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Taxes in California: What taxes do you need to pay?
Discover one of the most complex tax systems in the USA: Taxes in California. We explain their rates and benefits in detail.
California is one of the 50 states of the USA, located in the west of the country and made up of such well-known cities as Los Angeles and San Francisco. It’s a place with a wide variety of entertainment where you can visit Hollywood studios, the famous Yosemite National Park, the Mojave Desert or the beaches of Santa Monica. Undoubtedly, one of the most touristic destinations in the United States and a strategic enclave to invest, start a business or enjoy your free time. If you’d like to move here, you need to know what taxes are like in California.
The state has one of the most complex tax systems in the country and the highest state taxes. For this reason, it’s first necessary to find out what taxes you’d be obliged to pay, as an individual or company, and what tax benefits are available to you. Stick around and we’ll tell you all you need to know with updated rates in 2025 and practical examples to help you understand how California’s tax system works.
Taxes for individuals or natural persons in California
As an individual or natural person residing in this state, you’ll be required to file a number of taxes in California, both direct and indirect. An employee, a self-employed person, is recognised as a natural person, digital nomad, a pensioner or student, among others.
For this group, a number of tax rights and obligations apply in their country of residence. If you want to know more about US taxes in general, you can read our post: Taxes in the USA: What are they and how much do I have to pay? Here’s a breakdown of the main taxes for individuals in California.
1. State income tax
State income tax is one of the taxes in California that applies to residents, but also to income generated within the state by non-residents. It works on the basis of progressive rates that increase according to the amount of annual earnings.
This tax is used to fund a variety of essential public services and programmes such as public education, health services, transportation, public safety and the environment. We explain you better how the progressive system works:
- Taxes: Vary between 1% and 13.3%, depending on the income bracket.
- Example: Someone earning $40,000 a year pays a rate of approximately 6%, which is equivalent to $2,400. On the other hand, for an income of $200,000, the rate increases to 9.3%, resulting in a payment of $18,600.
2. Sales and use tax
Indirect taxes in California are, for example, sales and use taxes. It’s a tax paid by consumers for the purchase of goods and services. It works in a similar way to VAT in other countries, where a percentage is added to the final price of the purchased good. The complexity in this state is that the rates vary depending on the local fees added by municipalities or districts. Here are some examples:
- Base rate: 7.25% general rate applies, plus additional local taxes.
- Los Angeles local tax: 3% is added, for a total of 10.25%.
- San Francisco local rate: 1.375% is added, for a total of 8.625%.
- San Diego local rate: 0.50%, for a total of 7.75%.
- Local tax Sacramento: 1.50%, totalling 8.75%.
- Example: If you make a purchase in Los Angeles for $1,000, you will pay $102.50 in taxes, for a total of $1,102.50.
3. Property Tax
Individuals purchasing real estate in California are taxed annually based on the assessed value of the property and its location, as some counties add their own local tax rate. In this way, they can fund community projects, as is the case in Los Angeles or San Francisco. For this reason, it’s important to know, in addition to California taxes, the local rates in your counties.
- Base rate: 1% of the assessed value of the property is applied.
- Los Angeles local rate: Up to 1.25% of local rates.
- San Diego local rate: Between 1% and 1.15%, depending on the area.
- Santa Clara local rate: May reach 1.2% due to school vouchers and infrastructure improvements.
- Example: If you buy a home in San Diego for $500,000, you would have to pay $5,000 per year plus an extra 1% local tax, for a total of $10,000.
4. Fuel tax
Other types of indirect taxes in California are those levied on gasoline and other fuels. In this case, the state only has a state fee of $0.588 per gallon of gasoline. For example, if you fill up a car with 15 gallons of gas, you’ll pay approximately $8.82 in taxes. In this way, California raises money to fund infrastructure and transport projects.
Taxes for legal persons or companies in California
California accounts for 15% of the US economy, making it the largest revenue-generating state in the country. On the one hand, this is a plus when it comes to setting up a business here, but on the other hand, taxes in California are among the highest and most complex, as we’ll see below. In this way, the government manages to finance the state’s public services such as education, infrastructure and sustainability initiatives.
