What Taxes Do Sole Proprietors Pay in California?

Sole proprietors in California pay federal income tax, a 15.3% federal self-employment tax, and California personal income tax on their net business profit, all reported through their personal returns rather than a separate business filing. Depending on what the business does, those core taxes sit alongside sales and use tax, payroll taxes, and local license fees. The taxes sole proprietors pay in California are structured around one key fact: your business and you are the same taxpayer, so business income flows straight onto your Form 1040 and your California Form 540.

Federal Income Tax on Business Profit

Your federal tax picture starts with IRS Schedule C. You report all business revenue there, subtract eligible expenses, and arrive at a net profit or loss figure.1Internal Revenue Service. About Schedule C (Form 1040) That net number flows onto your Form 1040 and is taxed at the same ordinary income rates that apply to wages. A sole proprietorship files no separate return of its own.2Internal Revenue Service. Sole Proprietorships

On top of the standard brackets, the federal qualified business income deduction (Section 199A) lets you deduct up to 20% of net business income before the income tax calculation.3Internal Revenue Service. Qualified Business Income Deduction Originally scheduled to expire after 2025, it was extended by the One Big Beautiful Bill Act signed on July 4, 2025. For 2026 the deduction begins to phase out above roughly $200,000 of taxable income for single filers and $400,000 for joint filers, and certain service businesses such as law, accounting, and consulting can lose it entirely at higher income levels.

Self-Employment Tax

Self-employment tax is usually the first unpleasant surprise. A traditional employee splits payroll taxes with the employer. A sole proprietor pays both halves: 12.4% for Social Security and 2.9% for Medicare, for a combined 15.3%.4Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) You calculate it on Schedule SE and file it with your Form 1040.5Internal Revenue Service. Instructions for Schedule SE (Form 1040)

The 12.4% Social Security portion only applies to net self-employment earnings up to $184,500 in 2026.6Social Security Administration. Contribution and Benefit Base Above that cap, you stop paying the Social Security piece, but the 2.9% Medicare tax keeps running with no ceiling. If net self-employment income exceeds $200,000 for a single filer or $250,000 for joint filers, an extra 0.9% Additional Medicare Tax applies to the excess.7Internal Revenue Service. Topic No. 560, Additional Medicare Tax

You get one break: half of your self-employment tax is deductible when calculating adjusted gross income on your federal return.4Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) That reduces the income subject to federal and California income tax. It does not reduce the self-employment tax itself.

California Personal Income Tax

California taxes your business profit at the same progressive personal income tax rates it applies to any other income. Rates run from 1% up to 13.3%, with the top rate including a 1% Mental Health Services Act surcharge on taxable income above $1 million. For 2026 single filers:

  • 1%: first $11,079
  • 2%: $11,080 to $26,264
  • 4%: $26,265 to $41,452
  • 6%: $41,453 to $57,542
  • 8%: $57,543 to $72,724
  • 9.3%: $72,725 to $371,479
  • 10.3%: $371,480 to $445,771
  • 11.3%: $445,772 to $742,953
  • 12.3%: $742,954 to $1,000,000
  • 13.3%: over $1,000,000

Married couples filing jointly get brackets roughly twice as wide. Your Schedule C profit is combined with wages, investment income, and any other taxable income before the rates apply.

You report net business income on Form 540, the California resident return.8California Franchise Tax Board. Sole Proprietorship California starts from your federal adjusted gross income but diverges on specific items, so you also complete Schedule CA (540) for state adjustments.9State of California Franchise Tax Board. 2025 Instructions for Schedule CA (540) – California Adjustments – Residents The most important adjustment for a sole proprietor is the qualified business income deduction. California does not conform to Section 199A, so you add that federal deduction back and pay California tax on the full amount of your business income. Nonresidents with California-source business income file Form 540NR instead.

One thing you do not owe: the $800 annual minimum franchise tax. That charge applies to corporations and LLCs doing business in California regardless of profit.10California Franchise Tax Board. Corporations11Franchise Tax Board. Limited Liability Company Sole proprietors owe tax only when they have taxable income.

Quarterly Estimated Tax Payments

Nobody is withholding tax from your business income, so you send it to the IRS and the FTB yourself throughout the year. Underpaying or missing a deadline triggers penalties that accrue daily.

