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The Best and Worst States for Business Taxes

The Best and Worst States for Business Taxes

Taxes are a reality of life for business owners. Although you can't avoid it, you can ensure that you do it correctly, cut your expenses, and stay away from audits and fines. Understanding your federal, state, and local taxes is essential to your overall success as a business owner. All businesses are required to pay business taxes, but the taxes you must pay and how you pay them depends on the sort of organization you own. No business owner especially enjoys the amount of labor involved in calculating taxes, but it is both a legal requirement and a duty businesses assume in exchange for the significant assistance society provides us with.

Sometimes, aspiring business owners are overly concerned about the tax obligations associated with beginning a company. Before investing in a business, be sure to check out the best states for business taxes in the U.S. For many small business owners, it's critical to stay current on tax rules so that they pay the correct amount each year. Small businesses will be impacted by several changes to the federal tax code in 2022 for the 2021 tax year. To ensure the success of your business, it is crucial to comprehend the extent of your tax obligations and to decide whether to handle them yourself or hire a professional.

The Primary Categories of Business Taxes

While individuals are primarily concerned with federal and state income taxes, businesses and business owners are usually responsible for five different types of taxes. While the combination and percentage of taxes levied will depend on the business’ state, the five primary categories of business taxes are as follows:

Income Tax

Except for partnerships, all businesses are required to file an annual income tax return. The form you use will depend on how your company is set up. A pay-as-you-go tax is the federal income tax. As you earn or receive money during the year, you must pay the tax. Typically, an employee's compensation has income tax deducted from it. You may need to pay approximated tax if you do not pay your taxes through withholdings or if you do not pay enough tax that way. If projected tax payments are not required, you can pay any taxes due when you file your return.

Estimated Tax

In general, you must pay income taxes regularly throughout the year, including self-employment tax.

Self-Employment Tax

A social security and Medicare tax largely applied to those who work for themselves is known as the self-employment tax (SE tax). Your social security benefits are influenced by the SE tax payments you make. Retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits are all provided through social security coverage.

  • In general, if one of the following applies, you must pay SE tax and submit Schedule SE (Form 1040 or 1040-SR).
  • If your self-employment net profits were $400 or greater.
  • If you work for a qualified church-controlled organization or a church that has chosen to exempt itself from social security and Medicare taxes, you are subject to SE tax if your employer pays you $108.28 or more in wages (unless you are a minister or a member of a religious order).

Employment Taxes

As an employer, you have various employment tax obligations when you have employees, including payments and documents to complete.

Taxes on employment include the following:

  1. Social security and Medicare taxes
  2. Federal income tax withholding
  3. Federal unemployment (FUTA) tax

Excise tax

If you do any of the following, you may be required to pay excise taxes and submit the documents described in this section.

  1. Produce or market specific goods
  2. Run specific commercial ventures
  3. Utilize a variety of tools, resources, or goods
  4. Obtain compensation for specific services

Examining the tax-friendliness of the states you're thinking about opening or moving your business to, can be useful. The way these taxes are handled varies a little from state to state, and where you live has a big impact on your finances. Although people have long thought about taxes when deciding whether to move or not, the argument has only been hotter in the last year with the advent of remote working and the idea that you aren't always required to work in the same place as your employer.

What Makes a State Tax-Friendly for Businesses?

Some of the best states for business taxes can be determined by comparing different taxes, such as corporate and individual tax rates, sales and excise taxes, property taxes, and unemployment insurance taxes.

21 states adopted state tax adjustments in 2021 that reduced taxes for both people and corporations.

In December 2021, a study on the State Business Tax Climate Index was published by the Tax Foundation, an independent tax research organization with headquarters in Washington, D.C., to assist policymakers and business leaders in comparing their state's tax systems to those of other states, it ranks the best and worst states for business taxes. It also identifies the states with the best-structured tax systems.

The State Business Tax Climate Index for 2020, which ranks state tax regimes, was just released by the Tax Foundation to help small business owners and entrepreneurs make the best choice possible. According to this ranking, the best states for business taxes are Wyoming and South Dakota, while New Jersey and New York are the worst.

The Tax Foundation conducted its index analysis by comparing more than 100 characteristics across five distinct types of taxes, even though rating the states is never easy because each has a unique tax system:

  • Corporate taxes
  • Individual income taxes
  • State taxes
  • Unemployment insurance taxes
  • Property taxes

Top 10 Best States for Business Taxes

   Wyoming

  • Corporate tax rank: 1
  • Individual income tax rank: 1
  • Sales tax rank: 6
  • Property tax rank: 35
  • Unemployment insurance tax rank: 31

South Dakota

  • Corporate tax rank: 1
  • Individual income tax rank: 1
  • Sales tax rank: 34
  • Property tax rank: 18
  • Unemployment insurance tax rank: 38

Alaska

  • Corporate tax rank: 28
  • Individual income tax rank: 1
  • Sales tax rank: 5
  • Property tax rank: 24
  • Unemployment insurance tax rank: 43

Florida

  • Corporate tax rank: 7
  • Individual income tax rank: 1
  • Sales tax rank: 21
  • Property tax rank: 12
  • Unemployment insurance tax rank: 2

Montana

  • Corporate tax rank: 22
  • Individual income tax rank: 24
  • Sales tax rank: 3
  • Property tax rank: 29
  • Unemployment insurance tax rank: 19

