In the world of business and corporate structuring, how a licensed nurse chooses to incorporate can significantly impact their tax obligations, legal liabilities, and operational flexibility. We realize that navigating California laws and regulations for nurses in the California Business and Professions Code, the business entities available to them, and federal and California tax classifications can be complex.

We work with licensed nurses daily to assist them with corporate matters such as choosing the right business entity for their nursing practice. The purpose of this article is to address the question: Can a California Professional Nursing Corporation be an S-Corp? This is one of the most common questions the nurses we work with have when they are weighing their options to choose a business structure for their nursing practice. In this article, we will discuss the California Professional Nursing Corporations and California S-Corps to shed light on this subject and offer a comprehensive understanding of both the California Professional Nursing Corporation and California S-Corp.

Executive Summary: Putting the Conclusion First for Busy Nurses

Yes, A California Professional Nursing Corporation can be an S-Corp. The term S-Corp, which is short for S Corporation, is an alternative taxation type as compared to a C Corporation. Both a California General Stock Corporation, which is a standard type of corporation under California law, and a California Professional Nursing Corporation, which is a corporation for the practice of nursing, may elect to be taxed as S Corporations. A California General Stock Corporation electing to be taxed as an S Corporation is generally referred to as a California S-Corp, whereas a California Professional Nursing Corporation electing to be taxed as an S Corporation may be referred to as a California Professional Nursing S-Corp.

If you are considering forming a California Professional Nursing Corporation, you will need guidance from seasoned professionals who understand the intricacies of California laws and regulations. San Diego Corporate Law has a dedicated team of experienced attorneys ready to assist you in making the best decisions for your nursing practice. Do not hesitate to contact us. We are here to help you navigate the complexities of corporate structuring, ensuring that your business is set up for success. Contact us today to get started on your path to a successful California Professional Nursing Corporation formation.

California S-Corps versus California Professional Nursing Corporations

In this section, we compare California S-Corps versus California Professional Nursing Corporations, as these are two business structures that licensed nurses often consider for their practices. We will cover the key differences between these two structures to provide an understanding of the terminology a licensed nurse is likely to encounter when choosing a business entity for their nursing practice.

What is a California General Stock Corporation?

A California General Stock Corporation is a standard type of corporation under California law. It is a legal entity separate from its shareholders, offering those shareholders protection from personal liability for debts, liabilities, obligations, and legal judgments against the California General Stock Corporation and providing some personal asset protection.

A California General Stock Corporation is characterized by the issuance of shares of stock to represent ownership, and it has a structured management comprising a board of directors and officers. The board of directors is responsible for managing the affairs of the California General Stock Corporation and making major business decisions for the California General Stock Corporation, while the officers (such as CEO, President, Secretary, CFO, and Treasurer) handle the day-to-day operations of the California General Stock Corporation.

A California General Stock Corporation can have an unlimited number of shareholders, and these shares can be publicly traded or privately held. The California General Stock Corporation is subject to corporate income tax, and shareholder dividends may be subject to double taxation, as discussed more fully in the taxation section later in this article.

What is a California Professional Corporation?

A California Professional Corporation is a specialized type of corporation for the following professions:

Accounting (See California Business & Professions Code Sections 5150-5158)

Acupuncture (See California Business & Professions Code Sections 4975-4979)

Architecture (See California Business & Professions Code Sections 5610-5610.7)

Audiology (See California Business & Professions Code Sections 2536-2537.5)

Chiropractic (See California Business & Professions Code Sections 1050-1058)

Clinical Social Work (See California Business & Professions Code Sections 4998-4998.5)

Dentistry (See California Business & Professions Code Sections 1800-1808)

Dental Hygienists in Alternative Practice (See California Business & Professions Code Sections 1967-1967.4)

Law (See California Business & Professions Code Sections 6127.5, 6160-6172)

Marriage and Family Therapy (See California Business & Professions Code Sections 4987.5-4988.2)

Medicine (See California Business & Professions Code Sections 2400-2417)

Midwifery (See California Business & Professions Code Sections 2505-2523)

Naturopathic Doctors (See California Business & Professions Code Sections 3670-3675)

Nursing (See California Business & Professions Code Sections 2775-2781)

Occupational Therapy (See California Business & Professions Code Section 2572)

