The vast majority of California’s small-business owners are very good at what they do while competing in one of the world’s most challenging markets. They know their craft, customers and industry, and what it takes to make their operation successful. Most owners, however, will be the first to admit that they are not business-taxation experts.
Yes, they know that certain tax payments are due at certain times. But they’re also aware that under California tax law, reporting and payment schedules can be complex and confusing–requiring highly detailed paperwork due on difficult-to-remember deadlines –, making it difficult to stay in compliance.
Business owners may not be aware that California does not conform with all federal tax legislation (e.g. Section 179, etc.), creating a challenge for out of the box or DIY solutions.
Many business owners take it upon themselves to try and make sense of tax laws while running their business. Unfortunately, this results in them neglecting the day-to-day business operations and pushing anything tax-related to the back burner, hoping to take care of it ‘later’. For many, later never comes, and if it does, it’s either immediately before–or just after–a critical tax-payment deadline.
The best strategy for any business owner, who isn’t a business-tax expert, is to work with someone who is. Just like the customers of a contractor, electrician, hairstylist or other specialist wouldn’t attempt such work themselves, businesses with tax needs are usually best served by calling on experienced professionals.
Must-Know Tax Types for CA Business Owners
Any overview of tax types and tax bills begins with how your business is structured.
There are many different structures (‘entities’) to consider. The most common ones in California include: C-Corporation (C-Corp); S-Corporation (S-Corp); and Limited Liability Company (LLC). Click to learn more about these and other types of business structures. Meanwhile, here’s a summary of tax types that may apply to you.
You can discuss in detail with a qualified tax professional—such as our Vitae® Tax Advisors (request a free, no-obligation consultation today).
Business Taxes—Business owners may be familiar with the Internal Revenue Service (IRS) and taxes that may apply to a company’s net income. Most owners also know about fees and penalties imposed on late or inaccurate tax payments. The state in which a business operates may also impose income taxes. In California, there are three common types of taxes:
1) Corporate and personal tax—a levy on company profits paid at the entity or personal level.
2) Franchise Tax –a minimum ‘privilege’ tax, which allows a business to operate (and be officially recognized or ‘chartered’) within the state; and
3) The Alternative Minimum Tax, which ensures that certain taxpayers pay their ‘fair share’–or at least the minimum tax amount.
Employment/Payroll Tax—Companies who have employees are responsible for paying and remitting taxes on workers’ wages. Examples of these ‘payroll’ taxes include: Social Security, Medicare, State Unemployment, and Disability taxes. Note that California recently passed legislation which aggressively subjects many contractors to employment taxes (AB5)
Self-Employment Tax—This is a levy on a self-employed (e.g. sole proprietor, single-member LLCs) person’s net earnings of $400 or more. Note that this tax covers both the employee and the employer share of the individual’s Social Security and Medicare tax obligation.
Excise Tax—An excise tax is an ‘indirect’ tax that’s often built into the price a company charges for certain types of products, such as alcohol, fuel and tobacco. Excise taxes may also apply to the use specific kinds of facilities or equipment or payments for certain kinds of services. A qualified tax advisor can tell you whether excise taxes apply to your organization. If subject to it, you will be responsible for collecting and sending the amounts due to the IRS.
Sales Tax—Currently, while there is no federal sales tax, 45 states and thousands of local governments, levy sales taxes, which are paid (at the point of purchase) by consumers whenever they buy goods and services. The responsibility for calculating, collecting and reporting sales tax falls directly on business owners, which add to the owner’s total tax burden.
Property Tax— Business owners typically must pay this county tax for rented/leased or owned space, and any equipment used to operate their business.
City Taxes – The city may levy a tax for operating within its boundaries. The calculation may vary on a city by city basis. For example, this tax may be based on gross income or number of employees.
Free, No-Obligation CPA Consultation
As mentioned at the outset, tax planning and preparation can be difficult and time consuming. For busy owners, knowing which taxes apply to your company, as well as when to pay them and how much you owe, is a big load to carry alone. If you’re struggling to understand or keep up with your company’s tax bills, contact us today for a free, no-obligation consultation with an experienced Business Tax Advisor (BTA). As small-business tax experts, we’ve helped thousands of companies, of nearly every business structure. Learn about our complete suite of business tax services, including how we support your business tax returns with fully documented tax accounting.