California Contractor Taxes and Licensing Guide

Installation labor on a California construction job is generally not taxed. The CDTFA treats contractors as the consumers of the materials they use, so you pay tax when you buy them. Fixtures are different: you're the retailer, so tax applies to their selling price. Most contractors need a seller's permit and a CSLB license.

Do California contractors charge sales tax on labor?

Generally no. California splits a job into two kinds of goods, and labor sits outside both. The California Department of Tax and Fee Administration (CDTFA) says contractors are the "consumers of materials they use" and the "retailers of fixtures that they provide and install." Materials are things like lumber, drywall, concrete and wire that lose their identity in the building. Fixtures keep their identity, like a water heater, a sink or a furnace.

So the tax lands in two places. On materials, you pay it to your supplier when you buy, and that cost gets built into your price. On fixtures, tax is figured on what you charge the customer for the fixture. Installation labor is not part of either. That's a big contrast with Washington, where the whole contract price is taxed.

How you write the contract changes the paperwork. CDTFA describes three common types: lump-sum (you "provide and install materials and/or fixtures for a single price"), time and material (installation or fabrication billed separately from materials and fixtures), and cost plus a fee, where "you separately state a fee, which is considered to represent nontaxable installation labor." Machinery and equipment contracts are another case: CDTFA says tax applies to the total contract price, excluding installation labor. Our labor vs. materials guide lines these models up across states.

Do I need a seller's permit, and when is use tax due?

CDTFA says "most construction contractors are required to register with the CDTFA for a seller's permit." It lists three exceptions: you work only on contracts with the United States Government, you're a general contractor who hires subcontractors exclusively, or you "exclusively furnish and install materials under lump-sum contracts." On federal contracts, CDTFA says "you owe tax on your cost of materials and fixtures."

• Out-of-state buys. Use tax "is due whenever you purchase taxable items without payment of California sales tax from an out-of-state vendor." That covers a tool or fixture ordered online from a seller that didn't charge California tax.
• No seller's permit? If your gross receipts are $100,000 or more a year, CDTFA says you must register for a Consumer Use Tax Account so you have somewhere to report that use tax.
• The rate. CDTFA lists the statewide rate as 7.25%. Most areas add district taxes, which CDTFA says range from 0.10% to 2.00%, and some areas stack more than one. CDTFA's current city and county tables show rates effective October 1, 2026.

Keep the receipts that show tax paid on materials. If an auditor can't see it, they can assess use tax on the purchase. Our use tax for contractors guide walks through how that reporting works.

What CSLB license do I need, and when?

California licenses contractors through the Contractors State License Board (CSLB), and it licenses by classification. CSLB Industry Bulletin #24-07 says that starting January 1, 2025, AB 2622 raised the minor work exemption from $500 to $1,000, "but there is a catch: the work cannot require a permit, and the unlicensed person cannot employ anyone for the project." Go over $1,000, pull a permit, or bring a helper, and you need a license. See the contractor license guide for how California compares.

What state income and franchise tax applies to a California contractor?

The Franchise Tax Board (FTB) handles income tax. If you run as a sole proprietor, your profit lands on your personal return. FTB says you generally must make estimated payments if you expect to owe at least $500 ($250 if married/RDP filing separately) and your withholding and credits fall short. The split isn't even like the federal one:

• LLCs. FTB says "every LLC that is doing business or organized in California must pay an annual tax of $800." An LLC making more than $250,000 also owes an LLC fee, estimated and paid by the 15th day of the 6th month of the tax year.
• Corporations. FTB says every corporation incorporated, registered or doing business in California "must pay the $800 minimum franchise tax." Newly incorporated or qualified corporations on or after January 1, 2020, don't owe it in their first taxable year.
• Planning. Run your federal number through the quarterly estimated tax calculator, then work out the state piece with your CPA.

Who needs workers' comp in California?

The Department of Industrial Relations (DIR) says "California employers are required by law to have workers' compensation insurance, even if they have only one employee." You can buy it from a licensed insurance company or from the State Compensation Insurance Fund (State Fund), which DIR describes as a non-profit that competes with private carriers. Self-insurance requires state approval, a net worth of at least $5 million and other conditions.

Some trades can't skip it even as a one-person shop. CSLB's bulletin on SB 1455 says the rule requiring comp for all licensees, with or without employees, was delayed from January 1, 2026, to January 1, 2028. Until then, licensees in all trades except C-39, C-8, C-20, C-22 and D-49 can keep claiming an exemption if they have no employees. Our workers' comp guide explains how premium is figured.

Local taxes and the rest of the checklist

• District taxes. Rates vary by city and county and CDTFA updates its tables, so check the current rate before you price fixtures.
• City business licenses. Your city or county may require its own business license or tax. Ask the city where your shop is.
• Getting paid. Read up on mechanics liens and California's notice steps before the job starts, not after a missed payment.
• Next door. Oregon and Nevada have their own tax and licensing rules, so read their pages before taking work across the line.