One of the challenges I have faced as a small business owner is
understanding state and local tax obligations. The issue for me is not
how much my business pays in state and local taxes, but the number of
taxes that apply to it at the state and local level. While each of these
taxes is relatively modest, it requires filling out and filing a
return, so the cost in time adds up.
Small business tax obligations vary by state and within a state by
locality. Nevertheless, based on my experience, here are a few state and
local tax obligations that might apply to your business and that can be
confusing.
Sales Taxes on Purchases of Equipment and Supplies
In my state, sales tax must be paid on purchases made for the business
on which sales tax wasn't charged (such as catalog or online purchases
from out-of-state retailers), and your state may have a similar tax
requirement. For my business, this tax generally does amount to a lot of
money in total, but, the rules are a bit complex, and it does require
filing a return and maintaining detailed records of applicable
purchases.
Local Taxes on Home Businesses
Many small businesses, such as mine, now are home based. Some
localities levy taxes or fees on home-based businesses. In my case, the
tax is relatively small and, once I filed the initial paperwork to
register my business, paying it each year has been easy. If you are
planning to start a home-based business or already operate one, it is a
good idea to check with your local government to find out if your
business must be registered locally, what regulations apply to it, and
if there is a business tax for operating from home.
State Unemployment Tax
Even though I am its only employee, my small business, which is an S
corporation, must pay state (and federal) unemployment taxes. The
structure of your small business can affect its unemployment tax
liability. For example, if you have a sole proprietorship and you are
the only employee, you don't have to pay federal unemployment tax.
Whether you have to pay state unemployment tax may depend on your state,
so be sure to check. On the other hand, if your business is a
corporation, as mine is, it may be liable for both state and federal
unemployment taxes.
State Income Taxes
The structure of your business also could affect how you report your
business income at the state level. For example, if your business is a
sole proprietorship, partnership or S corporation, for federal tax
purposes (and perhaps for state taxes as well), the business income and
expenses are reported on your personal return (although you may have to
file supplementary forms detailing business income and expense). On the
other hand, a C corporation, which is a separate entity from you, must
file its own return. Since not all small businesses report their income
and expenses the same way, check with your accountant or do some
research on your own to find out which tax rules apply to your business.
Tax Filing When No Income or Tax Liability
In my state, some business returns must be filed quarterly even if a
business has no income in the quarter or tax liability in the quarter,
which I initially found to be confusing. Your state may have similar
requirements, so, even if you operate a seasonal business that generates
no income during certain tax periods, be sure that you understand its
filing requirements for such periods.
I have found with business taxes, when in doubt, check with your
accountant. You can save yourself a lot of time, hassle and money if you
get your tax filings right the first time.
