If you sell taxable products or services in California, and especially if you collect a significant amount of sales tax each month, you may be required to make sales tax prepayments to the state. While this requirement can seem overwhelming at first, understanding the rules and timelines will help you stay compliant and avoid costly penalties.
In this blog, I’ll walk you through why sales tax prepayments exist, who’s required to make them, how the payment schedule works, and what steps you should take if you’re approaching or have already crossed the threshold.
Why Does California Require Sales Tax Prepayments?
The short answer: cash flow—not yours, but the state’s.
The California Department of Tax and Fee Administration (CDTFA) requires certain businesses to remit a portion of their sales tax collections before the quarterly tax return due date. This ensures the state receives funds in a more timely manner.
Prepayments apply only to businesses with a significant tax liability, ensuring that large-volume sellers contribute earlier in the quarter instead of waiting until the end.
Who Must Make Prepayments?
Under California Revenue and Taxation Code Section 6471, if your average monthly sales tax liability is $17,000 or more, you may be required to make prepayments.
This isn’t something you calculate on your own. The CDTFA reviews your filings and, if you meet the threshold, they will notify you in writing. Once notified, you must follow a prepayment schedule until you are formally released from the requirement.
This is especially relevant for businesses in industries like retail, e-commerce, and food services—those with high-volume taxable sales.
How Do Sales Tax Prepayments Work?
Let’s break down the general rules by quarter:
Quarters 1, 3, and 4:
For January–March, July–September, and October–December:
- You must prepay at least 90% of your sales tax liability for each of the first two months in the quarter.
- Payments are due by the 24th of the following month (unless it falls on a weekend or holiday).
For example:
- January’s prepayment is due February 24.
- February’s is due March 24.
Quarter 2 (April–June):
This quarter includes a unique twist. The CDTFA wants part of June’s liability ahead of time as well.
Here are your two options for your second prepayment:
Option A:
Prepay 90% of May’s liability plus 90% of the liability for the first 15 days of June.
Option B:
Prepay 90% of May’s liability plus 50% of 90% of May’s liability, which amounts to 135% of May’s liability.
It might sound complicated, but don’t worry—your bookkeeper or accountant can help you calculate the proper amount. Or, for a simpler route, add up your tax collected from May 1 to June 15 and pay that amount.
Staying Compliant: What You Need to Remember
Once you’ve been placed into the prepayment program, you remain in it until the CDTFA notifies you otherwise in writing.
It’s important to:
- Keep accurate and timely records.
- Set reminders for each due date.
- Stay on top of your monthly sales data—you can’t calculate 90% of a month’s liability if you don’t know your numbers.
Don’t Forget: Prepayments Don’t Replace Quarterly Returns
Prepayments are installments, not substitutes. You are still required to file your full quarterly sales tax return. When filing, you’ll reconcile your total tax liability, report gross sales and exemptions, and then apply your prepayments toward the balance due.
What Should You Do Now?
If you’ve received a notice from the CDTFA—or think your business might be close to the threshold—take these action steps:
- Review your monthly liabilities.
Are you consistently averaging $17,000 or more in sales tax? - Consult your tax professional.
Don’t risk underpaying or missing a deadline. - Set a payment calendar.
Prepayments are due by the 24th of each month, not at the end of the month like returns. - Ensure your sales data is up to date.
Timely bookkeeping is essential to calculating your prepayment accurately.
Final Thoughts
While California’s sales tax prepayment system might seem complex, with the right information and tools, it becomes a manageable part of your financial calendar.
If you need help preparing or filing your sales tax, the team at Accounting Business & Payroll is here for you. Contact us at 310-534-5577 or email contact@abandp.com. We’re happy to take this off your plate so you can focus on growing your business.