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If you’re a foreigner and want to open a company headquarters in California, you’ll also face specific taxes. If you’d like more information on taxes for foreigners in the USA, you can read our article: What taxes do foreigners in the USA have to pay?
1. Corporate income tax
Companies registered in California are taxed on income generated within the state. The levy varies according to the business structure and is used to finance essential state services. We explain in more detail:
- Traditional Corporations (C Corporations): Has a rate of 8.84% on net income.
- S Corporations: 1.5% rate on net income, with a minimum of $800 per year.
- Sole proprietorships and partnerships: Pay through the owner’s personal income tax.
- Example: A C Corporation with net income of $500,000 will pay $44,200 per year in income tax.
2. Minimum annual tax
There are mandatory taxes in California for any company, even if they don’t make any profit in that year. This is the annual minimum tax at a rate of $800 per year, regardless of your tax structure or earnings. For example, a newly registered LLC that had no income in its first year yet must pay this $800.
3. Sales and use tax
As with the VAT tax in other countries, California has designed a levy on the sales and use of tangible goods and services. The companies are responsible for adding this tax to the final invoice to the customer and then declaring it in their annual tax return and returning it to the state.
As we’ve seen in the section on individuals, we remind you that the state rate is 7.25%, but there are some counties that impose their own local rate, such as San Francisco, San Diego or Los Angeles, among others. For example, a retailer in Los Angeles who sells $10,000 worth of goods in a month will have to pay a total of $1,025, when adding the extra 3% local tax.
4. Payroll tax
California corporate taxes also apply to employee payrolls. It’s the duty of the company or legal entity to make contributions in order to finance unemployment insurance, disability insurance and other state welfare programmes for its employees. Let’s see what the rates are:
- Unemployment insurance (UI): Between 1.5% and 6.2%, depending on employees’ salaries and the company’s experience.
- Disability insurance (SDI): 1.2%, partly covered by employees.
- Example: A company with a payroll of $100,000 might pay about $5,000 for UI (at 5% on average) and $1,200 for SDI.
Tax benefits in California
As you’ve seen, taxation in California is a very complex and demanding tax system. For this reason, and with the aim of promoting job creation, state investment and attracting international talent, this state has created a programme of benefits that you can take advantage of. We explain the main tax advantages in this table:
| Tax benefits | Features |
|---|---|
| Research and development (R&D) tax credits | Companies with research and development projects can deduct up to 15% of the costs. |
| Payroll tax exemptions | If you hire employees in disadvantaged areas such as Oakland, Richmond or Fresno, you can benefit from this exemption. |
| Incentives for renewable energies | Credits for companies installing solar systems or investing in clean technologies. |
| Tax incentive programmes | Available for small businesses affected by natural disasters such as forest fires, earthquakes, floods, etc. |
| EB-5 Visa Program | Ease of obtaining permanent residency for foreigners who invest at least $800,000 in disadvantaged areas or $1,000,000 in other areas. |
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Frequently Asked Questions about taxes in California
The main taxes include state income tax (which varies from 1% to 13.3% depending on income), sales and use tax (between 7.25% and 10.75% depending on the region) and property tax (with an average base rate of 1% of the assessed value of the property).
Yes, a number of tax benefits are available to foreigners, such as international tax treaties to avoid double taxation or permanent residency with the EB-5 investor visa. Certain reductions or exemptions also apply if they decide to invest in certain areas or sectors.
Property tax is calculated on the assessed value of the property, which is generally the initial purchase price, adjusted annually for inflation up to a maximum of 2% per year. The average fee is 1%, but there are additional local fees that may increase the total.
Yes, self-employed income is also subject to state and federal income tax. In addition, freelancers must pay quarterly estimated taxes and self-employment tax, which includes Social Security and Medicare.
If you as an individual or legal entity fail to meet your tax obligations in California, the consequences can include penalties, fines and garnishments of wages or property. It’s important to keep up to date with tax dates in order to comply with all taxes.
Taxes in California are among the highest in the USA. It ranks number one for state income tax and sales and use tax. Some states such as Texas or Nevada are exempt from income tax and Oregon does not have a sales tax either.
