If you are thinking about starting a small business, no matter where your new business operates it will need to pay certain state and local taxes, in addition to those required by the federal government.

Since tax laws pertaining to small businesses can vary among jurisdictions, it is critical that you contact your state and local government revenue or taxation office to determine the tax obligations of your new business. Keeping this in mind, the following is a general discussion of typical state and local taxes for small businesses.

State Income Tax

All businesses must pay state income taxes. Some businesses are taxed as separate entities for income purposes, including corporations or limited liability companies (LLCs). Other business's incomes are not taxed separately from the income(s) of their principal owner(s). For example, in most states a sole proprietorship's income and expenses are included on the personal income tax return of the sole proprietor himself or herself.

State business income tax is a pay-as-you-go tax -- businesses usually must pay the tax as income is earned during the year.  As a business, you may be required to make estimated tax payments throughout the year (i.e. every three months). If you are not required to make estimated tax payments, you may pay any tax due when you file your business or individual income tax return at the end of the tax year.

To learn more about business income tax obligations, how to pay your business income tax, and other business regulations in your state, use the State Links page from the IRS.

State Employment Tax

If you intend to hire employees for your new business, you should be aware that employers are required to pay certain employment-related state taxes, in addition to those required by the federal government. Depending on where you operate your business, as an employer your state employment tax obligations can include:

• Withholding a portion of employees' wages to pay state income tax on their behalf
• Payment of unemployment taxes
• Payment of state workers' compensation insurance
• Retention of your business's payroll and employment tax records for a certain number of years

Remember also that, in addition to payment of state employment taxes, one of the first steps you will need to take when starting a small business is to obtain an Employer Identification Number (EIN) from the federal government, through the Internal Revenue Service (IRS). Your business may also need to acquire a similar tax identification number from your state's department of revenue or taxation.

Local Taxes

As a small business owner, you may also need to pay the following taxes on the local (city or county) level:

• Operating tax (used by some cities in lieu of a business license)
• Property tax
• Sales tax (for businesses engaged in retail sales)
• Income tax (rare, but may be imposed on businesses operating in larger cities)