California LLC Tax Rate: Everything You Need to Know
California LLC tax rates are: $800 for LLC tax, an LLC fee that ranges from $0 to $11,790, and FICA tax at 15.3% of taxable wages. 3 min read
2. Franchise Tax
3. Avoiding the LLC tax
4. Federal Taxes
Updated July 8, 2020:
California LLC tax rates are $800 for LLC tax, an LLC fee that ranges from $0 to $11,790, and FICA tax at 15.3% of taxable wages. The rates for sales tax and Nonconsenting Nonresident members' tax vary depending on the location of the LLC and the people involved.
California State Taxes and the LLC
California has three types of taxes on business: corporate tax, franchise tax or an alternative minimum tax, and income tax. Most businesses are subject to two or three of these taxes. A California LLC is by default treated as a disregarded entity if it has one member or a partnership if it has more than one member. LLCs are not subject to corporate tax because they have pass-through status but are subject to a number of California state taxes on the personal income of the owners.
This double taxation, relatively high tax rate, and the possibility of taxing LLC owners on some profits the owners that are directly reinvested in the business stack the odds against small businesses in California.
California Franchise tax is charged on most businesses in the state including corporations, LLCs, and partnerships. The California Franchise Tax Board explains that the tax is charged for the "privilege of conducting business in California." Each LLC is charged a minimum LLC tax of $800. This amount is levied on most domestic and foreign LLCs registered in California, whether they did business in that tax year or not. Even inactive businesses keep accumulating the tax as long as they are still registered with the California secretary of state.
In addition to the static LLC tax, there is a variable LLC fee which increases as the total income of the LLC goes up. Unlike the calculations for the tax rates of corporations, both the LLC fee and LLC tax are not dependent on profits.
The state of California defines total income as the total revenues the company gets from California. Before 2007, the California Franchise Tax Board claimed that it could tax a California LLC's income from anywhere in the world, but courts adjusted the law.
The total income tiers and their tax rates are as follows:
- An LLC whose income is below $250,000 is not charged an LLC fee, therefore, the total franchise tax is $800.
- LLCs whose total income is between $250,000 and $499,999 are charged an LLC fee of $900, bringing the total tax to $1700.
- LLCs with incomes from $500,000 to $999,999 pay an LLC fee of $2,500, making the total franchise tax $3,300.
- LLCs whose total income is between $1,000,000 and $4,999,999 are charged an LLC fee of $6,000 making the total franchise tax $6,800.
- If the LLC's total income is $5,000,000 and above, the fee is $11,790 bringing the total tax to $12,590.
To pay franchise tax in California, LLCs file the Limited Liability Company Return of Income form, Form 568. The $800 is paid for all years the LLC is in operation including the first and last years even if the LLC is in operation for just part of the year.
The exception to this is some LLCs that apply for short periods and don't do business, nonprofits with tax-exempt status, some LLCs owned by members of the US Army, and certain LLCs that choose to be treated as S corporations. Some LLCs that are not subject to the franchise tax are instead required to file the Partnership Return of Income form, Form 565.
Avoiding the LLC tax
The $800 LLC tax for small businesses in California can only be legally avoided if the company registers as a sole proprietorship. However, this is a decision you should only make if you are willing to operate without liability protection for your personal assets.
Some companies attempt to sidestep the tax by incorporating in other states. But, if the FTB finds out from your tax returns that you conducted business in California, you will be required to pay the tax anyway.
The net income that is generated by an LLC is considered self-employment income and is subject to a 15.3% tax in addition to the state taxes on the LLC.
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