Optometry (See California Business & Professions Code Sections 3160-3167)

Osteopathy (See California Business & Professions Code Sections 2402-2417, 3600)

Pharmacy (See California Business & Professions Code Sections 4150-4156)

Physical Therapy (See California Business & Professions Code Sections 2690-2696)

Physician Assistants (See California Business & Professions Code Sections 3540-3545)

Podiatry (See California Business & Professions Code Sections 2402-2417)

Professional Clinical Counselor (See California Business & Professions Code Sections 4999.123-4999.129)

Psychology (See California Business & Professions Code Sections 2907-2907.5, 2995-2999)

Shorthand Court Reporters (See California Business & Professions Code Sections 8040-8047)

Speech-Language Pathology (See California Business & Professions Code Section 2537.5)

Veterinary (See California Business & Professions Code Sections 4910-4917)

Therefore, a California Professional Nursing Corporation is a specific type of corporation under California law used by licensed nurses for rendering nursing services.

Similar to a California General Stock Corporation, a California Professional Nursing Corporation is a legal entity separate from its licensed nurse shareholders, offering those shareholders protection from personal liability for debts, liabilities, obligations, and legal judgments against the California Professional Nursing Corporation and providing some personal asset protection. This means that the personal assets of the licensed nurse shareholders are typically shielded from claims against the California Professional Nursing Corporation, however, nurses are still personally liable for their own malpractice or professional misconduct, which liability cannot be shielded by any business entity in California.

A California Professional Nursing Corporation is characterized by the issuance of shares of stock to represent ownership, and it has a structured management comprising a board of directors and officers. The board of directors is responsible for managing the affairs of the California Professional Nursing Corporation and making major business decisions for the California Professional Nursing Corporation, while the officers (such as CEO, President, Secretary, CFO, and Treasurer) handle the day-to-day operations of the California Professional Nursing Corporation.

Forming a California Professional Nursing Corporation involves the inclusion of specific language in the Articles of Incorporation and/or Bylaws that is not included in the Articles of Incorporation or Bylaws of a California General Stock Corporation. This language included in the Articles of Incorporation and/or Bylaws also differs by profession for each different type of California Professional Corporation.

As is the case for a California General Stock Corporation, a California Professional Nursing Corporation can have an unlimited number of shareholders, but generally speaking each of these shareholders must be a licensed nurse or, according to California Corporations Code §13401.5(f), the following licensed persons:

Licensed physicians and surgeons. (Section 13401.5(f)(1))

Licensed doctors of podiatric medicine. (Section 13401.5(f)(2))

Licensed psychologists. (Section 13401.5(f)(3))

Licensed optometrists. (Section 13401.5(f)(4))

Licensed marriage and family therapists. (Section 13401.5(f)(5))

Licensed clinical social workers. (Section 13401.5(f)(6))

Licensed physician assistants. (Section 13401.5(f)(7))

Licensed chiropractors. (Section 13401.5(f)(8))

Licensed acupuncturists. (Section 13401.5(f)(9))

Naturopathic doctors. (Section 13401.5(f)(10))

Licensed professional clinical counselors. (Section 13401.5(f)(11))

Licensed midwives. (Section 13401.5(f)(12))

The California Professional Nursing Corporation is subject to corporate income tax, and shareholder dividends may be subject to double taxation, as discussed more fully in the taxation section later in this article.

What is a California S-Corp?

A California S Corporation, commonly referred to as an S-Corp, is either a California General Stock Corporation or California Professional Nursing Corporation which has elected to be taxed as an S Corporation through an Internal Revenue Service tax election.

An eligible California General Stock Corporation or California Professional Nursing Corporation can avoid double taxation (as discussed more fully in the taxation section later in this article) by electing to be treated as a California S-Corp. The designation of “S-Corp” refers to Subchapter S of the Internal Revenue Code, which creates an alternative form of corporate taxation that may be elected by small businesses to provide for a single level of corporate tax at the shareholder level as compared to the double taxation of a California Corporation not electing taxation as an S Corporation.