Federal

Use Form 1040-ES to calculate and submit federal estimated payments.12Internal Revenue Service. About Form 1040-ES, Estimated Tax for Individuals Four roughly equal installments are due April 15, June 15, September 15, and January 15 of the following year, and the amount you send has to cover both income tax and self-employment tax.13Internal Revenue Service. Form 1040-ES – Estimated Tax for Individuals

To avoid an underpayment penalty, your payments for the year must total at least the smaller of 90% of your 2026 tax or 100% of your 2025 tax. If your 2025 adjusted gross income was over $150,000 ($75,000 if married filing separately), that second figure rises to 110% of your 2025 tax.13Internal Revenue Service. Form 1040-ES – Estimated Tax for Individuals

California

California uses Form 540-ES, and you must make estimated payments if you expect to owe at least $500 in state income tax for the year ($250 if married filing separately).14Franchise Tax Board. Estimated Tax Payments The due dates track the federal schedule, but the installments are not equal:

  • April 15: 30% of your estimated annual tax
  • June 15: 40%
  • September 15: 0% (no payment)
  • January 15: 30%

Seventy percent of your California estimated tax is due by mid-June, while only 50% of your federal estimate is due by that date.14Franchise Tax Board. Estimated Tax Payments Paying California in four equal chunks will leave you short in June and expose you to penalties even if your year-end total is correct. California’s safe harbor mirrors the federal rule: 90% of current-year tax or 100% of prior-year tax, bumped to 110% if your prior-year AGI exceeded $150,000.15Franchise Tax Board. Instructions for Form 540-ES Estimated Tax for Individuals

Sales and Use Tax If You Sell Goods

If your sole proprietorship sells physical goods, you register with the California Department of Tax and Fee Administration, obtain a seller’s permit, and collect sales tax at the point of sale.16California Department of Tax and Fee Administration. Sales and Use Tax in California The money you collect is held in trust for the state and remitted on the schedule the CDTFA assigns based on your sales volume.

Use tax is the mirror image. When you buy a taxable item from an out-of-state vendor who does not charge California sales tax, you owe use tax at the same rate.17California Department of Tax and Fee Administration. California Use Tax Permit holders report it on the regular sales and use tax return. If you buy equipment or supplies online and California tax does not appear on the invoice, assume use tax is owed.

Payroll Taxes If You Hire

Hire even one employee and pay more than $100 in wages during a calendar quarter, and you must register with the California Employment Development Department within 15 days.18Employment Development Department. Am I Required to Register as an Employer? Registration brings four state payroll obligations on top of federal payroll duties like FICA, FUTA, and W-2 reporting.2Internal Revenue Service. Sole Proprietorships

  • Unemployment Insurance (UI): employer-paid, 1.5% to 6.2% on the first $7,000 of each employee’s wages, with new employers starting at 3.4%.
  • Employment Training Tax (ETT): employer-paid, 0.1% on the first $7,000 of each employee’s wages.
  • State Disability Insurance (SDI): withheld from employee wages at 1.3%, with no wage cap.
  • Personal Income Tax (PIT) withholding: withheld from employee wages based on the employee’s DE 4 form and the FTB withholding schedules.

UI and ETT are costs you absorb. SDI and PIT come out of the employee’s paycheck and you remit them to the EDD.19Employment Development Department. Contribution Rates, Withholding Schedules, and Meals and Lodging Values If an employee does not submit a DE 4, you withhold as if they claimed single with zero allowances.

Local Licenses and Fictitious Business Names

California has no single statewide business license. Cities and counties set their own rules, and most require registration or a license before you begin operating.8California Franchise Tax Board. Sole Proprietorship Fees and renewal cycles vary. CalGold, the state’s online permit assistance tool, identifies what applies to your location and industry.

If you operate under any name other than your legal surname, file a fictitious business name statement with the county clerk where your principal place of business sits. Filing fees generally run about $10 to $50, most counties require publication in a local newspaper, and the statement needs to be renewed every five years. Skipping it can prevent you from enforcing contracts made under the business name.

A Note on Deductions

Every dollar of legitimate business expense reduces both your income tax and your self-employment tax, so deductions carry extra weight for a sole proprietor. Common ones include the home office deduction (the simplified method pays $5 per square foot up to 300 square feet, capped at $1,500),20Internal Revenue Service. Simplified Option for Home Office Deduction vehicle expenses using either the standard mileage rate or actual costs, self-employed health insurance premiums (federal only, and it does not reduce self-employment tax), supplies, software, professional services, and continuing education in your field. Keep contemporaneous records for anything that depends on usage, mileage, or square footage.