The basics of the franchise tax

Headshot for Amanda Graber, Content Marketing Specialist for ComplYant, a business tax tool for entrepreneurs and small businesses.
By Mandy Graber

Navigating taxes, particularly business taxes, can be tricky. Look no further than the franchise tax. Despite how it may sound, this tax doesn’t just apply to a franchise. Even if you’re not running the newest location of a popular fast-food restaurant or opening a store under a logo with nationwide recognition, you might owe a franchise tax. 

Whether you’re a solopreneur with your own LLC or you’re running a booming business with dozens of employees, you’re probably already managing your state income tax. Then you’ve potentially got permits and licenses to manage. If you do have employees, there are payroll taxes, and if you’re working for yourself, you have self-employment taxes. 

On top of all of that, you may have to deal with franchise taxes. You have to sort out if this tax is levied in the state where you do business or where you incorporated your business. Currently, about a dozen states impose this tax, and if you’re dealing with a state that does, you’ll need to understand if it applies to you and remit payment on time.

What is a franchise tax?

Franchise tax is a type of tax paid by businesses to legally operate within a certain state. Some states refer to a franchise tax as a privilege tax, but the function is typically the same. Basically, it’s an annual fee for the privilege of doing business in the state. 

Depending on the state, the franchise tax may be imposed on all businesses or just on certain types of businesses, such as banks or corporations. In general, if you aren’t required to register with your state, you probably aren’t required to pay this tax. However, you should check with the United States Small Business Administration or consult a tax professional if you have any doubts.

| A franchise tax is money a business must pay to a state in addition to other taxes. Often it is levied simply for doing business, being incorporated, or even owning property in that state. 

A franchise tax is usually imposed in addition to other taxes, including income taxes. The amount of the franchise tax can vary greatly from one jurisdiction to another. However, this tax is not based on profit and must be paid whether your business makes money or not.

Determining what you owe can also be tricky because not all states are the same. Some states impose this tax as a flat fee. Other states may calculate what you owe as a percentage of the business's net worth or assets. In some cases, the amount of the tax may be based on the number of shares of stock owned by the business. For example, some states charge a franchise tax of $1 per share of stock owned.

How to pay a franchise tax

If you own a business in a state that requires you to pay franchise tax, you’ll want to do so on time to remain in good standing with the government. Here is a breakdown of the basic steps you can follow to pay your franchise tax:

#1 - Check your state’s website

Check your state or local government website to find out the amount you will need to pay and when the money will be due. The amount can vary based on the type and size of your business. 

#2 - Gather the necessary information and documents

Gather the necessary documents and information you will need to pay your franchise tax. This may include your business’s tax returns, financial statements, and other documents. 

#3 - Calculate what you owe 

Calculate the amount of franchise tax you will need to pay. You may be able to do this yourself, or you may need to use a professional accountant. 

#4 - Determine your payment options

Visit your state or local government website to find out the payment options available. Many states and localities offer online payment options, such as credit cards or electronic checks.

#5 - Pay by the deadline

Follow the instructions provided on the website to submit your payment. Make sure to keep a copy of your payment confirmation for your records. 

#6 - Seek help if needed

Contact your state or local government if you have any questions or need assistance in paying your franchise tax. 

States with a franchise or privilege tax have different methods for calculating the amount owed. They may also have different procedures for remitting these fees or varying payment due dates. You’ll need to consult your state or local authorities to find the most accurate information for you and your business.

As an example: California

Let’s look at a step-by-step example of how a business owner would approach a franchise tax. California is one of the states that currently imposes a franchise tax annually. This tax is levied on any business that is registered in California, except for nonprofits and other tax-exempt businesses. 

Determine if the tax applies

Californian business owners can determine if they need to pay franchise tax by visiting the California Franchise Tax Board's website. This website provides information about what types of businesses are subject to franchise tax, as well as the rates and filing requirements. 

Find the proper forms

Generally, corporations and LLCs are required to pay the franchise tax. Businesses required to pay the franchise tax need to file forms that can be found on the Franchise Tax Board's website. 

File by the due date

Business owners should submit the proper form, along with any required documentation, by April 15th if their business runs on a calendar year. 

Pay the amount owed

The amount owed can vary a bit depending on the structure of the business and when it was formed. 

  • LLCs are required to pay $800 annually. However, Assembly Bill 85 waives this fee for the first year for limited partnerships, limited liability companies, and limited liability partnerships that were organized or registered with the state after January 1, 2021, and before January 1, 2024. 
  • Corporations pay $800 or a percentage of their income (whichever is larger). S corporations pay 1.5%, while  C corporations and professional corporations pay 8.84%. Fortunately, corporations also qualify for the waiver of their first year of franchise tax payments.
  • Sole proprietors in California are not required to register in California and are not required to pay the franchise tax.

Consult the Californian tax authorities if needed

If you need help understanding the franchise tax requirements in California, you can speak with a tax professional. They can provide you with the information and assistance you need to make sure you are filing and paying the correct amount of franchise tax. 

Headshot for Amanda Graber, Content Marketing Specialist for ComplYant, a business tax tool for entrepreneurs and small businesses.
By Mandy Graber
Mandy is a seasoned content creator with experience in a wide variety of industries. She works alongside our ComplYant Tax Experts to help make tax-related content more accessible to everyone. In her long tenure as a writer and content creator, she has covered a wide array of topics, including insurance, education, financial technology, and more.

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