California is the world's fifth-largest economy and one of the most expensive places in the United States to run a business from a tax perspective. It has the highest top personal income tax rate in the country at 13.3%, a corporate rate of 8.84%, an $800 minimum tax that applies to almost every entity, and the highest statewide sales tax rate at 7.25%.
That doesn't stop millions of businesses from operating there. This guide explains each California business tax in 2026, what forming and keeping an entity costs, and how to plan around the biggest burdens.
Corporate income (franchise) tax
California calls its corporate tax a franchise tax when it applies to corporations doing business in the state.
| Entity | Rate | Minimum |
|---|---|---|
| C corporation | 8.84% of net income | $800 |
| Bank or financial corporation | 10.84% | $800 |
| S corporation | 1.5% of net income | $800 |
| Bank or financial S corporation | 3.5% | $800 |
Key points:
- Single sales factor apportionment with market-based sourcing for services and intangibles.
- Water's-edge or worldwide combined reporting for unitary groups.
- First-year exemption: Newly formed or registered corporations were exempt from the $800 minimum in their first year, but that exemption has expired, so new corporations should budget for it.
- Doing business test: Out-of-state companies are "doing business" in California if their California sales, property or payroll exceed indexed thresholds (sales of about $750,000 or more), even without a physical presence.
- Returns: Form 100 (C corporations) and Form 100S (S corporations) are due on the 15th day of the fourth month after year-end.
Personal income tax and pass-through owners
California taxes individuals on a progressive scale with ten brackets for single filers in 2026:
| Taxable income (single) | Rate |
|---|---|
| $0 to $11,456 | 1% |
| $11,456 to $27,157 | 2% |
| $27,157 to $42,861 | 4% |
| $42,861 to $59,498 | 6% |
| $59,498 to $75,197 | 8% |
| $75,197 to $384,109 | 9.3% |
| $384,109 to $460,927 | 10.3% |
| $460,927 to $768,213 | 11.3% |
| $768,213 to $1,000,000 | 12.3% |
| Over $1,000,000 | 13.3% |
The 9.3% bracket covers most middle- and upper-middle-income business owners. California does not offer the federal 20% qualified business income deduction, and it taxes capital gains as ordinary income.
Pass-through entity elective tax (PTE): Partnerships, S corporations and LLCs taxed as partnerships can elect to pay 9.3% of qualified net income at the entity level. Owners receive a California credit, and the entity-level tax is fully deductible for federal purposes, avoiding the $40,000 SALT deduction cap. The election has been extended through tax year 2030.
The $800 LLC tax and LLC fee
California's LLC costs are the most widely discussed in the country:
| LLC total California income | Annual LLC fee | Plus annual LLC tax |
|---|---|---|
| Under $250,000 | $0 | $800 |
| $250,000 to $499,999 | $900 | $800 |
| $500,000 to $999,999 | $2,500 | $800 |
| $1,000,000 to $4,999,999 | $6,000 | $800 |
| $5,000,000 or more | $11,790 | $800 |
The $800 tax applies every year, even if the LLC has no income or is inactive, until the LLC is formally cancelled. Single-member LLCs pay it in addition to the owner's personal income tax.
Sales and use tax
California's statewide base rate is 7.25%, the highest in the nation. Local district taxes add between 0.1% and 3.5%, and some cities in Los Angeles and Alameda counties reach 10.75%. The average combined rate is about 9.03%.
- Seller's permit: Required for any business selling tangible goods in California, issued free by the California Department of Tax and Fee Administration (CDTFA).
- Remote sellers: Must register once California sales exceed $500,000 in a year.
- Services: Most services are not taxable, which narrows the base compared with states like Hawaii or New Mexico.
Other California business taxes
- Payroll taxes: Employers pay unemployment insurance on a $7,000 wage base and the Employment Training Tax. Employees pay State Disability Insurance (SDI) at 1.3% for 2026 with no wage cap.
- Local business taxes: Los Angeles, San Francisco, Oakland and others charge gross receipts or payroll-based business taxes. San Francisco's gross receipts tax and Overpaid Executive Tax are among the most complex in the country.
- Property tax: Proposition 13 caps the general rate at 1% of assessed value plus local voter-approved levies, and limits annual increases to 2% until a change of ownership.
Forming a business in California: fees and ongoing costs
| Item | LLC | Corporation |
|---|---|---|
| Formation filing fee | $70 | $100 |
| Statement of Information | $20 every two years | $25 annually |
| Annual tax | $800 plus LLC fee if gross receipts exceed $250,000 | $800 minimum franchise tax |
| Registered agent | Required | Required |
Worked example: $500,000 of profit
| Step | Amount |
|---|---|
| Taxable income | $500,000 |
| California corporate tax at 8.84% | $44,200 |
| Federal tax at 21% on $455,800 | $95,718 |
| Total income tax | $139,918 (28.0%) |
For a single LLC owner with $150,000 of California taxable income, state income tax is about $10,268. At $75,000 it is about $3,295. The $800 LLC tax applies on top in both cases.
Choosing an entity in California
California's tax rules shift the usual entity math:
- Single-member LLC: Pays the $800 LLC tax and possibly the LLC fee, and the owner pays personal income tax on all profit. A sole proprietorship avoids the $800 but offers no liability protection.
- S corporation: Pays 1.5% of net income (minimum $800) at the entity level, on top of the shareholders' personal tax. That 1.5% often costs less than the federal self-employment tax saved, so S corporations remain popular once profit passes about $100,000.
- C corporation: Pays 8.84% plus 21% federally, about 28% combined. California does not conform to the federal QSBS exclusion, so founders who sell qualifying stock still owe California tax on the gain.
High earners should model the PTE election every year. An S corporation owner with $500,000 of profit can deduct roughly $46,500 of state tax federally through the election, worth about $17,000 at a 37% federal rate.
Recent changes for 2025 and 2026
- PTE election extended through 2030, with changes to the payment rules.
- SDI rate set at 1.3% for 2026, with no cap on wages.
- Film tax credit expansion increased funding to $750 million a year.
- Net operating loss suspension and credit limits that applied for 2024 through 2026 restrict businesses with income above $1 million from using NOLs and cap business credits at $5 million.
Is California a good state for business?
Advantages
- Huge consumer market and the deepest pool of technology and venture talent in the world
- Strong research universities and industry clusters
- PTE election softens the federal SALT cap for pass-through owners
- Proposition 13 keeps property tax predictable for long-term owners
Drawbacks
- Highest top personal income tax and statewide sales tax rates in the country
- $800 annual minimum tax on every LLC and corporation
- Complex local business taxes in major cities
- High costs for labor, real estate and regulatory compliance
Many founders form in Delaware or move to Nevada, Texas or Washington to avoid California income tax. A business that keeps employees, property or substantial sales in California still owes California tax regardless of where it is incorporated.
Compliance checklist
- File Articles of Organization or Incorporation with the Secretary of State.
- File the initial Statement of Information within 90 days.
- Register with the Employment Development Department for payroll taxes if you hire.
- Obtain a seller's permit from the CDTFA if you sell taxable goods.
- Pay the $800 tax by the 15th day of the fourth month of the tax year (Form 3522 for LLCs).
- File Form 568 (LLCs), 100 or 100S with the Franchise Tax Board each year.
Compare California with its neighbors below, or estimate your taxes in the United States calculator. See LLC taxes for more on the S corp election.