If your business collects a lot of sales tax in California, the state doesn’t wait until the end of the quarter to get paid. Under the California sales tax prepayment rules, any business the California Department of Tax and Fee Administration (CDTFA) determines has an average monthly tax liability of $17,000 or more must make two prepayments each quarter, then file a regular quarterly return that reconciles what was already paid against what was actually owed. Miss a prepayment deadline and a 6% penalty attaches to the amount that was late.
Who Has to Make Prepayments
The trigger is set in Revenue and Taxation Code Section 6471: an estimated tax liability averaging $17,000 or more per month.1California Department of Tax and Fee Administration. Revenue and Taxation Code 6471 – Prepayment Note what that figure measures. It’s tax liability, not gross taxable sales. A business at the state and local combined rate would need substantially higher sales volume before its tax collections reach the threshold.
You don’t sign up for the prepayment schedule. The CDTFA reviews your account, decides you qualify, and sends you a written notice. Once you’re in, you stay in every quarter until the CDTFA notifies you in writing that you’re out.2California Department of Tax and Fee Administration. Return Prepayments If your sales have fallen off, you can ask the CDTFA to remove you, but the change isn’t effective until they confirm it.
When the Two Prepayments Are Due
Each quarter carries two prepayment deadlines, and both fall on the 24th of a month.3California Department of Tax and Fee Administration. EFT Filing Instructions for Sales and Use Tax Prepayment Accounts
- For the first, third, and fourth quarters, the first prepayment is due by the 24th of the second month of the quarter. The second is due by the 24th of the third month.
- For the second quarter, the first prepayment is due May 24 and the second is due June 24.
The full quarterly return is filed by the last day of the month after the quarter ends: April 30, July 31, October 31, and January 31.4California Department of Tax and Fee Administration. Filing Dates for Sales and Use Tax Returns If any of these dates land on a weekend or a state holiday, the next business day counts as timely.
How Much Each Prepayment Should Be
For the first, third, and fourth quarters, each prepayment must equal at least 90% of your state and local tax liability for that month.1California Department of Tax and Fee Administration. Revenue and Taxation Code 6471 – Prepayment Take the tax you actually owed for the month, multiply by 0.9, and send that in. District taxes and local add-ons are part of the calculation, not just the base state rate.
You can pay 100% if you want to. There’s no cap on voluntary overpayment, and paying in full each month simply shrinks the balance due on your quarterly return.2California Department of Tax and Fee Administration. Return Prepayments
The Second Quarter Works Differently
April through June is where most mistakes happen. The first prepayment is straightforward: 90% of April’s state and local tax liability. The second prepayment covers a longer period and can be calculated two ways.1California Department of Tax and Fee Administration. Revenue and Taxation Code 6471 – Prepayment
- Option A: 90% of May’s tax liability, plus 90% of the tax liability for the first 15 days of June. This covers May 1 through June 15.
- Option B: 90% of May’s tax liability, plus an additional 50% of that same 90% figure. It’s easier because you don’t have to cut off the books mid-June.
If you come across guidance saying the second quarter requires a 95% rate, ignore it. That rate was lowered to 90% in 2000, and any source still quoting 95% is out of date.
The Prior-Year Alternative
If you were in business during the same quarter last year, you can skip the current-month math and base your prepayments on last year’s numbers instead. For the first, third, and fourth quarters, each prepayment equals one-third of the tax liability you reported for the same quarter of the prior year, adjusted to the current tax rate.1California Department of Tax and Fee Administration. Revenue and Taxation Code 6471 – Prepayment
For the second quarter, the prior-year method changes shape. Your first prepayment is one-third of last year’s second-quarter liability. Your second prepayment is one-half of that same figure, reflecting the longer window it covers.
The prior-year method rewards stability. If your sales have grown since last year, using old numbers leaves you underpaid, and you’ll owe a larger balance on the quarterly return. If sales have fallen, you’ll be overpaying every month and waiting for a credit.
How to Submit a Prepayment
Prepayments go through the CDTFA online portal or by mail. From your account, you can pay directly from a bank account with no fee, or by credit card with a 2.3% processing charge from the card vendor. Mailed checks and money orders are accepted if they’re postmarked by the deadline.5California Department of Tax and Fee Administration. Make a Payment Cash isn’t accepted at CDTFA offices without a specific exemption.
The EFT Mandate
Businesses with an estimated monthly tax liability of $10,000 or more must pay by Electronic Funds Transfer.6California Department of Tax and Fee Administration. Regulation 1707 – Electronic Funds Transfer That’s a separate threshold from the $17,000 prepayment trigger, so some businesses on the prepayment schedule aren’t subject to mandatory EFT. If you are required to use EFT and you pay by another method, the CDTFA adds a penalty on top of any late-payment penalty.
Keeping Records
The portal generates a confirmation receipt for each transaction and maintains a transaction history. Save your own copy of every confirmation for at least four years. The portal is a useful reference, but it shouldn’t be your only record.
What Happens If You’re Late
A late prepayment that arrives before the last day of the month following the quarter carries a 6% penalty on the prepayment amount.7California Legislative Information. California Code Revenue and Taxation Code 6476 On a $20,000 first-quarter prepayment paid in April instead of February, that’s a $1,200 penalty on that prepayment alone. If you miss that outer deadline as well, the unpaid amount rolls onto the quarterly return, where standard delinquency penalties and interest kick in.
The CDTFA can waive the 6% penalty under Section 6592 if the delay resulted from reasonable cause and circumstances beyond your control, and you exercised ordinary care.8California Department of Tax and Fee Administration. Revenue and Taxation Code 6592 – Excusable Delay Natural disasters, serious illness, and system outages are the kinds of facts that support a waiver. Forgetting the date or having a slow month for cash does not.
Reconciling on the Quarterly Return
Your two monthly prepayments are credits against the total tax liability shown on your quarterly return. If the prepayments came in higher than the quarter’s actual liability, the overpayment carries forward to the next quarter or can be refunded. If the prepayments fell short, the balance is due with the quarterly return by the filing deadline.4California Department of Tax and Fee Administration. Filing Dates for Sales and Use Tax Returns
Some underpayment is normal because prepayments are estimates, which is exactly why the 90% threshold exists. The concern is a pattern of significant underpayment, which can lead the CDTFA to look at whether the estimation method is being applied in good faith.