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.