Summary. Paying state taxes as a small business depends on your business structure and the state you pay taxes to. Small businesses are usually taxed based on their income, which can either be paid by the company or passed on to the owners.
If you own or manage a small business, you know that taxes are a complicated process. Unlike a large company, which can hire a multitude of lawyers and accountants, you are more involved.
It gets more confusing when you factor in state taxes. Along with federal taxes, state taxes are a significant portion of tax payments. Unfortunately, every state is a bit different, which means your company has to be very careful to file correctly.
This article will help guide you with a general overview of how state taxes for small businesses work. However, note that if you need legal advice, you should contact a qualified tax professional.
Key Takeaways
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Small businesses are taxed by income, either as a corporate tax or through personal income taxes.
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Small businesses may also have to pay state employment taxes, property taxes, and excise taxes.
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The Small Business Administration defines who can be considered a small business based on the industry, income, and amount of employees.
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Small businesses can be structured as sole proprietors, partnerships, LLCs, or corporations.
What Is a Small Business?
In the United States, the Small Business Administration (SBA) varies its definition of a small business by industry, as well as by income or the number of employees in the company.
This is released in the SBA’s Table Of Size Standards which are matched to the North American Industry Classification System (NAICS) of industries. These standards are modified by the Office of Management and Budget.
The table refers to size standards of the largest amount of income or employees a business within the industry can have and still qualify as a small business for Federal Government programs.
If you are unsure about whether or not your business qualifies, you should refer to the table and speak to a government representative or legal professional.
How Are Small Businesses Taxed By States?
How small businesses are taxed by states depends on the state they pay taxes to and the structure of the business.
In general, small businesses have to pay some, or all, of the following taxes:
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Business income tax
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State employment tax
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Property tax
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State excise tax
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State sales tax
This varies by state because every state has their own specific set of tax laws that businesses must comply with to avoid penalties.
How the income tax is paid also depends on the type of business structure, which is the legal framework that determines ownership responsibilities. This will usually be one of the following:
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Sole proprietorships
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Partnerships
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Corporations
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Limited liability company
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Cooperative
As an employer, you will want to understand the structure of your business and to which state you are required to pay taxes. Taxes are a confusing process, so it can be very helpful to refer to the Small Business Administration (SBA) for further guidance.
State Taxes For Small Businesses
There are several types of taxes a small business may have to pay to a state, including:
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Business Income. This is based on the profit or loss a business declares. Depending on their structure, the business may have to pay the taxes itself, or else it can “pass-through” the profits and losses on to the owners, who then include it on their personal income tax payment.
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Corporate State Tax. If the business is structured as a corporation, then corporate taxes must be paid. As of 2022, there are 44 states that have a corporate state tax rate.
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Income State Tax. If the business is structured in such a way that profits and losses are passed through to the owners, such as in an LLC, then the owners will include this information on their personal tax returns. As of 2022, there are 43 states that have an income tax.
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Gross receipt tax. Four states, Nevada, Ohio, Texas, and Washington require a gross receipts tax instead of a corporate income tax. This is a tax on the gross sales of a business without consideration for deductions on business expenses.
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State Employment Taxes. These are employment taxes that states may require businesses to pay to support programs such as unemployment insurance, workers’ compensation insurance, and temporary disability insurance.
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Property Tax. This is also known as a real estate tax. If a business owns a property, it will have to pay a property tax that is determined by each state.
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State Excise Tax. This occurs if a business sells products subject to excise taxes, such as fuel, alcohol, or tobacco.
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State Sales Tax. Sales taxes on certain goods are charged to the buyer and collected by the seller. Therefore, it is the responsibility of the business to make sure they collect the sales tax appropriately. As of 2022, 45 states, as well as Washington D.C., collect a sales tax.
How Are Small Businesses Structured?
There are several ways a small business can be structured which will determine how it is taxed, including:
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Sole proprietorships. A sole proprietor is someone who owns an unincorporated business by themself. Taxes of a sole proprietorship are reported on a personal income tax return.
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Partnerships. A partnership is when two or more people establish a relationship of business or trade with each other. A partnership will file an annual information return; however, it passes its profits or losses to its partners, who then pay tax on their personal income return. There are two types of partnerships:
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Limited partnerships (LP). In a limited partnership, one partner has unlimited liability, while other partners have their liabilities limited. This means those with limited liabilities can not be personally responsible for debts or liabilities.
