What to know about California state taxes

California state tax laws are constantly changing, and it's important for businesses and individuals to stay informed of these updates in order to ensure compliance and avoid penalties. With the complexity of California state taxes, it’s important to be informed about how your unique situation affects your taxes. 

‍

What are the most important things to know about California state taxes?

If you own a businesses, the California Competes Tax Credit is available to companies that want to expand or relocate to the state. The credit is based on the number of jobs created and the amount of investment made by the company. The California Research Credit allows businesses to claim a credit for qualified research expenses. The California Small Business Stock Option Credit allows eligible small business to claim a credit for qualified stock option expenses.

For individuals, the California Earned Income Tax Credit is available to low-income individuals and families. The California Child and Dependent Care Credit allows taxpayers to claim a credit for expenses related to the care of a child or dependent. The California Mortgage Credit Certificate Program allows eligible first-time homebuyers to claim a federal tax credit for a portion of their mortgage interest. The California Solar Tax Credit allows individuals and businesses to claim a credit for installing solar energy systems on their property.

Regarding changes to taxes for individuals that applies to the 2022 tax year, the most notable change is the increase in the state's income tax bracket. Additionally, the standard deduction will increase for individuals, with the single filer deduction increasing to $5,202 from $4,803 and the married/joint filer deduction increasing to $10,404 from $9,606.

‍

What is the California income tax bracket for individuals?

California has a progressive state income tax system, meaning the tax rate increases as an individual's income increases. The state's income tax bracket for individuals for the 2022 tax year is as follows:

‍

• 1% on the first $10,099 of taxable income for single filers, and $20,198 for married/joint filers.
• 2% on the next $10,100 to $23,942 of taxable income for single filers, and $20,199 to $47,884 for married/joint filers.
• 4% on the next $23,943 to $37,788 of taxable income for single filers, and $47,885 to $75,576 for married/joint filers.
• 6% on the next $37,789 to $52,455 of taxable income for single filers, and $75,577 to $104,910 for married/joint filers.
• 8% on the next $52,456 to $66,295 of taxable income for single filers, and $104,911 to $132,590 for married/joint filers.
• 9.3% on the next $66,296 to $338,639 of taxable income for single filers, and $132,591 to $677,278 for married/joint filers.
• 10.3% on the next $338,640 to $406,364 of taxable income for single filers, and $677,279 to $812,728 for married/joint filers.
• 11.3% on the next $406,365 to $677,275 of taxable income for single filers, and $812,729 to $1,354,550 for married/joint filers.
• 12.3% on the next $677,276 or more of taxable income for single filers, and $1,354,551 or more for married/joint filers.

‍

What should small businesses know about California state taxes?

Depending on the type of business entity, most businesses are subject to a California corporate tax, a California alternative minimum tax (AMT), and/or a California franchise tax. The income generated by your business is also subject to the California state income tax.

For C corporations and LLCs, the corporate tax rate (8.83%) is applied to any income earned. If they don’t return a profit, they’re charged with the AMT of 6.65%. Pass-through entities and C corporations that do not report net income must also pay a California franchise tax. 

In California, S corporations must pay a franchise tax of 1.5% of their net income or $800, whichever is greater. LPs and LLPs pay a flat franchise tax of $800 per year, whereas general partnerships and sole proprietors do not. LLC franchise taxes are based on net income and are charged at the following rates: 

‍

• Less than $250,000 is charged $800
• $250,000 - $499,999 is charged $900
• $500,000 - $999,999 is charged $2,500
• $1,000,000 - $4,999,999 is charged $6,000
• $5,000,000 or more is charged $11,790