State and Local Taxes: Introduction
If you are thinking about starting a small business, it doesn't 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 check with 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 the typical state and local taxes for small businesses. For more information related to this topic, please visit FindLaw's Business Taxes section.
State Income Tax
All businesses must pay state income taxes. Some businesses, such as corporations, are taxed as separate entities for income purposes, while the income of other businesses is 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. Partnerships and limited liability companies (LLCs) are also often taxed like a sole proprietorship, although LLCs may elect to be taxed like a corporation.
State business income tax is typically a pay-as-you-go tax, meaning businesses usually must pay the tax as income is earned throughout the year. As a business, you may be required to make estimated tax payments during the year. 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 in April.
To learn more about business income tax obligations, how to pay your business income tax, and other business regulations in your state, you can visit the Internal Revenue Service (IRS) website, which provides links to the state governments of all 50 states.
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, your state employment tax obligations can include:
- Withholding a portion of each employee's 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 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 IRS. Your business may also need to acquire a similar tax identification number from your state's department of revenue or taxation.
Your tax obligations do not end at the federal and state level; you will also likely be subject to local (city or county) taxes as well. The taxes you may need to pay to your local government can include:
- Property tax
- Operating tax, which is used by some cities in lieu of a business license
- Sales tax, if your business is engaged in retail sales
- Income tax, which is rare but may be imposed on businesses operating in larger cities
As with state taxes, your local taxes will vary depending on the rules of the city and county that your business is operating within.
Getting Legal Help
It's important to determine your federal, state, and local tax obligations before starting your business so as to avoid problems, such as costly penalties, in the future. An experienced business organizations attorney can help you ensure that you are in compliance with all tax obligations, as well as other requirements, imposed on businesses in your industry and location.