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Limited liability partnerships (LLP). In a limited liability partnership, all partners have a limited liability.
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Corporations. A corporation is where a shareholder exchanges money or property for the capital stock of the business. There are several types of corporations, including:
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C corporations. These are traditional corporations that are recognized as separate tax-paying entities. This means a C corporation pays taxes on its profits, sometimes twice, which is known as a double tax.
First taxes are paid by the corporation when the profit is earned and then by the shareholders when dividends are distributed.
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S corporations. S corporations avoid the double tax by passing all corporate income, losses, deductions, and credits onto their shareholders. The shareholders then declare these results on their personal income taxes.
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B corporations. B corporations are recognized by several states as a special type of C corporation that focuses on providing public benefit as well as profit.
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Nonprofit corporations. Also known as 501(c)(3) corporations, nonprofit corporations focus on providing public benefits over profits. They must meet certain requirements to be registered as a 501(c)(3), which can exempt them from federal and state taxes on earned profits.
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Limited Liability Company (LLC). LLCs can be thought of as a combination of corporations and partnerships. They are business structures that protect the owners from personal responsibility for debts or liabilities. Profits and losses can be passed through to the owners of an LLC as personal income to avoid corporate taxes.
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Cooperative. Cooperatives are businesses that are owned by and operated by those who will benefit from their services. Cooperatives are taxed like other businesses; however, they sometimes have additional deductions available to them.
It is important to note that how a business is structured affects how it is taxed. Carefully consider your business’s legal and financial needs when choosing a business structure. The SBA provides information if you need help with this decision.
Tax Years For Small Businesses
When filing taxes, businesses have to choose their tax year, which can be one of the following:
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Calendar tax year. This is the most common tax year. It runs from January 1st to December 31st of any given year.
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Fiscal tax year. A fiscal tax year runs for 12 consecutive months and ends in any month that isn’t December.
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Short tax year. A short tax year is applied when a business wasn’t in existence for an entire year or changed its accounting period.
Businesses should pick a tax year based on their needs. For the most part, this means the calendar tax year. If a business wishes to change its tax year, it must get approval from the IRS.
State Taxes For Small Businesses FAQ
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When do small businesses file taxes?
Small businesses will file taxes based on their structure. Most businesses have to file an annual income tax return. It is likely they will also need to pay quarterly estimated tax returns.
Corporations must file estimated tax payments on the 15th day of the fourth, sixth, ninth, and twelfth month of their fiscal year. Owners of pass-through businesses usually pay estimated tax payments on the 15th of April, June, September, and January. If the 15th falls on a weekend or holiday, the date is pushed back to the following business day.
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Which state has the lowest taxes for small businesses?
The states with the lowest taxes for businesses are Wyoming and South Dakota. This is because both states do not have a state corporate tax or a state income tax, meaning that regardless of their structure, a business will not have to pay taxes on income.
Meanwhile, four states, Nevada, Ohio, Texas, and Washington, have a gross receipts tax instead of a corporate tax. This taxes the gross sales of a business without deductions for business expenses.
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Do I have to pay taxes if my business makes no money?
Even if your business made no money, you might still need to file a tax return. It is important to consult a legal and tax professional when deciding whether or not to file if your company did not make any money.
Corporations are required to file tax returns, even if they do not make money. Sole proprietorships and partnerships do not have to file if they did not make any income; however, it can still be beneficial to file for other reasons.
LLCs have to file if they have a corporate structure, and they do not have to file if they have a “pass-through” structure.
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What happens if you don’t report business income?
You can face severe penalties for not reporting business income. This can include fees, interests, additional fines, as well as arrest and prison time. Therefore it is critical for your business to report its income accurately and file all necessary tax documents.
Again, consult legal tax professional professionals if you have specific questions pertaining to your business.
References
Author
Conor McMahon
Conor McMahon is a writer for Zippia, with previous experience in the nonprofit, customer service, and technical support industries. He has a degree in Music Industry from Northeastern University and in his free time he plays guitar with his friends. Conor enjoys creative writing between his work doing professional content creation and technical documentation.