To be considered an S-Corp in California, the California General Stock Corporation or California Professional Nursing Corporation must submit Internal Revenue Service Form 2553, Election by a Small Business Corporation, signed by all the shareholders. For the Internal Revenue Service to approve S Corporation status, the California General Stock Corporation or California Professional Nursing Corporation must have only individuals who are citizens or permanent residents of the United States, certain trusts, and estates (but not non-resident alien individuals, partnerships, corporations, LLCs, or any other business structures) as shareholders, have not more than one hundred (100) shareholders, have only one class of stock, and must not be certain types of ineligible corporations (such as financial institutions, insurance companies, etc.).

When a California General Stock Corporation elects to be taxed as an S Corporation, it is generally referred to as a California S-Corp.

When a California Professional Nursing Corporation elects to be taxed as an S Corporation, it is generally referred to as a California Professional Nursing S-Corp or a California Professional Nursing Corporation taxed as an S-Corp.

Are There Other Business Structures Worth Mentioning?

A California Limited Liability Company (LLC) May Not Be Used for a Professional Practice

Neither a foreign nor a California limited liability company (LLC) may be used to render nursing services in California. This comes as a surprise to many licensed nurses, as professional limited liability companies (PLLCs) are commonly used to render nursing services in other states. However, California Corporations Code Section 17701.04(e) answers the question clearly regarding the use of a foreign or California LLC as a business entity for licensed nurses in California:

“Nothing in this title shall be construed to permit a domestic or foreign limited liability company to render professional services, as defined in subdivision (a) of Section 13401 and in Section 13401.3, in this state.”

Thus, licensed nurses may not form limited liability companies for the provision of nursing services in California.

A Registered Limited Liability Partnership (LLP) May Be Used for Certain Professional Practices

A Registered Limited Liability Partnership (LLP) may be utilized for certain licensed professionals in California to render professional services in professional practices. However, this is only applicable to specific professions such as lawyers, architects, or accountants, and thus is not applicable to nurses.

California General Stock Corporations and Non-Professional California S-Corps are Generally Not Permitted

California General Stock Corporations, and California S-Corps that are not California Professional Corporations cannot be used for rendering nursing services in California.

Taxation of California General Stock Corporations and California Professional Nursing Corporations

Taxed as an S Corporation, there is no difference between the federal corporate income tax for a California General Stock Corporation and a California Professional Nursing Corporation when each is taxed as an S Corporation.

Traditionally the default taxation of a California General Stock Corporation and a California Professional Nursing Corporation differed significantly. However, as of the time of this writing, the 2017 Tax Cuts and Jobs Act has leveled the playing field, at least for a C Corporation, for now. The 2017 Tax Cuts and Jobs Act is scheduled to sunset (expire) at the end of the 2025 tax year, and with it the flat 21% federal corporate tax rate on both California General Stock Corporations and California Professional Nursing Corporations not taxed as S Corporations. Unless extended beyond 2025, the corporate tax rate on professional corporations not taxed as S Corporations may return to the flat 35% corporate tax rate that applied before the 2017 Tax Cuts and Jobs Act.

Taxation of California General Stock Corporations

This section describes both the federal and California corporate taxation of California General Stock Corporations not electing to be taxed as S Corporations.

Federal Income Taxation of a General Stock Corporation in California

A California General Stock Corporation faces federal income taxation in line with the structure set forth by the Internal Revenue Code. Its profit is subject to taxation at the corporate level initially, consistent with the corporate tax rate – flat at 21% as per the 2017 Tax Cuts and Jobs Act. This is often referred to as the “first bite” of the so-called double taxation.

In addition to corporate income tax, the distributed profits of a California General Stock Corporation, referred to as dividends, are taxed at the shareholder level. This constitutes the “second bite” of double taxation. The tax rate applied on dividends depends on whether they are considered “qualified” or “non-qualified”. Qualified dividends, which meet certain requirements, are taxed at the more favorable long-term capital gains rates, whereas non-qualified dividends are taxed at the ordinary income tax rates of the shareholder receiving the dividend.

It is worth noting that the current 21% federal corporate tax rate is scheduled to sunset at the end of 2025, as per the provisions in the 2017 Tax Cuts and Jobs Act. Unless further legislation extends this provision, the corporate tax rate could revert back to the previous federal corporate tax structure, which was a progressive tax structure with a top corporate taxation rate of 35%. This potential future change could entail significant tax planning considerations for California General Stock Corporations.

