August 3, 2022

Best States for Taxes From a Business Perspective

Taxes are a huge burden on small businesses. Researching tax information is just as much of a burden. Take a look inside for the ten best and worst states for business taxes. 

Considering how taxes will factor into your finances is essential as a business owner. When it comes to taxes, not all states are created equal. It is important to be informed about everything tax-related to ensure you stay compliant and put your business in the best position to thrive. 

Taxes can be a huge burden on small businesses. In addition, there is more than one type of tax to consider when deciding where to conduct your business and which entity you want to declare. 

Read on to learn more about the best and worst states for business taxes.

Types of Business Taxes

Before we get into the best and worst states for business taxes, it is important to note which types of taxes you will have to deal with when conducting business. The most common types of taxes you need to be aware of as a small business owner are:

  • Income Tax
  • Estimated Tax
  • Self-Employment Tax
  • Employment Tax

If you’ve got the guts to take on small business ownership, you’ve got what it takes to conquer the intricacies of taxes.

Income Tax

Your business organization dictates the income tax you must file each year. Some examples of business organizations are:

  • Sole proprietorship is the most common structure of an unincorporated business you own yourself.
  • Partnerships: This is another common type of business, but instead of shouldering everything yourself, you have a partner to take on ownership with.
  • S Corporations: With this type of business, you are choosing to pass on corporate credits, losses, deductions, and income when you file federal taxes. 
  • Limited Liability Company (LLC): This is a combination of a sole proprietorship and a partnership that protects the owners of the business from liabilities and debts.

You will not have to file an annual income tax return if you are in a partnership. However, you are still on the hook for income tax if you have a sole proprietorship, an S Corp, or an LLC. Considering what you want for your small business, the type of business entity you choose matters when tax season rolls around. 

Regarding federal income tax and state income state, you pay your way as you earn money throughout the year. Hopefully, when it’s time to file, you will not owe the government any more money. But sometimes, it happens. This is where estimated tax comes in.

Estimated Tax

Estimated tax is the way to pay taxes on income not subject to withholding, and it is paid quarterly instead of once a year. This applies to both federal and state taxes, covering earnings from interest, dividends, alimony, rents, and other sources. 

Estimated tax is something that many small business owners have to be aware of because your estimated payments may not be sufficient to cover your income tax, meaning that you will have to pay additional money. 

It might seem daunting to estimate a number that does not yet exist, so to give you an idea, you can use Form 1040-ES to help you figure that out. Or you can just use an accountant or accounting software like many. 

Self-Employment Tax

The IRS defines self-employed as someone who:

  • Conducts business as a sole proprietor or independent contractor
  • Has a partnership in a business or trade
  • Carries on any type of business for themself

This is a tax you must pay on top of income tax and is related to Social Security and Medicare tax. If you are self-employed and you have earned more than $400, you must file taxes.

Employment Tax

As a business owner, if you have employees, there are certain taxes you are responsible for, including federal income, unemployment, social security, and Medicare taxes. 

These are all employment taxes that get withheld from employees' paychecks and paid directly to the IRS. While the amounts and requirements vary depending on the size and kind of your business, it’s important to understand what employment taxes you are responsible for as an employer. 

The 10 Best States for Business Taxes

  1. Alaska
  2. Utah
  3. Wyoming
  4. South Dakota
  5. Florida
  6. Montana
  7. New Hampshire
  8. Indiana
  9. North Carolina
  10. Nevada

When starting or maintaining your small business, you always want what is best for its growth. Working the tax system can sometimes play a huge part in how your business performs financially. 

If you are curious about how taxes play a role in different states, read on to find out the ten best states for business taxes. 

1. Alaska

When you think of Alaska, the first thing that comes to mind might be beautiful glaciers. But as a business owner, the most important thing that should come to mind is the absence of income tax. That’s right! Alaska is one of nine states without state income tax. The others being Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.

Another notable tax rate is the unemployment tax. This tax can range from 1% to 2.44% based on a few different factors.

In Alaska, there is no sales tax. This makes Alaska our number one pick with no income and no sales tax.

2. Utah

Utah does have an income tax, but it sits well below the national average at 4.85%. Its sales tax sits at a similar rate of 4.7%

One of the most enticing things about starting a business in Utah is its incentive program.

In 2005, Utah started a program to attract more business owners to move to Utah. This initiative aimed to boost the job market, economy, and diversity of the state. The incentives include tax credits or grants.

Obtaining tax credits or grants for your business can be a huge burden eliminated from your financial responsibilities.

