California LLC Tax: Everything You Need to Know
California LLC tax can be tricky for any small business owner so it's best to clarify your tax schedule as soon as possible. 3 min read
2. Increased Self-Employment Tax
California LLC Tax
California LLC tax can be tricky for any small-business owner so it's best to clarify your tax schedule as soon as possible. If the income for the fiscal year is:
- Less than $250,000 (which would include any loss), the total CA tax owed is $800 (LLC Tax plus $0 for an LLC fee)
- It is $1700 ($800 LLC Tax plus a $900 LLC fee) if it falls between $250,000 and $499,999;
- $3,300 ($800 LLC tax and $2,500 LLC fee) if the total income is between $500,000 and $999,999
- $6,800 ($800 LLC tax and $6,000 LLC fee) if the income falls between $1,000,000 and $4,999,999
- CA tax owed is $12,590 ($800 LLC Tax plus an $11,790 LLC fee) if the income is more than $5,000,000
Just about all California LLCs and out of state LLCs that do business in California must pay the $800 a year franchise tax -- whether or not they did business or lost money. Also, regardless of whether or not a business is fully in operation for an entire year doesn’t matter; the full $800 is due come tax season. Now, of course, there are some exceptions. If a business is in operation for a very short period of time and does not do any business is one. Other exceptions include nonprofit companies that have a tax exemption status, an LLC owned and operated by a U.S. Armed Forces veteran, and LLCs that choose to have a small business corporation taxation status (otherwise known as an S corporation).
Before 2007, the FTB (or the Franchise Tax Board) would tax all worldwide revenues of Californian limited liability companies; however, the Northwest Energetic Services, LLC vs. California Tax Board and the Ventas Finance I, LLC vs. Franchise Tax Board court cases determined that the FTB could only place LLC fees to moneys allocated directly from California business. So as of today, one’s total income is determined by the revenues from California, but can vary because of complicated definitions in California’s Revenue and Taxation Code.
Any LLCs that paid too much can request a refund. Again, the $800 a year LLC tax is expected no matter how much business was done that tax year, but of course some exceptions do apply. Do note, though, that LLC tax does accumulate every year; therefore, if an LLC is still listed as active, but in fact is not, then the tax will continue to build up.
Some argue whether or not it would have been more aptly named had it instead been called the LLC fee instead of the LLC tax because it is more of a privilege fee than anything else. People must pay for the right, or again the privilege, of doing business in California. Likewise, the LLC fee would have been more aptly named the LLC tax because it is based on the amount the LLC brings in during a fiscal year.
Note that LLCs may choose to operate on a different fiscal year as opposed to the calendar year if it suits their needs better. LLC taxes must be paid alongside any U.S. federal income taxes that are due and do not rely upon any profits made that fiscal year (which is the opposite how California taxes corporations based in the state).
Increased Self-Employment Tax
There are perhaps a few reasons why a California LLC should not operate a business, but the main one is that each member of the LLC will have a very noticeable self-employment tax to pay each fiscal year. Unless the LLC chooses otherwise, each LLC is treated by California either as a sole proprietorship when it only has one person, or is treated as a partnership when there are two or more. This comes into play whenever the business begins pulling in money.
That money (or net income) is taxed as self-employment income at 15.3 percent, but this doesn’t include the normal federal and state taxes. On the other hand, if that same LLC was considered a corporation, that person would instead only pay a 15 percent capital gains tax on profit distributions instead of a self-employment tax. Moreover, if it were listed as an S Corporation, they would only pay a 7.65 percent employment tax on salaries. Profits that come from dividends are not taxed as income or payroll but, instead, at the 15 percent capital gains rate.
If you need help with California LLC tax, you can post your job on UpCounsel's marketplace. Upcounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.