Federal Self-Employment Taxation of a General Stock Corporation in California

Shareholder-employees of a California General Stock Corporation are not subject to self-employment taxes, but they are subject to standard payroll taxes.

In the context of a California General Stock Corporation, payroll taxation primarily refers to the tax implications for the owners or shareholders who are also employees of the California General Stock Corporation. In general, shareholders who work for the California General Stock Corporation are treated as employees for tax purposes. This means that they are subject to Federal Insurance Contributions Act (FICA) taxes, which are equivalent to self-employment tax for self-employed individuals or owners of certain other types of businesses.

FICA taxes account for 15.3% of the income of an employee up to a certain limit, which is adjusted each year for inflation. This tax is divided into two portions: 12.4% for Social Security and 2.9% for Medicare. Generally, the California General Stock Corporation and the employee each pay half of the FICA taxes, meaning the employee would see 7.65% of their wages (up to the annual limit) withheld for FICA taxes, and the California General Stock Corporation would pay a matching amount.

For shareholder-employees of a California General Stock Corporation, this means their wages are subject to these taxes. However, any dividends paid to them as shareholders (which should be a return on their investment, not payment for services provided) are not subject to FICA taxes. This can provide some tax savings, but it is important to note that the Internal Revenue Service requires shareholder-employees to be paid “reasonable compensation” for their work. In other words, shareholder-employees cannot avoid FICA taxes entirely by taking all their income as dividends. This is a key aspect of the federal self-employment taxation of a California General Stock Corporation.

Additional Medicare Tax for a General Stock Corporation in California

Additional Medicare Tax is applicable to the wages, compensation, and self-employment income of individuals over a certain threshold. As of the time of this writing, the threshold is $200,000 for single and head of household filers, and $250,000 for married taxpayers filing jointly. For certain shareholder-employees of a California General Stock Corporation, this tax may be a consideration.

The Additional Medicare Tax is a 0.9% tax that applies to the amount by which the annual income of a shareholder-employee exceeds the aforementioned thresholds. This tax is only borne by the employee; there is no employer match for Additional Medicare Tax.

For shareholder-employees of a California General Stock Corporation, their salaries or wages (not dividends) may be subject to this Additional Medicare Tax if their income exceeds the threshold. It is important to note that this is separate and distinct from the standard Medicare tax of 2.9% which is split between the California General Stock Corporation and employee as part of FICA taxes.

California Income Taxation of a General Stock Corporation in California

California imposes a corporate tax on California General Stock Corporations at the flat rate of 8.84% on net income, which is calculated as gross income minus allowable deductions, and subject to a minimum franchise tax of $800 annually.

The California Revenue and Taxation Code outlines the specific regulations and guidelines about what counts as income and what deductions are permissible. It is worth noting that California, unlike some states, does not conform to federal tax law in all instances. Therefore, certain income or deductions recognized on the federal tax return might not be recognized on the California corporate tax return, and vice versa.

An important aspect of California state taxation for California General Stock Corporations relates to the apportionment of income. If a California General Stock Corporation operates both within and outside of California, not all of its income might be subject to California tax. California uses a formula to apportion income based on the proportion of the sales, property, and payroll of the California General Stock Corporation that are in California.

Additionally, California General Stock Corporations are subject to an alternative minimum tax (AMT) of 6.65%. This is a parallel tax system that is designed to ensure California General Stock Corporations pay at least a minimum amount of tax. California General Stock Corporations must calculate their tax liability under both the regular corporate tax system and the AMT system and pay whichever amount is higher.

Finally, like federal law, California law requires reasonable compensation to shareholder-employees, thus affecting the distribution of income between salary and dividends. However, unlike federal law, California does not have a separate tax rate for qualified dividends. All dividend income is taxed at the same rates as other income. This is a significant consideration in the state income taxation of a California General Stock Corporation.

Taxation of California Professional Nursing Corporations Taxed as Personal Service Corporations

This section describes both the federal and California corporate taxation of California Professional Nursing Corporations not electing to be taxed as S Corporations.

