The holidays are rapidly approaching followed by the New Year celebrations and then we are in time of year when taxes are on everyone’s mind. While most people tend to focus on Uncle Sam and the IRS, you most likely have state tax obligations as well – particularly if you have a business. And, many of these obligations entail a year-long commitment.
Whether you handle your business’ taxes yourself or have a professional manage them for you, you’re the one who is ultimately responsible and will pay the price for not complying. Since so many tax requirements are on the state level, it’s important to understand all the different types of taxes and make sure you’re not accidentally leaving anything out. After all, the state can impose hefty fines and even place your company in “bad standing” where you’ll be unable to get a loan, expand into another state, or renew a permit.
Do You Understand State Business Taxes?
Below is an overview of the different types of taxes imposed by states. Keep in mind that each state has different taxes and different ways of calculating each tax, so be sure to find out how each tax applies to your situation.
1. State Income Taxes
Forty-four states levy a corporate income tax. According to the Tax Foundation, corporate tax rates range from 4 percent in North Carolina to 12 percent in Iowa. Similar to your individual income taxes, the corporate income tax is a tax on the company’s profits. If your company is structured as a C Corporation, the company itself files a tax return and is responsible for paying taxes on its profits. If the business is structured as an LLC, S Corporation, General Partnership, or Sole Proprietorship, then the company profits flow through to the owners and are paid on the individual level.
At present, Nevada, Ohio, South Dakota, Texas, Washington, and Wyoming are the six states with no corporate income taxes. However, there are some important things to keep in mind here. Just because a state foregoes corporate income taxes, this doesn’t mean you get a free ride. Some of these states (Nevada, Ohio, Texas, and Washington) have a tax on gross receipts.
There’s a misconception that by incorporating your business in a “tax-free” state, you’ll be able to avoid state taxes altogether. This is generally not the case. You are required to follow state tax law in whatever state(s) you’re doing business. So, if you are based in California (and conduct your business there) and want to incorporate in Nevada, you’ll still most likely be required to pay California state taxes on your income earned in the state.
Small Business Deals
2. Franchise Tax
Another state tax is the franchise tax; this has absolutely nothing to do with franchise restaurants or other franchise businesses. It’s basically a tax charged by some states for the privilege of doing business there. Franchise taxes, like income tax, are typically paid on an annual basis. For example, here in California, there’s an annual $800 franchise tax that applies to virtually every LLC registered to do business in California. It applies even if your business operates at a loss for the year. You’ll need to check with your state’s Secretary of State office or Franchise Tax Board to determine the requirements in your state.
Keep in mind that franchise taxes are imposed on companies that conduct business in the state. This means that if you’re incorporated in one state, you may still need to pay franchise taxes in other states where you are registered to do business.
3. Sales Tax
If your business sells taxable goods or services, you’re required to collect sales tax from customers and pay the tax to your state. The amount of tax owed is calculated by applying your state’s applicable tax rate to the total sales price of the goods or services. At present, 45 states collect statewide sales taxes, with tax rates varying from 7.5 percent in California to 2.9 percent in Colorado.
You’ll first need to register with the state by applying for a sales permit. You’re then responsible for collecting the appropriate sales tax on each sale and reporting/paying the tax to state authorities. In most states, you will need to file a return and pay your sales tax each month (although the schedule can vary based on your location and the amount of sales tax you collect on a monthly basis).
If you’re selling to customers in multiple states, you’ll need to figure out which sales are subject to state sales tax. Generally speaking, you won’t need to collect sales tax unless you have a physical presence in the state (a “nexus” in legal terms). For example, you are considered to have a physical presence in a state if: you have an office or store in the state; you or employees take orders or perform services in the state; or you own/lease property in the state.
4. Property Tax
Another important tax to be aware of the property tax. Property taxes are typically imposed on the local city or county level and it’s not just about owning real estate. You may still owe property tax on “tangible personal property” like furniture, computers, machinery, tools, equipment, and supplies. Most likely, your business owns and uses at least a few items that qualify as property.
The property tax is typically an annual filing with the county or city. Rules for the types of property covered by the tax, as well as the tax rate, vary between local governments. You’ll need to check with your city or county assessor’s office to find out your specific requirements.
If you are uncertain about how state or federal taxes apply to your business, it’s smart to speak with an accountant or other professional to help sort everything out. Ideally, you want to have a solid tax understanding and strategy before launching your business. However, it’s never too late to sort out tax matters.
State Flags Photo via Shutterstock