This is the 5th FAQ of this series on taxes for Canadian businesses in the USA.
What state taxes does a Canadian business pay in California?
The California state sales tax rate is 7.25%. This rate is made up of a base rate of 6%, plus California adds a mandatory local rate of 1.25% . Depending on local sales tax jurisdiction, the total tax rate can be as high as 10.25%. Food and prescription drugs are exempt from sales tax.
The California state use tax rate is 7.25%. This rate is made up of a base rate of 6%, plus California adds a mandatory local rate of 1.25%.
California has four state payroll taxes. Wages are generally subject to all four payroll taxes. However, some types of employment are not subject to payroll taxes and withholding.
Unemployment Insurance (UI) and Employment Training Tax (ETT) is paid by the employer. Employers pay a percentage on the first $7,000 in wages paid to each employee in a calendar year. The maximum UI tax is $434 per employee per year (calculated at the highest UI tax rate of 6.2 percent x $7,000.) The maximum EET is $7 per employee, per year ($7,000 x .001).
State Disability Insurance (SDI) is a deduction from employees’ wages. Employers withhold a percentage (1% as of 2020) for SDI on the first $122,909 in wages paid to each employee in a calendar year. Employers must also withhold personal income tax as a certain percentage of income from each payroll of an employee earning income while in California. The amount of tax you withhold from an employee depends on the length of your pay period, the employees gross pay and the number of withholding allowances/exemptions claimed on the California Form DE 4.
Corporate Tax (Income Tax)
The corporate tax applies to corporations and LLCs that elect to be treated as corporations. This tax rate is a flat 8.84%, which is higher than average in the United States, and it applies to net taxable income from business activity in California.
Alternative Minimum Tax (Income Tax)
Corporations are subject to the alternative minimum tax (AMT) of 6.65%. This is a tax that prevents corporations from effectively writing down income to minimize corporate tax.
The California Franchise Tax Board requires that most businesses registered in the state of California pay a franchise tax. The minimum franchise tax is $800 per year. The amount due whichever amount is larger—either $800 or the net income of the corporation multiplied by its applicable corporate tax rate.
If you remain under certain thresholds in this state you are not responsible for taxes.
Availability of Treaty Benefits
Use taxes are often treated as income taxes by the Canadian government when calculating income in Canada and applying for foreign tax credits. Meaning if you pay use tax in the USA but have no net profit, you will not benefit from a tax credit theoretically. The actual application is a bit more complex.
Income taxes in the USA are almost always treated as income taxes by the Canadian government. Thus, in the majority of cases, if you pay tax in the state you don’t pay tax again in Canada unless the Canadian rate is higher.
If you are considering business in California, including sales over $500,000 to residents and businesses in California, please contact us and we can advise on the best structure to reduce or minimize the impact of the taxes.