Federal Income Taxation of a Professional Nursing Corporation Taxed as a Personal Service Corporation in California

A California Professional Nursing Corporation faces federal income taxation in line with the structure set forth by the Internal Revenue Code. Its profit is subject to taxation at the corporate level initially, consistent with the corporate tax rate – flat at 21% as per the 2017 Tax Cuts and Jobs Act. This is often referred to as the “first bite” of the so-called double taxation.

In addition to corporate income tax, the distributed profits of a California Professional Nursing Corporation, referred to as dividends, are taxed at the shareholder level. This constitutes the “second bite” of double taxation. The tax rate applied on dividends depends on whether they are considered “qualified” or “non-qualified”. Qualified dividends, which meet certain requirements, are taxed at the more favorable long-term capital gains rates, whereas non-qualified dividends are taxed at the ordinary income tax rates of the shareholder receiving the dividend.

It is worth noting that the current 21% federal corporate tax rate is scheduled to sunset at the end of 2025, as per the provisions in the 2017 Tax Cuts and Jobs Act. Unless further legislation extends this provision, the corporate tax rate could revert back to the previous federal flat corporate tax rate of 35%. This potential future change could entail significant tax planning considerations for California Professional Nursing Corporations.

Federal Self-Employment Taxation of a Professional Nursing Corporation Taxed as a Personal Service Corporation in California

Shareholder-employees of a California Professional Nursing Corporation are not subject to self-employment taxes, but they are subject to standard payroll taxes.

In the context of a California Professional Nursing Corporation, payroll taxation primarily refers to the tax implications for the owners or shareholders who are also employees of the California Professional Nursing Corporation. In general, shareholders who work for the California Professional Nursing Corporation are treated as employees for tax purposes. This means that they are subject to Federal Insurance Contributions Act (FICA) taxes, which are equivalent to self-employment tax for self-employed individuals or owners of certain other types of businesses.

FICA taxes account for 15.3% of the income of an employee up to a certain limit, which is adjusted each year for inflation. This tax is divided into two portions: 12.4% for Social Security and 2.9% for Medicare. Generally, the California Professional Nursing Corporation and the employee each pay half of the FICA taxes, meaning the employee would see 7.65% of their wages (up to the annual limit) withheld for FICA taxes, and the California Professional Nursing Corporation would pay a matching amount.

For shareholder-employees of a California Professional Nursing Corporation, this means their wages are subject to these taxes. However, any dividends paid to them as shareholders (which should be a return on their investment, not payment for services provided) are not subject to FICA taxes. This can provide some tax savings, but it is important to note that the Internal Revenue Service requires shareholder-employees to be paid “reasonable compensation” for their work. In other words, shareholder-employees cannot avoid FICA taxes entirely by taking all their income as dividends. This is a key aspect of the federal self-employment taxation of a California Professional Nursing Corporation.

Additional Medicare Tax for a Professional Nursing Corporation Taxed as a Personal Service Corporation in California

Additional Medicare Tax is applicable to the wages, compensation, and self-employment income of individuals over a certain threshold. As of the time of this writing, the threshold is $200,000 for single and head of household filers, and $250,000 for married taxpayers filing jointly. For certain shareholder-employees of a California Professional Nursing Corporation, this tax may be a consideration.

The Additional Medicare Tax is a 0.9% tax that applies to the amount by which the annual income of a shareholder-employee exceeds the aforementioned thresholds. This tax is only borne by the employee; there is no employer match for Additional Medicare Tax.

For shareholder-employees of a California Professional Nursing Corporation, their salaries or wages (not dividends) may be subject to this Additional Medicare Tax if their income exceeds the threshold. It is important to note that this is separate and distinct from the standard Medicare tax of 2.9% which is split between the California Professional Nursing Corporation and employee as part of FICA taxes.

California Income Taxation of a Professional Nursing Corporation Taxed as a Personal Service Corporation in California

California imposes a corporate tax on California Professional Nursing Corporations at the flat rate of 8.84% on net income, which is calculated as gross income minus allowable deductions, and subject to a minimum franchise tax of $800 annually.

The California Revenue and Taxation Code outlines the specific regulations and guidelines about what counts as income and what deductions are permissible. It is worth noting that California, unlike some states, does not conform to federal tax law in all instances. Therefore, certain income or deductions recognized on the federal tax return might not be recognized on the California corporate tax return, and vice versa.

