income tax is owed only on actual profits, not on gross receipts. Single-member LLCs report income on Schedule C (Form 1040); multi-member LLCs report on Form 1065 and distribute K-1s to members.

Q3: When are California LLC estimated tax payments due?

Estimated tax installments are due April 15, June 15, September 15, and January 15 of the following year. You must pay estimated taxes if you expect to owe $500 or more in California income tax for the year. Failure to pay estimated taxes may result in penalties and interest.

How LLCs Are Taxed Federally: Pass-Through, Disregarded Entity & S-Corp Elections

California does not impose a separate entity-level income tax on LLCs. Instead, your LLC is a pass-through entity for California purposes, meaning income flows through to members' personal returns and is taxed at individual rates. Your federal classification determines how this pass-through works.

Default Federal Treatment: Disregarded Entity (Single-Member) or Partnership (Multi-Member)

A single-member LLC is treated as a disregarded entity by the IRS unless you elect otherwise. You report all business income and expenses on Schedule C (Form 1040), and the LLC itself files no separate federal return. California follows this federal classification and taxes you on the Schedule C income at graduated rates (1%–13.3%).

A multi-member LLC is treated as a partnership by default. The LLC files Form 1065 (U.S. Return of Partnership Income) and issues Schedule K-1s to each member. Each member reports their share of income on their personal return and pays California tax on that share. The LLC itself pays no California income tax; members do.

Electing S-Corp Treatment

You may elect to have your LLC taxed as an S-Corporation by filing Form 2553 (Election by a Small Business Corporation) with the IRS. California automatically recognizes this election under Cal. Rev. & Tax. Code § 17941(d). As an S-Corp, your LLC files Form 1120-S (U.S. Income Tax Return for an S Corporation) federally and a corresponding California return.

The S-Corp election can reduce self-employment tax. As an S-Corp, you must pay yourself a reasonable salary subject to payroll taxes, but profits above that salary are distributed as dividends, which avoid the 15.3% self-employment tax. However, S-Corp status requires more administrative work: payroll processing, quarterly estimated tax payments, and compliance with corporate formalities. For most small LLCs, the self-employment tax savings do not justify the added complexity unless your net profit exceeds $60,000–$80,000 annually.

Electing C-Corp Treatment

You may also elect to have your LLC taxed as a C-Corporation by filing Form 8832 (Entity Classification Election) with the IRS. California recognizes this election. As a C-Corp, your LLC pays federal and California corporate income tax on profits, and members pay tax again on dividends (double taxation). This election is rarely advantageous for small LLCs unless you plan to retain earnings for reinvestment or have specific liability or financing goals.

California State Income Tax for LLCs: Rates, Brackets & Member Reporting

California imposes a graduated state income tax on all income derived from or attributable to California sources (Cal. Rev. & Tax. Code §§ 17001–17039.6). For 2026, the rates range from 1% to 13.3% depending on your total taxable income and filing status.

Tax Rates and Brackets (2026)

California's income tax brackets are adjusted annually for inflation. For 2026, the top marginal rate of 13.3% applies to the highest income earners. The exact brackets depend on your filing status (single, married filing jointly, head of household, etc.). You can find current brackets on the California Franchise Tax Board website (ftb.ca.gov).

Unlike the franchise tax, California income tax is owed only on net business income—that is, gross receipts minus ordinary and necessary business expenses. If your LLC operates at a loss, you owe no California income tax for that year (though you still owe the $800 franchise tax).

How Members Report LLC Income

Single-member LLC (disregarded entity): You report all LLC income and expenses on Schedule C (Form 1040) and pay California tax on the net profit at graduated rates. You also pay self-employment tax (15.3% on 92.35% of net profit) to cover Social Security and Medicare.

Multi-member LLC (partnership): The LLC files Form 1065 and issues Schedule K-1s to each member. Each member reports their allocated share of income (or loss) on their personal return, regardless of whether the LLC distributes cash. California taxes each member on their K-1 income at graduated rates. Members also pay self-employment tax on their share of partnership profits.

Estimated Tax Payments

If you expect to owe $500 or more in California income tax for 2026, you must make quarterly estimated tax payments on:

April 15, 2026 (for income January–March)
June 15, 2026 (for income April–May)
September 15, 2026 (for income June–August)
January 15, 2027 (for income September–December)

You can pay estimated taxes online through the FTB website or by mail using Form 540-ES (Estimated Tax for Individuals). Underpayment of estimated taxes may result in penalties and interest, even if you ultimately owe no tax or receive a refund.

California Franchise Tax: The $800 Annual Minimum & Gross Receipts Fees

Every LLC doing business in California or organized under California law must pay an annual franchise tax of $800, due April 15 each year (Cal. Rev. & Tax. Code § 17941). This tax is separate from income tax and is owed regardless of whether your LLC is profitable. The $800 is a minimum—if your LLC earns over $250,000 in California-source income, you owe an additional gross receipts fee.

The $800 Minimum Franchise Tax

The $800 is mandatory for all LLCs from the date of formation (or qualification to do business in California) until you file a Certificate of Dissolution or Certificate of Cancellation with the Secretary of State (Cal. Rev. & Tax. Code § 17941(a)–(b)). You owe it even if:

Your LLC is inactive or has no income
Your LLC operates at a loss
You are a single-member LLC (disregarded entity)
You have elected S-Corp or C-Corp taxation

First-year exemption: The temporary first-year exemption created by AB 85 (2020) applied only to LLCs formed between January 1, 2021 and December 31, 2023. It expired December 31, 2023 and has not been renewed. All LLCs formed in 2024, 2025, and 2026 owe the full $800 in their first taxable year.

