California S‑Corporations: Rules & Requirements

California recognizes a valid federal S corporation election under IRC § 1362 IRC § 1362 and overlays state requirements for corporate-level tax, minimum franchise tax, filing and payment timing, elective pass-through tax, payroll compliance, and apportionment rules. Core items include a 1.5% S corporation tax on net income, the $800 minimum franchise tax (with a first-year relief for newly formed or qualified corporations), timely filing of Form 100S, and single‑sales‑factor apportionment with market assignment for most businesses. California’s elective pass‑through entity (PTE) tax can reduce California personal income tax for eligible S‑Corp owners. For federal alignment and state conformity, see the federal S corporation rules and California S corporation guidance:

• Federal S election: IRC § 1362

• IRS overview and filing: S corporations; 2024 Instructions for Form 1120‑S

• California S corporations: FTB S corporations

California Recognition of the Federal S Election

• California does not require a separate state S election. A valid federal election under IRC § 1362 IRC § 1362 controls California status. A federal termination or revocation generally ends California S status as well, and California follows federal-style rules for inadvertent terminations and relief (owners should track federal status closely) IRC § 1362; IRS S corporations.

Corporate‑Level Taxes on California S Corporations

• Tax rate and minimum franchise tax
  California S corporations owe a 1.5% tax on S‑corp net income (3.5% for financial institutions) and the $800 minimum franchise tax (with an important first‑year exception for newly formed/qualified corporations) FTB S corporations; 2024 Instructions for Form 100‑ES (Estimated Tax).

• Filing due date and payment timing
  California S corporation returns (Form 100S) are due on the 15th day of the 3rd month after the close of the taxable year; taxes are due by that date even if you file under extension Due dates—businesses.
  For estimated payments: franchise/income tax filers generally follow California’s corporate installment schedule of 30% / 40% / 0% / 30%. If the estimated tax does not exceed the minimum franchise tax (plus any QSub annual tax), the entire amount is due by the 15th day of the 4th month of the taxable year 2024 Instructions for Form 100‑ES.

• Qualified Subchapter S Subsidiary (QSub) annual tax
  An S corporation parent must pay an $800 annual tax for each QSub incorporated, qualified, or doing business in California. The QSub annual tax is due with the parent’s first estimated tax installment 2024 Instructions for Form 100‑ES.

Pass‑Through Entity (PTE) Elective Tax—Benefits to Owners

• Eligibility and rate
  For taxable years beginning on or after 2021 and before 2026, qualifying partnerships and S corporations may elect to pay a 9.3% entity‑level tax on qualified net income. Consenting owners (other than partnerships) may claim a corresponding 9.3% credit on their California personal return, potentially lowering California personal tax on S‑Corp income PTE elective tax; PTE tax help (FAQs).

• How the election works
  The election must be made on an original, timely filed return and is irrevocable for the year. A June 15 prepayment (≥ $1,000 or 50% of prior-year elective tax) is generally required for 2022–2025 to preserve eligibility. Credits apply to consenting qualified taxpayers, and unused credits may be carried forward for up to five years, subject to credit ordering rules PTE elective tax; PTE tax help.

Employer and Payroll Tax Requirements (EDD)

• If the S corporation has employees in California, it must register with the Employment Development Department (EDD) and file Quarterly Contribution Return and Report of Wages (DE 9/DE 9C), reconciling Unemployment Insurance (UI), Employment Training Tax (ETT), State Disability Insurance (SDI), and California Personal Income Tax (PIT) withheld. Deposit schedules and timely filing/payment obligations apply (consult EDD for current instructions and deadlines).

Apportionment and Market Assignment—California Sourcing Requirements

• Single‑sales‑factor formula
  California generally requires apportioning trades or businesses to use the single‑sales factor to apportion business income to California 2024 Instructions for Form 100‑ES.

• Market assignment for sales other than tangible personal property
  Sales of services and intangibles are assigned to California based on the customer’s market (not cost of performance), which affects sourcing for multistate S corporations and should be considered in compliance planning 2024 Instructions for Form 100‑ES.

S Election Terminations and Inadvertent Termination Relief (California)

• California follows federal rules for terminations and revocations. A federal revocation or termination (e.g., passive investment income limits coupled with subchapter C earnings and profits) generally ends California S status; inadvertent termination relief follows federal patterns where issues are corrected timely and shareholders agree to required adjustments IRC § 1362; IRS S corporations.

Filing Deadlines and Returns

• California return deadline
  For calendar‑year S corporations, Form 100S is due March 15; extensions may be available for filing, but tax must be paid by the original due date Due dates—businesses.

• Federal alignment and California differences
  California conforms to the Internal Revenue Code as of January 1, 2015, with identified exceptions (e.g., certain TCJA items). Review the latest Franchise Tax Board guidance each year for state‑specific adjustments that may affect S corporations FTB S corporations.

Practical Compliance Checklist for California S‑Corp Owners

• Confirm a valid federal S election—state recognition is automatic IRC § 1362; IRS S corporations.

• File Form 100S by the 15th day of the 3rd month after year‑end; pay the 1.5% S‑corp tax and (except in the first year for newly formed/qualified corporations) the $800 minimum franchise tax by the original due date Due dates—businesses; FTB S corporations.

• Consider the elective PTE tax if beneficial; make a timely election, meet the June 15 prepayment rule (for 2022–2025), and prepare FTB 3804/3804‑CR to compute entity tax and owner credit PTE elective tax; PTE tax help.

• If employing workers, register with EDD, file DE 9/DE 9C, and deposit UI/ETT/SDI/PIT on schedule (see EDD for current procedures).

• For multistate operations, apply single‑sales‑factor apportionment and market assignment; review business income and gross receipts rules 2024 Instructions for Form 100‑ES.

• If holding QSubs, include the QSub annual tax with the parent’s first estimated tax installment 2024 Instructions for Form 100‑ES.

Key Benefits and Considerations

• First‑year minimum franchise tax relief
  Newly formed or qualified corporations are exempt from the $800 minimum franchise tax in their first taxable year 2024 Instructions for Form 100‑ES.

• Elective PTE tax
  The 9.3% entity‑level tax paired with a 9.3% owner credit can lower California personal tax for S‑Corp shareholders when structured properly and made on a timely original return (with the required prepayment for applicable years) PTE elective tax; PTE tax help.

• Streamlined sourcing
  Single‑sales‑factor apportionment and market assignment provide clearer, often simpler sourcing for many multistate businesses versus legacy cost‑of‑performance rules 2024 Instructions for Form 100‑ES.

Summary

California’s framework for S‑Corp owners centers on:

• Automatic recognition of the federal S election and state conformity with identified differences IRC § 1362; FTB S corporations.

• Corporate‑level taxes (1.5% S corporation tax and $800 minimum franchise tax), with first‑year relief for newly formed/qualified corporations FTB S corporations; 2024 Instructions for Form 100‑ES.

• The elective PTE tax structure that can lower California personal tax for consenting owners when used properly PTE elective tax; PTE tax help.

• Payroll compliance for employers via EDD (DE 9/DE 9C and deposit requirements).

• Simplified apportionment via single‑sales‑factor and market assignment for multistate operations 2024 Instructions for Form 100‑ES.

This essay is not tax advice. Always consult a qualified tax professional for your specific situation.