An important aspect of California state taxation for California Professional Nursing Corporations relates to the apportionment of income. If a California Professional Nursing Corporation operates both within and outside of California, not all of its income might be subject to California tax. California uses a formula to apportion income based on the proportion of the sales, property, and payroll of the California Professional Nursing Corporation that are in California.

Additionally, California Professional Nursing Corporations are subject to an alternative minimum tax (AMT) of 6.65%. This is a parallel tax system that is designed to ensure California Professional Nursing Corporations pay at least a minimum amount of tax. California Professional Nursing Corporations must calculate their tax liability under both the regular corporate tax system and the AMT system and pay whichever amount is higher.

Finally, like federal law, California law requires reasonable compensation to shareholder-employees, thus affecting the distribution of income between salary and dividends. However, unlike federal law, California does not have a separate tax rate for qualified dividends. All dividend income is taxed at the same rates as other income. This is a significant consideration in the state income taxation of a California Professional Nursing Corporation.

Taxation of California General Stock Corporations and California Professional Nursing Corporations Taxed as S Corporations

This section describes both the federal and California corporate taxation of California General Stock Corporations electing to be taxed as an S Corporation and California Professional Nursing Corporations electing to be taxed as an S Corporation.

Federal Income Taxation of a General Stock Corporation or Professional Nursing Corporation Taxed as an S Corporation in California

Both California General Stock Corporations electing to be taxed as S Corporations and California Professional Nursing Corporations electing to be taxed as S Corporations are subject to a unique form of federal income taxation. Unlike California General Stock Corporations and California Professional Nursing Corporations not electing to be taxed as S Corporations, which are subject to double taxation (once at the corporate level and again on shareholder dividends), California General Stock Corporations electing to be taxed as S Corporations and California Professional Nursing Corporations electing to be taxed as S Corporations are pass-through entities. This means that the California General Stock Corporations electing to be taxed as S Corporations and California Professional Nursing Corporations electing to be taxed as S Corporations do not pay federal income tax. Instead, the income, losses, deductions, and credits of the California General Stock Corporation electing to be taxed as S Corporations and California Professional Nursing Corporations electing to be taxed as S Corporations pass through to the shareholders. These elements are then reported on the individual tax returns of the shareholders and taxed at their individual income tax rates.

It is important to note that a California General Stock Corporation electing to be taxed as S Corporations and California Professional Nursing Corporations electing to be taxed as S Corporations must meet several criteria set by the Internal Revenue Service. These include having a maximum of 100 shareholders, all of whom must be U.S. citizens or resident aliens, and having only one class of stock.

It is important to understand that while the California General Stock Corporation electing to be taxed as S Corporations and California Professional Nursing Corporations electing to be taxed as S Corporations do not pay federal income taxes, they are still required to file an annual income tax return using Form 1120S. This tax form reports the income, gains, losses, deductions, credits, and other information of the California General Stock Corporation electing to be taxed as an S Corporation and California Professional Nursing Corporations electing to be taxed as an S Corporation necessary to calculate the tax liability of shareholders. The California General Stock Corporation electing to be taxed as an S Corporation and California Professional Nursing Corporation electing to be taxed as an S Corporation provide each shareholder with a Schedule K-1, reporting the share of the income, deductions, and credits of the California General Stock Corporation electing to be taxed as an S Corporation and California Professional Nursing Corporation electing to be taxed as an S Corporation, which the shareholders must report on their personal income tax returns.

Federal Self-Employment Taxation of a General Stock Corporation or Professional Nursing Corporation Taxed as an S Corporation in California

Shareholder-employees of a California General Stock Corporation taxed as an S Corporation or California Professional Nursing Corporation taxed as an S Corporation are not subject to self-employment taxes, but they are subject to standard payroll taxes.

In the context of a California General Stock Corporation taxed as an S Corporation or California Professional Nursing Corporation taxed as an S Corporation, payroll taxation primarily refers to the tax implications for the owners or shareholders who are also employees of the California General Stock Corporation taxed as an S Corporation or California Professional Nursing Corporation taxed as an S Corporation. In general, shareholders who work for the California General Stock Corporation taxed as an S Corporation or California Professional Nursing Corporation are treated as employees for tax purposes. This means that they are subject to Federal Insurance Contributions Act (FICA) taxes, which are equivalent to self-employment tax for self-employed individuals or owners of certain other types of businesses.