One exception: If you file a Short Form Cancellation (LLC-4/8) within 12 months of formation and have not conducted any business, you may avoid the first-year franchise tax. This option is available only if your LLC has truly remained inactive.

Gross Receipts Fees (Additional Tax for High-Income LLCs)

In addition to the $800 franchise tax, LLCs with total California-source income exceeding $250,000 must pay an additional annual gross receipts fee (Cal. Rev. & Tax. Code § 17942). The fee is based on your total income from all sources derived from or attributable to California, including gross receipts less returns and allowances.

Fee schedule (2026):

$250,000–$499,999: $900
$500,000–$999,999: $2,500
$1,000,000–$4,999,999: $6,000
$5,000,000 or more: $11,790

The gross receipts fee is estimated and paid by June 15 of the current tax year (Cal. Rev. & Tax. Code § 17942(d)(1)). You file Form FTB 3536 (LLC Estimated Fee Voucher) with your estimated payment. If you underpay the estimated fee, a 10% penalty is added to the shortfall (Cal. Rev. & Tax. Code § 17942(d)(2)).

The final fee is reconciled when you file your Form 568 (California Return of Income for S Corporations) or Form 565 (California Return of Income for Partnerships and Partners) (depending on your federal classification) by the April 15 deadline following the tax year.

Payment and Filing

Pay the $800 franchise tax and any gross receipts fees using Form FTB 3522 (LLC Tax Voucher) or online through the FTB website. Both are due April 15 for calendar-year LLCs. If you miss the deadline, the FTB will assess penalties and interest.

Sales Tax Obligations for California LLCs

If your LLC sells taxable goods or provides certain taxable services in California, you must register for a seller's permit and collect and remit sales tax (Cal. Rev. & Tax. Code § 6001 et seq.). California's base sales tax rate is 7.25%, but local jurisdictions add surtaxes ranging from 0.10% to 3.00%, making the total rate 7.25% to 10.25% depending on location.

Who Must Register

You must register for a seller's permit if you:

Sell tangible personal property (goods) in California
Provide certain services subject to sales tax (e.g., repairs, installation, telecommunications)
Lease tangible personal property
Operate a restaurant or bar

You do not need a seller's permit if you provide services only (e.g., consulting, accounting, legal services, personal training) or sell only tax-exempt items.

Registration and Compliance

Register online with the California Department of Tax and Fee Administration (CDTFA) at cdtfa.ca.gov. Registration is free and typically takes 1–2 business days. Once registered, you receive a seller's permit number, which you must display at your place of business.

You must:

Collect sales tax from customers at the point of sale
File sales tax returns (Form 101-A or 101-B) monthly, quarterly, or annually depending on your sales volume
Remit collected taxes to the CDTFA by the due date (typically the 15th of the following month)
Keep detailed records of all sales and tax collected

Failure to register, collect, or remit sales tax can result in substantial penalties, interest, and potential criminal liability.

Exemptions and Special Rules

Certain items are exempt from sales tax, including:

Food for human consumption (groceries, but not prepared food)
Prescription medications
Medical devices
Agricultural equipment and supplies

If you sell both taxable and exempt items, you must track and report each category separately. Consult the CDTFA website or a tax professional if you are unsure whether your products or services are taxable.

Self-Employment Tax for LLC Members

If your LLC is taxed as a disregarded entity (single-member) or partnership (multi-member), you must pay self-employment tax on your share of LLC profits. Self-employment tax covers Social Security and Medicare and is calculated at 15.3% on 92.35% of net profit (Internal Revenue Code § 1401 et seq.).

How Self-Employment Tax Works

As a sole proprietor or LLC member, you are responsible for both the employee and employer portions of Social Security and Medicare taxes. The self-employment tax rate is:

12.4% for Social Security (on income up to $168,600 in 2024; adjusted annually)
2.9% for Medicare (on all net profit, with an additional 0.9% on income over $200,000 for single filers)

You calculate self-employment tax on Schedule SE (Self-Employment Tax) and report it on your Form 1040. You may deduct half of your self-employment tax as an adjustment to gross income.

S-Corp Election to Reduce Self-Employment Tax

If you elect S-Corp taxation, you can reduce self-employment tax by paying yourself a reasonable salary subject to payroll taxes and distributing the remaining profit as dividends. Dividends are not subject to self-employment tax, only income tax.

Example: If your LLC earns $100,000 in net profit and you elect S-Corp status, you might pay yourself a $60,000 salary (subject to 15.3% payroll tax = $9,180) and distribute $40,000 as dividends (subject only to income tax, no self-employment tax). This saves approximately $6,120 in self-employment tax compared to partnership taxation.

However, the IRS requires that your salary be reasonable for the work you perform. If you pay yourself an artificially low salary to avoid payroll taxes, the IRS may reclassify distributions as wages and assess back taxes and penalties.

Estimated Tax Deadlines for California LLCs (2026)

California requires you to pay quarterly estimated taxes if you expect to owe $500 or more in state income tax for the year. Estimated tax payments are due on four dates:

| Payment | Due Date | Tax Period |

1st Quarter	April 15, 2026	January 1 – March 31
2nd Quarter	June 15, 2026	April 1 – May 31
3rd Quarter	September 15, 2026	June 1 – August 31
4th Quarter	January 15, 2027	September 1 – December 31

How to Calculate and Pay Estimated Taxes

Estimate your total California taxable income for 2026 and apply the graduated tax rates (1%–13.3%) to calculate your expected tax liability. Divide by four and pay one-quarter by each deadline. You can adjust payments quarterly based on actual year-