California is one of the richest states in the country. Not only is the environment here more physically pleasant to be in, but it also encourages people to think big and take risks. Thus, it’s no surprise that some of the biggest movies, television series, electronic devices, and even video games have all come from this state. It’s also not surprising that more people, who have either grown up in the state or recently arrived here, decide to start their business every year. If there’s any place in the USA you want to try a start-up, it’s California. As with any business anywhere else in the country, you need to take care of some paperwork. The 2019 Form 3522 is one of them. So, what is it, and how does it affect your business in California?
As the old saying goes, there are only two things that are certain in life. These are death and taxes. Whether you run a business in California or are a salaried employee, you pay taxes every year. However, the way you pay taxes when you run a business differs from when you work for someone else and earn a monthly salary. Your income is no longer “fixed” for the year. With a salary, you know how much money you earn annually. But, depending on the size of your business, your company’s earnings will determine the tax you need to pay.
If you have formed an LLC, which is a limited liability company, then your tax is known as “pass-through.” While you enjoy protection from business liability when it comes to your taxes, what your company earns is also considered your income. Thus, you avoid double taxation. If you were to operate as a corporation, then these larger entities treat the revenue of the business and the salary of employees as different things.
Form 3522 applies to LLCs. Businesses use this form to declare what people in California know as a franchise tax. It also acts as a form of “registration fee” for companies that have started a business in California. Form 3522 is a tax form that you need to file and pay for every year as a part of doing business in the state of California.
When you create an LLC in California, you have to file Form 3522 and pay for a minimum amount of $800. You should pay that $800 upon the formation of your LLC or within the first four months of your company.
After that, you’ll fill out this form for every year that you are operating in California. This year, you are to file the 2019 Form 3522. You should submit it again to continue paying this particular form of tax. However, $800 is not a fixed expense that you can write off for every year. There is a condition attached to Form 3522, and that is your level of financial success. If the company becomes more successful, things change.
Increasing Tax Brackets
Personal and business income taxes work a bit differently. You report your income for the year with the personal income tax. The amount of tax that you have to pay for the year will depend on that final annual income. So, this means if you had a fixed salary with no change, you’d know the approximate amount that you will pay in taxes every year. However, if you got a raise six months into the year, your new salary would increase the amount you have to pay for that year.
The franchise tax that is part of Form 3522 has much more leeway. $800 is all you have to pay, up to a certain point. If your business is modest, for example, and the LLC has a total revenue of less than $250,000, then you’ll only have to pay $800 every time you fill out and submit Form 3522. However, once you report revenues that exceed $250,000, you’ll need to pay additional taxes.
The Additional Tax
Companies, like people, are taxed according to their revenues. But the brackets for taxes are much bigger. For example, whether your LLC made $50,000 or $200,000, you only have to pay $800 when you submit your Form 3522 every April 15.
If your revenues are over $250,000, things change. A business that continues to see an increase in its revenues cannot keep paying taxes in the lowest tax bracket. Thus, you should also file Form 568.
If you make more than $250,000, you must file Form 568 in addition to form 3522. The breakdown of revenue and taxes now works out this way:
- $250,000 – $499,999 = $900
- $500,000 – $999,999 = $2500
- $1,000,000 – 4,999,999 = $6000
- Over $5,000,000 = $11,790
The $800 you would normally pay as part of Form 3522 is a line item in Form 568. So, you may be able to credit it depending on what kind of financial situation your LLC is facing that year.
Getting It Right
Fortunately, as long as you keep detailed and accurate financial records, filling out the 2019 Form 3522 is not that complicated. The form itself only requires a few details like the name of the LLC, DBA, EIN, contact details, and the amount you will have to pay.
Once you’ve filled out the form, you can send it along with a check or money order to the Franchise Tax Board in Sacramento. If you prefer to do this the modern way, you can also make your payment online. If you choose to do this, you don’t even have to fill out the form. It’s really up to you to decide how you want to address this, but it’s important to remain honest and compliant with franchise tax requirements.
Business Filing Section