Introduction
California has one of the most complex tax structures in the U.S. Residents and businesses are subject to multiple taxes, including income tax, sales tax, and franchise tax. Understanding these obligations is crucial for compliance and tax planning.
Overview of California’s Tax System
California collects revenue from individuals and businesses through various tax channels:
- Personal Income Tax: Based on residency and income earned.
- Sales & Use Tax: Applied to goods and some services.
- Property Tax: Levied on real estate owners.
- Franchise Tax: Paid by LLCs, corporations, and partnerships.
- Employment Taxes: Paid by employers for workers’ wages.
Each tax type has specific compliance requirements and due dates.
Income Tax for Residents & Non-Residents
Applicable Code: IRC §§ 61, 63; California Revenue & Taxation Code § 17041
- Residents: Taxed on worldwide income, filing Form 540.
- Non-Residents & Part-Year Residents: File Form 540NR and are only taxed on California-source income.
- Businesses: Must file Form 100 (corporations), Form 100S (S-corps), or Form 568 (LLCs).
Example:
A California resident earning $120,000 in salary and $10,000 in rental income must report and pay tax on the full $130,000.
California Sales & Use Tax
Applicable Code: IRC § 164(d), BOE Publication 401
- Retailers must collect sales tax on taxable goods.
- California’s statewide base rate is 7.25%, but local sales tax rates may increase total rates up to 10.75%.
- Online purchases from out-of-state sellers require consumers to self-report use tax.
Example:
A business selling $100,000 in goods in Los Angeles at a 9.5% tax rate will owe $9,500 in sales tax.
Property Tax Rules
Applicable Law: California Revenue & Taxation Code §§ 50–100
- Property tax is 1% of assessed value plus voter-approved levies.
- Homeowner’s Exemption: Reduces assessed value by $7,000, saving about $70 annually.
California Franchise Tax
Applicable Code: IRC § 7701, California Revenue & Taxation Code § 23151
- LLCs: Pay $800 minimum tax + gross receipts fee if applicable.
- Corporations: Pay the greater of $800 or 8.84% of net income.
- S-Corps: Pay 1.5% tax on net income, with a $800 minimum.
Example:
An LLC with $500,000 in revenue owes $800 franchise tax + $2,500 gross receipts fee = $3,300 total.
Employment Taxes
Applicable Code: IRC §§ 3101, 3111, 3301
Employers must pay:
- State Unemployment Insurance (UI)
- Employment Training Tax (ETT)
- State Disability Insurance (SDI)
California’s Employment Development Department (EDD) administers payroll tax reporting.
Capital Gains Tax in California
California does not provide lower rates for long-term capital gains. Instead, capital gains are taxed as ordinary income, unlike federal rates that distinguish between short- and long-term gains.
Example:
Selling stock for a $10,000 gain in a 9.3% tax bracket results in $930 state tax owed.
Other State-Level Taxes
- Vehicle License Fee (VLF): Tax component included in annual vehicle registration.
- Excise Taxes: Levied on fuel, cigarettes, alcohol, and cannabis.
- Tourism Taxes: Applied to hotel stays and rental cars.
Step-by-Step Guide to Compliance
- Determine your tax obligations based on residency and business activities.
- Gather federal tax documents (W-2s, 1099s, business records).
- File required California tax forms (540, 100, 568, etc.).
- Register with CDTFA & EDD if collecting sales tax or hiring employees.
- Pay estimated taxes quarterly (if applicable).
- File returns and pay taxes by April 15, 2025.
Conclusion
California taxes individuals and businesses across multiple categories. Proper planning and compliance with tax obligations help avoid penalties and maximize deductions.
Call to Action
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FAQs – Commonly Asked Questions
Q1: Do I have to pay California state taxes if I live out of state?
A: If you earn income from a California source, you must file Form 540NR.
Q2: What is the minimum franchise tax for LLCs in California?
A: The minimum franchise tax is $800, plus additional fees for gross receipts over $250,000.
Q3: How does California tax capital gains?
A: Capital gains are taxed as ordinary income, unlike federal rates.
Q4: Are online purchases subject to California sales tax?
A: Yes, if a retailer has a physical presence or nexus in California.
Q5: How do I qualify for the homeowner’s exemption?
A: You must own and occupy your home as your principal residence.
About Our CPA
Anshul Goyal, CPA EA FCA is a licensed Certified Public Accountant in the United States and a Chartered Accountant from India. He is an Enrolled Agent authorized to represent clients before the IRS. Anshul specializes in California taxation, IRS litigation, and cross-border tax planning. With 15+ years of experience, he has helped over 2,000 clients and saved more than $200M in taxes.
Disclaimer
This article is for informational purposes only and does not constitute tax or legal advice. Tax laws frequently change, and individual circumstances vary. Consult a qualified CPA or tax professional before making any tax-related decisions to ensure compliance with California and federal tax laws.