California business tax codes live in two main places: the Revenue and Taxation Code (R&TC), which covers income, franchise, and sales and use taxes, and the Unemployment Insurance Code (UIC), which covers payroll taxes and worker classification. Three separate state agencies enforce them. The Franchise Tax Board handles income and franchise taxes, the California Department of Tax and Fee Administration handles sales and use tax, and the Employment Development Department handles payroll. What you owe, and under which code, depends on how your business is organized, whether you sell tangible goods, and whether you have employees.
What You Owe by Entity Type
The R&TC treats each business structure differently. The starting point for most entities is the $800 minimum franchise tax, but who pays it, when, and on top of what varies.
C Corporations
Every corporation incorporated in California or qualified to do business here pays the greater of its calculated income tax or the $800 minimum franchise tax set by R&TC Section 23153.1Franchise Tax Board. C Corporations The C corp income tax rate is a flat 8.84% of net income. If 8.84% of net income works out to less than $800, you still owe $800.
Newly incorporated or newly qualified corporations are exempt from the $800 minimum in their first taxable year.2Franchise Tax Board. Corporations Starting year two, the minimum applies every year whether or not the business earned anything. The only way to stop the clock is to formally dissolve or surrender the entity with the Secretary of State.
S Corporations
S corps face a reduced rate of 1.5% of net income, with the same $800 floor.3State of California Franchise Tax Board. S Corporations
LLCs
LLCs doing business in California or organized under California law owe the $800 annual tax under R&TC Section 17941, which cross-references the same amount in Section 23153.4Franchise Tax Board. Limited Liability Company LLCs no longer get a first-year exemption. The temporary waiver under Assembly Bill 85 covered LLCs formed between January 1, 2021 and January 1, 2024, and that window has closed.5Franchise Tax Board. FTB Publication 3556 – Limited Liability Company Filing Information An LLC formed in 2026 owes $800 from day one.
LLCs with significant California-source income owe more than just the flat tax (see the next section).
Sole Proprietors
Sole proprietors do not file a separate business tax return in California. All business income and expenses go on the personal California return (Form 540), using the same Schedule C that accompanies the federal Form 1040.6Franchise Tax Board. Sole Proprietorship Business Type There is no $800 minimum because the business and the individual are the same taxpayer.
Partnerships
General partnerships do not owe the $800 annual tax, but they must file Form 565 and issue each partner a Schedule K-1. Limited partnerships do owe the $800, like LLCs and corporations.7Franchise Tax Board. Partnerships In either case, the partnership itself pays no income tax; each partner reports their share and pays individually.
The LLC Gross Receipts Fee
On top of the $800 annual tax, LLCs with total income from California sources above $250,000 owe a graduated fee under R&TC Section 17942.8California Legislative Information. California Revenue and Taxation Code 17942 The tiers are:
- $250,000 to $499,999: $900
- $500,000 to $999,999: $2,500
- $1,000,000 to $4,999,999: $6,000
- $5,000,000 or more: $11,790
The fee is based on “total income from all sources derived from or attributable to this state,” not gross receipts as it’s commonly described. It stacks on the $800, so an LLC with $6 million in California-source income owes $12,590 before any income taxes flow through to members.
Sales and Use Tax
If you sell tangible personal property at retail in California, R&TC Section 6051 imposes sales tax on you as the retailer. The tax is legally yours, though it’s almost always passed to the buyer as a line item.
California’s statewide base rate is 7.25%. Cities and counties can add district taxes, so combined rates in many areas run above 9% or 10%.9California Department of Tax and Fee Administration. Know Your Sales and Use Tax Rate Use tax fills the gap when a California buyer purchases taxable goods from an out-of-state seller who didn’t collect sales tax; the rate matches the buyer’s local sales tax rate, so buying from out of state produces no tax advantage.10California Department of Tax and Fee Administration. California Use Tax
Out-of-state sellers who exceed $500,000 in sales into California during the preceding or current calendar year must register with the CDTFA and collect California use tax.11California Department of Tax and Fee Administration. Use Tax Collection Requirements Based on Sales into California That threshold is higher than the $100,000 floor used by most other states, so some sellers who owe tax elsewhere may not yet owe it in California.
