California Franchise Tax for LLCs and S-Corps: What You Actually Owe

What California means by “franchise tax”

California calls it a “franchise tax,” but it’s really a fee for the privilege of doing business in the state. Every LLC and S-corp operating in California owes it — and unlike a federal income tax, it applies whether or not the business turns a profit.

The structure differs by entity type. LLCs have two separate charges that stack: a flat $800 minimum tax and a gross receipts fee that scales with income. S-corps pay a single 1.5% rate on net income, with the $800 as a floor. Understanding which category you fall into, and how the math works at your income level, is the starting point for California entity planning.

The $800 minimum — what it is and who owes it

The $800 minimum franchise tax (California Revenue and Taxation Code §17941 for LLCs, a parallel provision for S-corps) is an annual fixed charge. Every LLC and S-corp in California owes it, and it applies to years with losses the same as years with profit. There is no phase-out at low income levels.

For LLCs, the $800 is paid as a prepayment during the tax year via Form 3522 (LLC Tax Voucher). For S-corps, it’s reported and paid with the annual Form 100S return. Both entities also owe any additional amount above $800 — for LLCs, that’s the gross receipts fee; for S-corps, that’s the 1.5% calculation if it exceeds $800.

The LLC gross receipts fee — the charge most new owners miss

Separate from the $800 minimum, California LLCs owe an annual fee based on total income from all California sources. This is calculated on Schedule IW of Form 568 and uses gross income — revenue before expenses — not net profit.

The fee schedule by total California income:

Two things to notice here. First, the fee is based on gross income, not net — a contractor with $400,000 in revenue and $200,000 in expenses still owes the $900 fee based on the $400,000. Second, the fee stacks on top of the $800 minimum — it does not replace it. At $400,000 gross income, an LLC owes $1,700 total.

The LLC gross receipts fee catches a lot of new owners off guard because it shows up in year one — even before the business is profitable — and it’s based on revenue, not income.

S-corp franchise tax: 1.5% on net income

California S-corps pay franchise tax under a different structure. Instead of a flat fee plus a gross receipts charge, S-corps pay 1.5% of California net income — with the $800 minimum as a floor. If 1.5% of net income comes out to less than $800, you pay $800. If it comes out to more, you pay the higher amount.

Unlike the LLC fee, the S-corp calculation is based on net income — the business’s California taxable income after deductions. The rate applies to the entity’s income before it flows through to the owner’s personal return.

What the two entities actually owe in California

The table below compares the California franchise tax and fee costs only. It does not reflect the full federal and state tax picture, which includes income tax, self-employment tax, and the SE tax savings from an S-corp election. The full cost comparison is covered in the related article on California LLC vs. S-corp true cost.

Note that LLC and S-corp measure income differently for this purpose: the LLC fee uses gross income (total revenue), while the S-corp rate applies to net income. The comparison below uses the same dollar figure for both, which is accurate for service businesses with minimal cost of goods.

The LLC consistently pays less in California franchise taxes than an S-corp at the same income level. This is one of the core reasons California entity decisions are different from the federal analysis — the S-corp saves money on federal self-employment tax but costs more in California franchise tax. At lower income levels the gap is modest; at higher income levels it grows substantially.

When these payments are due

For calendar-year entities:

• LLC $800 minimum: Prepaid during the tax year via Form 3522 (LLC Tax Voucher), due April 15. New LLCs pay by the 15th day of the 4th month after registration.
• LLC return and gross receipts fee (Form 568): Due March 15 of the following year. The fee is calculated on Schedule IW and paid with the return. Can be extended to September 15.
• S-corp franchise tax (Form 100S): Due March 15 of the following year. Can be extended to September 15.

Both the LLC return and the S-corp return share the same March 15 deadline as the federal returns for the same entity types — making it easier to coordinate state and federal filing on the same schedule.

Is the franchise tax deductible?

Yes. The California franchise tax and LLC fee are deductible as a business expense on your federal return. For LLCs, the tax and fee reduce the business’s net income reported on the federal return. For S-corps, it reduces corporate net income before the K-1 flows through to the owner.

The deduction is not subject to the SALT cap — that limitation applies to state income taxes and property taxes claimed on Schedule A by individuals, not to state taxes paid at the entity level. An S-corp owner gets a full federal deduction for the franchise tax the S-corp pays, regardless of how much state tax they’re personally deducting.

Whether the franchise tax is deductible on the California return depends on your entity type. LLCs and S-corps generally cannot deduct their own franchise tax on the California return, but the practical impact is limited since the deduction primarily matters at the federal level.