FICA taxes account for 15.3% of the income of an employee up to a certain limit, which is adjusted each year for inflation. This tax is divided into two portions: 12.4% for Social Security and 2.9% for Medicare. Generally, the California General Stock Corporation taxed as an S Corporation or California Professional Nursing Corporation taxed as an S Corporation and the employee each pay half of the FICA taxes, meaning the employee would see 7.65% of their wages (up to the annual limit) withheld for FICA taxes, and the California General Stock Corporation taxed as an S Corporation or California Professional Nursing Corporation taxed as an S Corporation would pay a matching amount.

For shareholder-employees of a California General Stock Corporation taxed as an S Corporation or California Professional Nursing Corporation taxed as an S Corporation, this means their wages are subject to these taxes. However, any distributions paid to them as shareholders (which should be a return on their investment, not payment for services provided) are not subject to FICA taxes. This can provide significant tax savings, but it is important to note that the Internal Revenue Service requires shareholder-employees to be paid “reasonable compensation” for their work. In other words, shareholder-employees cannot avoid FICA taxes entirely by taking all their income as distributions of profits. This is a key aspect of the federal self-employment taxation of a California General Stock Corporation taxed as an S Corporation or California Professional Nursing Corporation taxed as an S Corporation.

Additional Medicare Tax for a General Stock Corporation or Professional Nursing Corporation Taxed as an S Corporation in California

An additional component of the taxation landscape for a California General Stock Corporation taxed as an S Corporation or a California Professional Nursing Corporation taxed as an S Corporation is the Additional Medicare Tax. This tax was introduced in 2013 as part of the Affordable Care Act to generate additional revenue for the Medicare program. It applies to the wages, compensation, and self-employment income of individuals over certain thresholds.

The Additional Medicare Tax is 0.9% and it applies to the amount by which the annual income of an individual exceeds $200,000 for single filers, $250,000 for married couples filing jointly, and $125,000 for married individuals filing separately. Importantly, this tax is only paid by employees; neither a California General Stock Corporation taxed as an S Corporation nor a California Professional Nursing Corporation taxed as an S Corporation are required to match this additional contribution as they do with the standard Medicare tax.

In the context of a California General Stock Corporation taxed as an S Corporation or a California Professional Nursing Corporation taxed as an S Corporation, shareholder-employees earning more than these thresholds will have the Additional Medicare Tax applied to their wages. However, similar to the standard Medicare tax, distributions paid to shareholders as returns on their investments are not subject to this tax.

California Income Taxation of a General Stock Corporation or Professional Nursing Corporation Taxed as an S Corporation in California

When it comes to income taxation at the state level, a California General Stock Corporation taxed as an S Corporation or a California Professional Nursing Corporation taxed as an S Corporation is required to pay an annual franchise tax. This tax is levied for the privilege of doing business in the state and is calculated based on the net income of the California General Stock Corporation taxed as an S Corporation or the California Professional Nursing Corporation taxed as an S Corporation. The current rate for this tax is 1.5%, and subject to a minimum franchise tax of $800 annually.

California General Stock Corporations taxed as S Corporations and California Professional Nursing Corporations taxed as S Corporations are pass-through entities. This means that California General Stock Corporations taxed as S Corporations and California Professional Nursing Corporations taxed as S Corporations do not pay income taxes at the federal, state, or California level, but the income, losses, deductions, and credits pass through to the shareholders who report this information on their individual income tax returns. Shareholders are taxed at their individual income tax rates, and these rates are progressive in California, ranging from 1% to 13.3%.

Shareholders of a California General Stock Corporation taxed as an S Corporation or a California Professional Nursing Corporation taxed as an S Corporation who are California residents must pay California income tax on their share of the income of the California General Stock Corporation taxed as an S Corporation or the California Professional Nursing Corporation taxed as an S Corporation, regardless of whether the income was derived from within or outside of California. However, nonresident shareholders must pay tax on their share of income derived from California sources (but may claim a credit on their California personal income tax returns for taxes paid to other states by the California General Stock Corporation taxed as an S Corporation or the California Professional Nursing Corporation taxed as an S Corporation on behalf of the shareholder).