3. Wyoming

For many years, Wyoming has become known as the “Most Business-Friendly Tax Climate.” Its sales tax rate is 4%. However, like Alaska, Wyoming does not have an individual income tax. Wyoming also does not have:

  • Inventory tax
  • Franchise tax
  • Occupation tax
  • Value-added tax

4. South Dakota

South Dakota is yet another state that does not have an income tax. Any state that abides by this law will ultimately ease that portion of the financial burden for your business. This state does have a state sales tax of 4.5%, but South Dakota does not require:

  • Personal property tax
  • Business inventory tax

In addition to the tax breaks, South Dakota offers several grants for small business owners as an incentive to conduct their business in the state.

5. Florida

You guessed it! In Florida, there is no income tax. There is a state sales tax rate of 6%, but by owning a business in Florida, you also allow yourself the opportunity for a few different financial incentives.

For example, Florida has a grant called the Rural and Urban Job Tax Credits. In the state of Florida, there are thirty-six rural communities and thirteen urban communities. 

The Rural and Urban Job Tax Credits incentivize eligible businesses to provide employment opportunities for residents of rural and urban areas.

6. Montana

For Montana, we are switching it up. Montana does have an income tax. In fact, Montana has a graduated individual income tax that ranges from 1% to 6.75%. Don’t let that turn you off — Montana redeems itself by being void of any state sales tax.

In the future, Montana’s governor has pledged several tax policy proposals meant to be more small business-friendly. The state wants businesses to grow, and the best way to do that is to incentivize business owners. Montana could be the new place to take your business if all goes to plan. 

7. New Hampshire

New Hampshire has no personal income tax. However, they have a 5% flat dividend income and interest tax rate. That is something to remember when considering New Hampshire as a place to lay down roots.

Another great thing about New Hampshire is that it does not have a state sales tax. This makes it one of the few states with no income tax and no sales tax.

8. Indiana

The Hoosier state has a flat income tax of 3.23%. Indiana’s state sales tax is 7%.

One important aspect to note about Indiana is that it is reportedly the tenth cheapest state to live in in the United States. With a low-income tax rate and a low cost of living, Indiana could be a great option to live and work.

9. North Carolina

North Carolina is another state with a flat income tax. At 4.99%, North Carolina holds the lower tax out of the Carolinas. The state’s sales tax comes in with a 4.75%.

This state values profit and offers many performance-based incentive grants to its businesses. It has also restructured its tax laws to encourage healthy competition within the small business community.

10. Nevada

For our tenth entry, Nevada rounds out the list as being another state with no income tax. It also does not have:

  • Franchise tax
  • Inventory tax
  • Estate tax

One tax to note is its state sales tax, which is 6.85%. Nevada prides itself on being business-friendly and welcomes new business across the state.

What Are the 10 Worst States for Business Taxes?

  1. Alabama
  2. Louisiana
  3. Vermont
  4. Arkansas
  5. Connecticut
  6. California
  7. Minnesota
  8. Maryland
  9. New Jersey
  10. New York

Life is all about balance, right? Now that we’ve shown you the ten best states for business taxes, it’s time to sift through the ten worst states for business taxes. 

1. Alabama

Our first of the worst is Alabama, where the state income tax ranges from 0% to 5%. In addition, this state's sales tax rate is 4%.

Alabama has some intricate laws when it comes to taxes. The state has an additional tax called the business privilege tax, which means that if you want to run a business in Alabama, you’ll have to pay for it.

Your tax payments will depend on what kind of business entity you have. See below for more details:

  • S corp: not subject to individual income tax but must pay business privilege tax
  • LLCs: not subject to individual income tax but must pay business privilege tax
  • Partnerships: not subject to individual income tax or business privilege tax, but must pay amount distributed from business income on federal and state tax returns
  • Sole Proprietorship: not subject to individual income tax or business privilege tax but must pay business income tax on federal and state tax returns

2. Louisiana

For years, the small business community has advocated for tax breaks and better treatment in Louisiana. Right now, the state’s tax structure is set up to protect large industries like oil, gas, and insurance companies. Because of this, the needs of small businesses have been neglected.

As you can imagine, Goliath is winning this fight, as restructuring tax laws would cause big businesses to lose opportunities for breaks and write-offs. 

3. Vermont

Vermont has a similar tax collection structure to Alabama. The state went through a restructure in 2013, and small businesses took a hit from it. 

While the restructuring proposed benefits small businesses, it turns out that business owners end up paying more taxes because they are paying more than once.

As the state’s laws are set up right now, the wealthy and larger corporations benefit, while small businesses struggle to grow. 

