Understand sales and use tax, payroll taxes (FICA, FUTA, SDI, SUI), quarterly estimated taxes, California's AB5 employee classification rules, and maintain proper records. Tax compliance protects your bottom line.
Key Takeaways
Why This Matters on the Exam
Tax compliance is money management. The C-36 exam tests whether you understand how to classify workers, collect sales and use tax, pay quarterly estimated taxes, and keep records the IRS and California demand. Get this wrong and you're looking at audits, penalties, and back taxes. I've seen contractors go under because of tax mistakes. This stuff matters, and the exam knows it.
What You Must Know
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Sales tax applies to materials only; labor for repairs/maintenance generally NOT taxed; keep materials and labor separate on invoices
California base sales tax rate: 7.25% plus local taxes (0.1%–1.25%); total typically 7.25%–10.75% depending on location
Use tax owed on out-of-state materials purchased without sales tax; self-reported to CDTFA or California income tax return
FICA: 7.65% employee + 7.65% employer withheld quarterly (Form 941); includes 6.2% Social Security + 1.45% Medicare
FUTA: 0.6% effective rate per employee on first $7,000 annual wages after 5.4% state credit; reported annually Form 940
SUI (State Unemployment Insurance): Employer-paid 0.1%–6.2% rate varies by experience rating; construction typically higher; quarterly Form DE9
SDI (State Disability Insurance): ~1% employee deduction; provides disability and family leave coverage; California-mandated
Quarterly estimated tax payments due April 15, June 15, September 15, January 15; safe harbor: 90% current year or 100% prior year tax
AB5 ABC Test requires ALL THREE parts: (A) no control over work method, (B) work outside usual business, (C) independently established; plumbers hired for plumbing work fail Part B—must be W-2 employees
1099 independent contractors must maintain own liability insurance, workers comp, and pay self-employment tax; W-2 employees require employer withholding and mandatory workers compensation
Record retention: income 3 years (6 if underreported 25%+), payroll 4 years, sales/use tax 4 years, business receipts 3–4 years minimum
California contractor tax obligations include federal income tax, sales tax, use tax, and payroll taxes
Sales tax applies to materials but generally NOT to labor for repairs or maintenance
Use tax applies when you purchase materials out-of-state without paying sales tax
Payroll taxes include FICA (Social Security/Medicare), FUTA, SDI, and SUI
1099 vs. W-2 classification is critical for compliance and has legal/tax consequences
Quarterly estimated tax payments are required for self-employed contractors
The IRS and California EDD have strict rules for employee vs. independent contractor classification
Misclassifying an employee as an independent contractor can result in significant penalties