As a business owner, you have many different tax obligations. Like all taxpayers, you have to pay personal income tax on wages and profits that you earn from the company, but your business also has to pay taxes on the entity level such as federal payroll taxes, corporate income taxes, and excise taxes. On top of these IRS taxes, you also need to be aware of your state and local tax requirements.
Understanding state and local tax rules can be complicated — especially if you’re doing business in multiple areas. To point you in the right direction, this guide covers the basics. Or you can contact us right now for customized guidance on your unique situation.
What Is SALT (State and Local Tax)?
State and local taxes refer to all of the taxes you pay on the state or local level. State taxes include state income tax that you withhold from employees’ paychecks and remit to the state as well as state unemployment insurance. In some states, you may also need to pay franchise tax or state corporate income tax.
Additionally, if you sell goods or services, you will need to collect and remit sales tax to the state. Businesses that sell goods to customers in multiple states need to figure out which states they have economic nexus in and then register, file, and remit sales tax in those states.
Because the laws vary, you need to work with a tax pro who can help you with understanding state and local tax to protect your business from unexpected nexus determinations.
On the local level, you may need to pay local business taxes to your county or municipality. Property taxes paid to your county are also considered to be local taxes.
Some of these taxes such as state sales and withholding taxes, you collect from your customers or your employees respectively, and then, you send the payment to the state. Your business doesn’t pay these taxes, but it is responsible for collecting them and filing the right returns.
With other state and local taxes such as corporate income tax, state unemployment insurance, and property tax, your business must pay the taxes out of its profits. These taxes can get expensive, but luckily, they are deductible when you file your business income tax returns.
What is a SALT Deduction?
A SALT deduction is a deduction for state and local taxes that you claim on a personal income tax return. You must itemize to claim this deduction, and the Tax Cuts and Job Act (TCJA) capped this deduction at $10,000. Here’s some good news — when it comes to business accounting, there is no cap on state and local tax deductions.
All of the state and local taxes paid by your business are considered business expenses, and thus, they are deductible. When you file your business tax returns, you will be able to deduct these taxes from your revenue. This reduces your taxable income and helps to reduce the total amount of business taxes that you owe.
Local vs State Taxes
Business taxes account for a significant portion of state tax revenue. In 2021, businesses paid over $950 billion in state and local taxes, accounting for 43.6% of all state and local taxes. Every state has state and local taxes, but the exact type of tax varies from state to state.
In Illinois, for example, c-corporations face a 7% income tax and a 2.5% replacement tax. S-corps and partnerships don’t incur corporate income tax, but they must pay a 1.5% replacement tax. Sole proprietorships don’t have to pay either of these taxes in Illinois.
Additionally, Illinois businesses must withhold state income tax from their employees. This is the case for most states, but businesses in Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming don’t have to worry about withholding state taxes for their employees as these states don’t assess personal income tax.
Illinois, like most states, also has a state sales tax. Businesses that sell taxable goods or services need to be aware of this tax and file accordingly. Most states have state sales tax as well as additional sales taxes on the local level. However, Alaska, Delaware, Montana, New Hampshire, and Oregon don’t have any sales tax.
You don’t count state sales tax in your revenue and thus you also don’t deduct it as a business expense. However, you need to be aware of your filing requirements and stay on top of them.
Finally, there’s property tax. If you own business property and pay property tax, that will also be deductible when you do your business taxes.
Taxes Based on Business Structure
As briefly indicated above, the structure of your business also affects your state and local taxes.
Your business will have to deal with certain taxes regardless of its structure. For instance, if you have employees or sell taxable goods, you will have to take care of state withholding tax and sales tax regardless of your business structure. You will also have to pay property tax if your business owns property.
The majority of states (44) have a corporate income tax. That ranges from 2.5% to 11.5% of corporate profits. This typically only applies to c-corps, but s-corps and partnerships may have to pay other profit-based state taxes such as the replacement tax in Illinois.
In some areas of Pennsylvania, Virginia, and West Virginia, there is a gross receipts tax. This is similar to a corporate income tax but a bit more aggressive. In South Dakota and Wyoming, you don’t have to worry about corporate income or gross receipts taxes.
Additionally, there is a franchise tax in Alabama, Arkansas, California, Delaware, Georgia, Illinois, Louisiana, Mississippi, Missouri, Minnesota, Nevada, New Hampshire, New York, North Carolina, Oklahoma, Tennessee, Texas, Vermont, and D.C. This usually just applies to corporations, but in a handful of states, LLCs (even if they’re sole props or partnerships) have to deal with an additional state business tax.
Get Help With Your Businesses Taxes Today!
Dealing with business taxes can be complicated and a small misstep can lead to intense penalties. To ensure your business is up to date on its obligations, you need to work with an accountant who provides state and local tax planning. At DHJJ, our tax prep and planning services include guidance for all kinds of tax situations.