Taxes
Contractors pay income tax, self-employment or payroll taxes, sales and use tax, and property tax, and each has its own forms and deadlines. The exam loves deposit schedules, due dates, and who pays which tax. Late or missing payroll tax deposits bring stiff penalties that can land on you personally.
All dollar amounts, rates, and dates in this lesson are for 2026 unless stated otherwise. Tax figures change often, so always check the current IRS Publication 15 (Circular E), the EDD California Employer’s Guide (DE 44), and FTB and CDTFA guidance before you file.
Income tax by type of business
How your business is organized decides who pays income tax. A pass-through entity does not pay federal income tax itself; its profit ‘passes through’ to the owners, who report it on their personal returns. A C corporation pays tax on its own profit, and shareholders pay tax again on dividends they receive.
| Entity | Federal return | Who pays federal income tax | California (FTB) |
|---|---|---|---|
| Sole proprietorship | Schedule C with Form 1040; Schedule SE | Owner, on personal return | Owner pays California personal income tax |
| Partnership | Form 1065 (information return); Schedule K-1 to each partner | Partners; the partnership pays no income tax | Partners pay on their share |
| C corporation | Form 1120 | Corporation at 21%; shareholders again on dividends | 8.84% rate; $800 minimum franchise tax |
| S corporation | Form 1120-S | Shareholders on their share, whether distributed or not | 1.5% rate on the S corporation; $800 minimum franchise tax |
| LLC | Taxed as sole proprietor (one member), partnership (two or more), or corporation if it elects | Depends on classification | $800 annual tax, plus an LLC fee if total California income is $250,000 or more |
New California corporations do not pay the $800 minimum franchise tax in their first taxable year. The LLC fee ranges from $900 (California income $250,000–$499,999) to $11,790 ($5,000,000 or more).
Self-employment tax
Sole proprietors and partners are not employees of their own business, so no one withholds Social Security and Medicare for them. Instead they pay self-employment (SE) tax of 15.3%: 12.4% for Social Security plus 2.9% for Medicare. You must pay SE tax if net earnings from self-employment are $400 or more. On Schedule SE, net profit is multiplied by 92.35% before applying the tax, and half of the SE tax is deductible when figuring adjusted gross income.
Worked example
Self-employment tax on $80,000 profit
- Net profit from Schedule C: $80,000.
- Net earnings: $80,000 × 92.35% = $73,880.
- SE tax: $73,880 × 15.3% = $11,303.64.
- Deductible half: $11,303.64 ÷ 2 = $5,651.82.
SE tax is $11,303.64, and $5,651.82 is deductible.
Estimated taxes
Because no employer withholds tax from business profits, owners pay estimated tax during the year. Federally, individuals generally must pay estimated tax if they expect to owe $1,000 or more, and corporations if they expect to owe $500 or more. You generally avoid a penalty if you pay at least 90% of this year’s tax or 100% of last year’s tax, whichever is smaller. California requires estimated payments if you expect to owe at least $500 ($250 if married/RDP filing separately), and uses a 110% prior-year rule when prior-year California AGI was more than $150,000.
| Payment | Federal due date (individuals) | California share of the year’s estimate |
|---|---|---|
| 1st | April 15, 2026 | 30% |
| 2nd | June 15, 2026 | 40% |
| 3rd | September 15, 2026 | 0% |
| 4th | January 15, 2027 | 30% |
Exam trap
California’s due dates match the federal dates, but the amounts do not: California wants 30%, 40%, 0%, and 30%. Corporations pay federal estimates on the 15th day of the 4th, 6th, 9th, and 12th months of their tax year.
Payroll taxes: who pays what
| Tax (2026) | Rate | Wage limit | Paid by |
|---|---|---|---|
| Social Security | 6.2% each | $184,500 | Employee and employer |
| Medicare | 1.45% each | No limit | Employee and employer |
| Additional Medicare Tax | 0.9% on wages over $200,000 | No limit | Employee only |
| Federal income tax withholding | Per Form W-4 and IRS tables | No limit | Employee (withheld) |
| FUTA (federal unemployment) | 6.0%, minus credit up to 5.4% = 0.6% | $7,000 | Employer only |
| California UI | 3.4% new employers; 1.5%–6.2% range | $7,000 | Employer only |
| California ETT | 0.1% | $7,000 | Employer only |
| California SDI | 1.3% | No limit | Employee (withheld) |
| California PIT withholding | Per EDD tables | No limit | Employee (withheld) |
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