The US has a complex tax system, with multiple taxes, including income taxes, often being imposed on a State level as well as a Federal level. Some types of taxes also apply locally, meaning that even within the same State you can pay very different taxes to other parts of the State.
- The US Corporate tax system operates on a Federal, State and Local system. This means taxes and other compliance costs may be charged from all three levels.
- Filing requirements, lodgement deadlines, and available deductions or credits often differ between locations.
- Due to the complexity of Local variances, compliance with the Local tax laws requires specialised Local knowledge for the area or areas in which your business operates.
- To optimise your corporate tax strategy, it is recommended that you consult with experienced tax professionals who have a Local understanding of US taxes, as well as international taxes.
- Tax returns are typically based on a calendar year.
Choosing Your State
Since every State has different laws, it can be important to select the right State for your business operations. You will be required to register in every State that you operate in, however if you have no particular business requirement for which State or States you operate in, then it can be advantageous to select a State that has more well known and simple tax laws.
For instance, Delaware has no state income tax, a fairly straight forward tax system, and well-known corporate laws across the US.
Types of Taxes
Income Taxes (Federal And State)
- The Federal tax rate for companies is 21%
- 44 States levy corporate income taxes. These taxes vary from 0% to 11.5%, with some states assessing taxes on a flat rate and others using tax brackets in the same manner that individual income taxes are assessed.
- 43 States levy state income taxes, 41 tax wage and salary income, New Hampshire exclusively taxes dividend and interest income and Washington only taxes capital gains income. Seven states don’t impose any individual income taxes. Some states use a flat income tax rate, while others have a graduated tax rate depending on the individual’s income.
Sales Taxes (State And Local)
- Sales taxes are similar to GST or VAT in certain parts of the world. However, as sales taxes are only imposed on a State level, the rates vary between 0% and 7.25% depending on the State.
- There are also various Local governments within 35 States that impose an additional sales or use tax, which ranges from 1% to 5%.
Property Taxes (State And Local)
- Local authorities such as cities, counties, and school boards, typically impose property taxes on the value of the property, including the land and the structure on the land.
- Each State imposes different parameters on property taxes.
- Property taxes can also be payable on purchase and/or sale of property.
- Most States have a “homestead” exemption which reduces or eliminates the cost of property tax on your primary residence, subject to a variety of qualifications or limits, which vary State to State, or even within States.
Payroll Taxes (Federal, State And Local)
- Federal payroll tax is paid by both the employer and the employee.
- Some States and Local authorities also require some form of payroll tax to be paid. The most common type is State Unemployment Insurance (SUTA tax), which is payable by the employer.
Franchise Of Privilege Tax (For Doing Business In A State)
- Some States require certain business organisations to pay a franchise tax, otherwise known as a privilege tax, for doing business in the State.
- This tax is typically calculated on the net worth of capital held by the entity.
- Some States use an economic and physical presence test to determine whether a business is taxed, while others have no written interpretation of the basis of their test for determining who is required to pay the franchise tax.
Gross Receipts Tax (State)
- Some States apply a gross receipts tax on a company’s gross sales, without consideration of deductions for expenses.
- Gross receipts tax applies to businesses, regardless of whether sales relate to business-to-business transactions or business-to-consumer transactions.
Business Licenses (State, Local, With Some Federal Regulations)
- Business licences or permits may be required on a Federal, State, or Local level.
- Business licenses can take some time to be processed, and they should be completed prior to commencing operations. The complexity of the application depends on your industry, as well as the locality managing the license.
- Licences and permits typically need to be renewed on a regular basis.
Due to the complexity of the wide variety of Local, State, and Federal taxes, it is important that you obtain qualified advice regarding your business. If your business expands into additional locations you will need to get updated advice regarding the new location in which you are operating.