Tax Law Basics
A working understanding of the basics helps you make better decisions before tax problems start. This overview covers the structures you should know: federal income tax, California state income tax, payroll, sales, and the procedures that govern audits and collections.
The Federal Income Tax System
Federal income tax is collected by the Internal Revenue Service under Title 26 of the United States Code, also called the Internal Revenue Code. Individuals file Form 1040 annually by April 15 (or October 15 with an extension). Businesses file various forms depending on entity type: 1120 for C corporations, 1120-S for S corporations, 1065 for partnerships, and Schedule C with Form 1040 for sole proprietors.
Income tax is progressive, with marginal rates rising as taxable income increases. The 2026 brackets are indexed for inflation annually. Standard deduction or itemized deductions reduce taxable income, and various credits reduce tax dollar-for-dollar.
California State Income Tax
California has a separate income tax administered by the Franchise Tax Board. California rates are higher than federal rates at most income levels, and the tax base is broader in some respects (no qualified dividend rate preference, for example) and narrower in others.
California is a community property state, which affects how income is allocated between spouses, particularly in the year of marriage, divorce, or death.
Self-Employment and Payroll Tax
Self-employed individuals owe self-employment tax on net earnings, equal to 15.3 percent on the first portion of earnings subject to Social Security and 2.9 percent on all net earnings for Medicare, with an additional 0.9 percent above certain thresholds. Half of self-employment tax is deductible above the line.
Businesses with employees owe payroll taxes: withheld federal and state income tax, employee and employer FICA, FUTA, SUI, and various California-specific items administered by the EDD.
Sales and Use Tax
California sales and use tax is administered by the CDTFA. Sales tax applies to most tangible personal property sold at retail in California; use tax applies to taxable items purchased without sales tax for use in California. Combined state and local rates currently range from 7.25 to over 10 percent depending on jurisdiction.
Procedural Basics
If you do not file or do not pay, the IRS will assess the tax, add failure-to-file and failure-to-pay penalties plus interest, and start collection. The procedural rights at each step (notices, hearings, appeals) are governed by IRC Sections 6320, 6330, and 7521 among others. Understanding the procedural framework is what separates effective representation from reactive scrambling.
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