4. Arkansas

Arkansas is another state with a tax structure like Alabama and Vermont. If you are a business owner, be ready to pay more than one business tax. Whether you run an S corp, an LLC, a partnership, or a sole proprietorship, taxes in this state are working against you.

So many business owners in Arkansas are fed up with the extra taxes that there is a movement to eliminate the income tax in this state. While this movement is still trying to gain traction, studies show that eliminating income tax could help boost Arkansas’ business economy. 

5. Connecticut

While Connecticut reportedly has the highest per capita income in the United States, it also has one of the highest tax collections. And what fun is making money for yourself if you have to give it all away to the government?

Much of Connecticut’s population has actually been leaving the state because of the tax burden there. It first started with large corporations, but small business owners have followed suit because the state has refused to help its own economy. 

6. California

California is enticing for anyone who loves sunshine. However, if you are a small business owner, do not let those rays blind you from the California tax reality.

California has some choices when it comes to tax structures. State income tax is on a scale from 1% to 12.3%, with sales tax from 7.25% to 10.75%. But again, taxes for your business will depend on what entity you have declared.

If you run an LLC, you can elect to be treated as a corporation for tax purposes. If you choose to do this, you are deciding on a fixed income tax of 8.84%, higher than the national average. 

However, if you choose to stay as one of the other business entities, your tax filing will depend on your income. 

7. Minnesota

One of the biggest challenges to Minnesota’s tax laws is the tax rates and their inner workings of them. If you are a small business owner in Minnesota, it could greatly behoove you to hire a CPA to handle your taxes, as the laws are intricate.

Minnesota also has one of the highest income tax rates in the country. Like Connecticut, Minnesota is seeing residents and business owners moving out of the state in search of less burdensome tax rates. 

8. Maryland

Maryland is not a tax-friendly state because of its individual income tax. With a range from 2% to 5.75%, the amount of taxes you owe will depend on your income for the year.

In this state, small businesses can report their business earnings through your individual income tax. So, if your business entity is an S corp, sole proprietorship, or partnership, you can choose to report your business income as individual income.

Many small business owners in Maryland report being discouraged by the tax structures in their state and do not feel the state is setting them up for success. 

9. New Jersey

The state of New Jersey has a scaled tax structure for businesses. For example, if your business earns $100,00 or less, you will have to pay 7.5% of your income to taxes. If your business makes $50,000 or less, you are responsible for paying 6.5% of your income to taxes.

Similar to some other states we have seen, in New Jersey, you can file your small business taxes as individual income. While this is a common option, it can stress you out as a business owner.

Like every state in the country, small businesses in New Jersey took a huge hit during the COVID-19 pandemic. Because of this, state legislation is working on tax breaks and business incentives. As of now, nothing has been finalized, but there might be hope for New Jersey. 

10. New York

The state income tax in New York is 6.5%. New York is known as the land of opportunity but has some intricate tax laws:

  • S Corp: Many states do not require S corps to pay personal income tax, but New York is not one of them. In fact, not only do S corp owners have to pay personal income tax, but New York also taxes S corps like big corporations. The tax rates for S corps are just slightly lower.
  • LLCs: In New York, LLCs can be classified as a partnership or as a corporation. If you categorize your LLC as a corporation, then your small business will be held to the same tax standards as big businesses. 
  • Partnerships: This entity does not have to pay federal income tax or state income tax in New York. Partnerships seem to get the biggest tax breaks, but owners must still pay individual state income tax.
  • Sole Proprietorships: This entity does not pay corporate taxes. However, as the owner, you will be on the hook for 4% to 10.9% of your individual income tax based on your business income. 
  • New York City Taxes: New York City has its own personal income tax, with four brackets ranging from 3.078% to 3.876%. The different rates are set at different income levels, and partially depend on your filing status. Still, every income-earning individual/estate/trust in NYC has to pay this personal income tax, even if they don’t reside in the city for the full year.

Conclusion

When it comes to making the right decisions for your business, many factors are at play. As you choose which type of business entity you’d like to run, consider the taxes laws and structures that come along with that. 

Taxes can be a huge burden on small businesses, so it is important to understand how taxes work in your part of the country.

Money isn’t everything, but it sure is something. Now that you know the ten best and worst states for taxes from a business perspective, it’s time to make some important decisions for your business.

Visit Hoist for more information on starting your next business.



Sources:

Choose A Business Structure ⎹ U.S. Small Business Administration

Impact Of Taxes On Small Business ⎸ Forbes

Beginner's Tax Guide for the Self-Employed ⎸ TurboTax Tax Tips & Videos

New York City Income Tax—Rates and Available Credits | The Balance 



Launch your painting business with Hoist.

Get Started