Federal and California Tax Rates and Fees

ALLEN M. LEE, A PROFESSIONAL LAW CORPORATION

(Updated June 7, 2011)

I. Business Entities

A. C Corporations

1. Federal taxes

a) Income Taxes

Personal service corporations are subject to a flat tax of 35% regardless of their income.

b) Accumulated Earnings Tax

In addition to the regular tax, a corporation may be liable for an additional 15% tax on accumulated taxable income in excess of $250,000 ($150,000 for personal service corporations).

2. CA State Taxes

a) California charges C corporations, as well as S corporations, LLCs and limited partnerships, a minimum annual franchise tax of $800, payable to the Franchise Tax Board.

b) California imposes an 8.84% flat tax on C corporations. Bank and Financial C-Corporations are taxed at 10.84%.

B. S Corporations

1. Federal taxes. S corporations are treated as pass-through tax entities, meaning that the profits or losses of the corporation pass through the business and are reflected and taxed on the individual tax returns of the shareholder, rather than being reported and taxed at a separate business level.

2. CA state taxes. An S corporation is taxed on its net income at a rate of 1.5 percent, with a minimum tax of $800. Financial S corporations are taxed at a rate of 3.5%.

C. Limited Liability Companies

1. Federal taxes. LLCs can elect to be taxed as a pass through entity (partnership taxation) or a corporation (corporate taxation). As a pass through entity, the profits or losses of the LLC pass through the business and are reflected and taxed on the individual tax returns of the members, rather than being reported and taxed at a separate business level. If the LLC elects corporate tax treatment, it will then be taxed at the applicable corporate tax rates.

2. CA state taxes.

a) California imposes on LLCs, as well as C corporations, S corporations and limited partnerships, a minimum annual franchise tax of $800, payable to the Franchise Tax Board.

b) California imposes on LLCs an additional “gross receipts fee,” which is essentially a tax based on the LLC's total income from all sources derived from or attributable to the state of California, and includes the cost of goods sold.

II. Payroll Taxes

A. Federal Payroll Taxes

1. Federal Unemployment (FUTA) Tax. For 2011, the FUTA tax rate is 6.2%. The FUTA tax rate is scheduled to decrease to 6.0% beginning July 1, 2011. This tax applies to the first $7,000 paid to each employee as wages during the year. Generally, you can take a credit against your FUTA tax for contributions to state unemployment funds up to a maximum 5.4% of taxable wages.

2. Social Security Tax (FICA). For 2011, the employee tax rate for social security is 4.2%. The employer tax rate for social security is 6.2%. Total, this is 10.4%. The 2011 wage base limit is $106,800, for a maximum of $6,621.60. Without further changes in the law, the employee tax rate will return to 6.2 percent, for a total of 12.4 percent, beginning in 2012.

3. Medicare Tax. The employee tax rate for Medicare is 1.45%. The employer tax rate for Medicare tax is also 1.45%. Total, this is 2.9%. There is no wage base limit for Medicare tax; all covered wages are subject to Medicare tax.

B. CA Payroll Taxes

1. Unemployment Insurance (UI). The UI taxable wage limit for 2011 is $7,000 per employee, per year. The UI tax rate for new employers is 3.4 percent for up to three years. The UI rate schedule in effect for 2011 is Schedule "F+", which provides for UI contribution rates from 1.5% to 6.2%.

2. Employment Training Tax (ETT). The 2011 ETT rate is 0.1 percent (.001) of the first $7,000 per employee, per year.

3. State Disability Insurance (SDI). The 2011 SDI tax rate (which includes Disability Insurance and Paid Family Leave) is 1.2 percent. SDI taxable wage limit is $93,316 per employee, per year, for a maximum of $1,119.79.

III. Self-employment tax (SE Tax)

This is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. The self-employment tax rate for self-employment income earned in calendar year 2011 is 13.3% (10.4% for Social Security and 2.9% for Medicare). For self-employment income earned in 2010, the self-employment tax rate is 15.3% (12.4% for social security and 2.9% for Medicare). Only the first $106,800 of the individual’s combined wages, tips, and net earnings are subject to any combination of the 12.4% social security part of the self employment tax, social security tax, or railroad retirement (tier 1) tax. All net earnings of at least $400 are subject to the Medicare part of the self employment tax.

IV. Other Federal

A. Personal Income Tax Rate Schedules

Married individuals filing joint returns and surviving spouses

Unmarried individuals (other than surviving spouses and heads of households)

B. Federal Long-Term Capital Gains and Qualifying Dividends (Rate on qualified dividends and gains for assets held at least 12 months)

1. For taxpayers in the 15% bracket or below --0%
2. For taxpayers in higher brackets--15%

Last updated July 28, 2011.

Allen M. Lee  Mr. Lee’s practice focuses on business, corporate and intellectual property matters, including the creation, protection and exploitation of intellectual property assets.  He counsels clients on business formation, general corporate matters, trademark, copyright, trade secret, patent, licensing, internet and domain name issues, among other things.  For more information contact: Allen M. Lee, a Professional Law Corporation, Tel: (408) 249-2735, Fax: (408) 260-8263, Email: allen@allenmlee.com, Internet: www.allenmlee.com.