Payroll Taxes Once You Hire
The moment you hire your first employee, the Unemployment Insurance Code takes over.12California Legislative Information. California Code UIC – Unemployment Insurance Code All four programs below are reported and paid through the EDD, not the FTB.
- Unemployment Insurance (UI), employer-paid. The 2026 rate schedule is F+, with rates from 1.5% to 6.2% depending on your experience rating.13Employment Development Department. Tax-Rated Employers
- Employment Training Tax (ETT), employer-paid. The 2026 rate is 0.1%.
- State Disability Insurance (SDI), employee-paid but withheld by you. The 2026 rate is 1.3%, applied to all wages with no cap.14Employment Development Department. Contribution Rates, Withholding Schedules, and Meals
- Personal Income Tax (PIT) withholding, employee-paid but withheld by you. The amount varies based on the employee’s earnings and withholding allowances, governed by UIC Division 6.
New employers usually receive a lower UI rate for the first few years, before their experience rating adjusts. Employers with more layoffs or unemployment claims generally pay higher rates.
Worker Classification: The ABC Test
Whether a worker is an employee or an independent contractor controls whether payroll taxes apply at all, and California uses one of the strictest tests in the country. Under UIC Section 621 and Labor Code Section 2775, any worker providing services for pay is presumed to be an employee unless the hiring business proves all three prongs of the ABC test:15California Legislative Information. California Unemployment Insurance Code 621
- A. The worker is free from the company’s control and direction over how the work is performed, both in practice and under any written contract.
- B. The work is outside the usual course of the hiring company’s business.
- C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work being performed.
All three must be satisfied. Prong B catches the most businesses. A delivery company that classifies drivers as contractors almost always fails prong B, because delivery is the company’s core business. Misclassification exposes you to back payroll taxes, penalties, and liability under both the UIC and the Labor Code.16California Legislative Information. California Labor Code 2775
The IRS uses a different, more flexible common-law test that examines behavioral control, financial control, and the overall relationship.17Internal Revenue Service. Employee (Common-Law Employee) A worker can pass the federal test as a legitimate contractor and still be reclassified as an employee under California’s ABC test.
Where California Breaks From Federal Rules
California nominally conforms to much of the Internal Revenue Code, but it decouples in several places that directly affect taxable income. Depreciation is where businesses get hit hardest.
The federal Section 179 deduction lets businesses write off qualifying equipment in the year of purchase. For 2026, the federal limit is $2,560,000, with a phase-out beginning at $4,090,000. California caps its Section 179 deduction at just $25,000, with a phase-out starting at $200,000. A business that deducts $500,000 in equipment federally has to add back $475,000 on the California return and depreciate the difference over time.
Bonus depreciation is a sharper break. Under the One Big Beautiful Bill Act, 100% bonus depreciation is permanently available at the federal level for qualifying property placed in service after January 19, 2025. California has never conformed to bonus depreciation and continues to reject it entirely. Any 100% first-year federal deduction must be recalculated using California’s standard depreciation schedules on the state return. Missing this adjustment is one of the most common audit triggers for businesses that file in both jurisdictions.
Which Agency Handles What
Three California agencies administer the codes above, and each operates independently.
Franchise Tax Board
The FTB administers all income and franchise taxes under the R&TC: corporate income tax, S corporation tax, LLC annual taxes and fees, partnership returns, and personal income tax (including sole proprietor income reported on Form 540). It handles filing, audits, and collections for these obligations.
California Department of Tax and Fee Administration
The CDTFA administers sales and use tax, along with excise taxes on fuel, tobacco, alcohol, and cannabis. Retailers must register with the CDTFA and obtain a seller’s permit before making taxable sales. The CDTFA also enforces economic nexus against out-of-state sellers.18California Department of Tax and Fee Administration. Sales and Use Tax in California
Employment Development Department
The EDD collects UI, ETT, SDI, and PIT withholding, and audits businesses for worker misclassification under the ABC test.19Employment Development Department. Payroll Taxes The three agencies share information, so a misclassification finding by the EDD frequently leads to follow-up inquiries from the FTB about unreported income or from the CDTFA about unreported taxable transactions.