How to File LLC Taxes in California? (Simple Guide)

Published by Jon Morgan | Co-Founder & Chief Editor

Last updated: September 20, 2024

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Staying compliant with California state requirements necessitates that all LLCs file taxes.

To help you understand the tax filing procedure, we joined forces with our licensed LLC advisors with over fifteen years of experience in the industry. We spent the past five weeks poring over the California Secretary of State's website for the correct and updated tax forms details.

Here's a summary of all taxes required for LLCs in California.

Quick Summary

How Are LLCs Taxed in California?

LLCs are taxed in California as pass-through entities where all the income trickles down to the owners and members who pay personal income tax with the IRS each tax year.

However, certain taxes will apply if your LLC has an "elective tax status" and is treated as a C or S-Corp.

State Taxes for California LLCs

State taxes are a mandatory obligation for LLCs operating in California.

1. Single-Member LLCs

A single-member LLC is treated as a sole proprietorship by default for taxation purposes.

Like a sole proprietorship, your single-member LLC does not submit federal tax returns or pay taxes. Instead, you report your LLC-related earnings or losses on your tax return (IRS Form 1040).

Any profit you make from your LLC is added to any other revenue you have made. This also applies to interest income or, if you're married and filing jointly, your spouse's income.

Based on our experience, we paid self-employment taxes, often known as Social Security and Medicare taxes, on our company revenue, which the IRS refers to as self-employment income.

The total amount of Social Security and Medicare taxes an employee pays equals the amount of self-employment taxes [1].

The 15.3% self-employment LLC fee rate includes the following: 

• 12.4% Social Security tax rate for an income cap of up to $132,900.
• 2.9% Medicare tax, with yearly caps of $200,000 for individual filers and $250,000 for married filers. A 0.9% additional Medicare tax is applied to every income over the cap.

2. Multi-Member LLCs

Multi-member limited liability companies are treated like partnerships and are, therefore, pass-through entities. 

This implies that while the LLC business entity must file LLC partnership tax reports with the IRS using Form 1065, referred to as an "information return," the LLC itself is not subject to taxation [2].

Learn more about multi-member LLC taxes.

3. LLCs Taxed as S-corp

Registering an LLC as an S-Corp is a smart way to enjoy LLC pass-through taxation and avoid paying Medicare and Social Security taxes in California.

As an S-Corp, the LLC is taxed on its profits at the individual net income tax rate.

Our company filed the personal tax return Form 1040 with the IRS and included the LLC earnings plus any other relevant income [3].

An S-Corp is also subject to a 1.5% corporate income tax rate.

4. LLCs Taxed as C-corp

A C-Corp is considered a separate legal entity from its owners for taxation reasons.

Therefore, neither gains nor losses are carried over to the owners' income tax returns.

Based on our experience, our C-Corp used Form 1120 to submit the tax returns to the IRS and pay income taxes on the net income.

"If your LLC is taxed similarly to a C Corp, it must pay income tax at the corporate tax rate on its net earnings for the tax year."
- Delina Yasmeh, J.D./Tax LL.M, Distinguished Expert in Mergers & Acquisitions

The corporate tax rate for C-Corps is 8.84%, and although it's lower than individual income rates, you risk double taxation (paying the individual and corporate taxes).

See our article for more information on why is LLC filing taxes as a C Corp.

Federal Taxes for California LLCs

From our experience owning LLCs in California, LLCs are not subject to federal income tax since the federal government considers them pass-through companies.

The LLC's members are the only ones who pay California LLC taxes on the LLC’s income using these different forms:

• For single-member LLCs, IRS Form 1040.
• IRS Form 1065 for LLCs handled as partnerships.
• IRS Form 1120 for LLCs taxed as corporations.

Other Taxes

The other taxes that California limited liability companies must pay include the following:

1. Annual Franchise Tax

Almost all California LLCs registered to do business in California are subject to the $800 minimum annual franchise tax for each fiscal year, paid to the California Franchise Tax Board [4].

Since there is no proration for partial years, even if the operating year may be shorter than a full year, the whole $800 franchise tax is usually owed in the first year of doing business in California.

The first-year California LLC annual franchise tax is due on the 15th day of the fourth month after incorporation.

However, we noticed that there are a few exceptions for the annual franchise tax:

• Nonprofit organizations.
• LLCs that are entirely owned by U.S. armed forces personnel on deployment.
• LLCs that want to be taxed as S corporations.

2. State Income Tax

There are nine different California income tax rates depending on the LLC income bracket [5].

Your taxable income, tax-filing status, and state of residence all affect your tax brackets and rates according to the following:

• 1% (0 to $10,099)
• 2% ($10,100 to $23,942)
• 4% ($23,943 to $37,788)
• 6% ($37,789 to $52,455)
• 8% ($52,456 to $66,295)
• 9.3% ($66,296 to $338,639)
• 10.3% ($338,640 to $406,364)
• 11.3% ($406,365 to $677,275)
• 12.3% ($677,276 or more)

The highest state tax rate in California is 13.3% due to the addition of a 1% mental health services tax on incomes above $1 million.

3. Sales and Use Tax

Statewide sales and use taxes are assessed at 7.25% by the California Department of Tax and Fee Administration (CDTFA).

However, most of California's local governments have implemented district taxes, which raise the tax a seller must pay. The district's tax rates are between 0.10 and 1.00 percent.

For their taxable sales and purchases, sellers must declare and pay the relevant district taxes. The seller always collects the appropriate amount of tax from the buyer and is responsible for paying it to the CDTFA.

If the taxes are not remitted, the seller will be liable for extra tax obligations, related fines, and interest fees.

Related articles:

• How to Create an LLC in California
• Premium LLC Formation Services in California
• Looking Up an LLC in California

What is Tax Deductible for an LLC in California?

The tax deductible for an LLC in California includes medical and dental expenses, gambling losses, business expenses, and mortgage interest.

Based on personal experience, here are other instances where taxpayers are eligible for tax credits:

• A taxpayer may write off a casualty loss brought on by a catastrophe that the president or the governor has proclaimed.
• Contributions to an IRA are deductible.
• You can declare the child and dependent care tax credit if you hire someone to look after your dependant, child, or spouse while you work.
• Taxpayers in the State of California can make contributions to a state fund that offers financial help to low-income students so they can attend college. The amount of these payments that taxpayers make can be deducted from their taxes up to 50%.
• You could be eligible for this credit if you are 65 or older and fulfill the qualifications. You may only apply for a credit up to a maximum of $1,695.

FAQs

References:

1. https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes
2. https://www.irs.gov/pub/irs-pdf/i1065.pdf
3. https://www.irs.gov/pub/irs-pdf/f1040.pdf
4. https://www.ftb.ca.gov/forms/misc/3556.html
5. https://www.ftb.ca.gov/forms/2022/2022-540-tax-rate-schedules.pdf