New Hampshire

  • Corporate tax rank: 41
  • Individual income tax rank: 9
  • Sales tax rank: 1
  • Property tax rank: 46
  • Unemployment insurance tax rank: 44

Nevada

  • Corporate tax rank: 25
  • Individual income tax rank: 5
  • Sales tax rank: 44
  • Property tax rank: 5
  • Unemployment insurance tax rank: 45

Tennessee

  • Corporate tax rank: 26
  • Individual income tax rank: 6
  • Sales tax rank: 46
  • Property tax rank: 33
  • Unemployment insurance tax rank: 20

Indiana

  • Corporate tax rank: 11
  • Individual income tax rank: 15
  • Sales tax rank: 19
  • Property tax rank: 1
  • Unemployment insurance tax rank: 25

Utah

  • Corporate tax rank: 14
  • Individual income tax rank: 10
  • Sales tax rank: 22
  • Property tax rank: 7
  • Unemployment insurance tax rank: 17

One thing that many of the top 10 states have in common is the lack of a significant tax. Every state imposes property taxes and unemployment insurance taxes, but there are states with no corporate income tax or that have not imposed an individual income tax or sales tax. No corporate or individual income taxes are levied in Nevada, South Dakota, or Wyoming; no state-level sales taxes are levied in Alaska; no individual income taxes are levied in Florida, Tennessee, or South Dakota; and no sales taxes are levied in New Hampshire or Montana.

Top 10 Worst States for Business Taxes

Hawaii

  • Corporate tax rank: 19
  • Individual income tax rank: 46
  • Sales tax rank: 28
  • Property tax rank: 30
  • Unemployment insurance tax rank: 29

Louisiana

  • Corporate tax rank: 34
  • Individual income tax rank: 34
  • Sales tax rank: 48
  • Property tax rank: 23
  • Unemployment insurance tax rank: 5

Vermont

  • Corporate tax rank: 43
  • Individual income tax rank: 40
  • Sales tax rank: 16
  • Property tax rank: 49
  • Unemployment insurance tax rank: 15

Arkansas

  • Corporate tax rank: 30
  • Individual income tax rank: 39
  • Sales tax rank: 45
  • Property tax rank: 27
  • Unemployment insurance tax rank: 33

Minnesota

  • Corporate tax rank: 45
  • Individual income tax rank: 43
  • Sales tax rank: 29
  • Property tax rank: 32
  • Unemployment insurance tax rank: 30

Maryland

  • Corporate tax rank: 33
  • Individual income tax rank: 45
  • Sales tax rank: 26
  • Property tax rank: 43
  • Unemployment insurance tax rank: 46

Connecticut

  • Corporate tax rank: 27
  • Individual income tax rank: 47
  • Sales tax rank: 23
  • Property tax rank: 50
  • Unemployment insurance tax rank: 23

California

  • Corporate tax rank: 46
  • Individual income tax rank: 49
  • Sales tax rank: 47
  • Property tax rank: 14
  • Unemployment insurance tax rank: 23

New York

  • Corporate tax rank: 24
  • Individual income tax rank: 50
  • Sales tax rank: 42
  • Property tax rank: 47
  • Unemployment insurance tax rank: 36

New Jersey

  • Corporate tax rank: 48
  • Individual income tax rank: 48
  • Sales tax rank: 43
  • Property tax rank: 44
  • Unemployment insurance tax rank: 32

Complex, non-neutral taxes with comparably high rates are a common problem among the states that rank in the bottom ten. For instance, New Jersey has some of the nation's highest property tax, the highest corporate income taxes, some of the highest individual income taxes, a particularly harsh approach to treating foreign income, an inheritance tax, and some of the worst structured individual income taxes.

The Best States to Launch a Business, Ranked

Taxes affect a company's profitability, location of a business, and the creation and retention of jobs. If taxes eat a higher portion of profits, the expense is transferred to customers, staff, shareholders, or a mix of these parties. As you might expect, businesses are more drawn to states with lower taxes.

While a company's geographical location may no longer be as important in today's society, starting a small business or startup in the United States is far more beneficial than starting one somewhere else.

The following is a list of some of the top states in each region to launch a business, according to the Small Business Administration and Tax Foundation:

New Hampshire

With its generous government resources and lack of a state sales tax, New Hampshire is quite open to business and entrepreneurs. Additionally, New Hampshire residents earn more per person. That implies that companies might find it simpler to offer their goods and services.

North Carolina

North Carolina is one of the greatest places to start a business since it is home to "The Triangle," a well-known tech powerhouse. North Carolina has a lot to offer prospective business owners looking for a location for their operation because of the state's low corporation tax rates, cheap property taxes, and low cost of living.

Texas

Despite not ranking in the top 10 states for small company taxation, Texas does boast a sizable population of college graduates, no corporate income tax, and an increasing number of IT, energy, and healthcare businesses that apply for business licenses annually.

Utah

Utah boasts the lowest corporation taxes in the US and the greatest approval rate for small business loans, which will appeal to small business owners. Utah's workforce is significantly college-educated, much like North Carolina's.

Montana

Once associated with mountains, ranches, and wide-open plains, Montana today conjures up images of small enterprises as well. With the fourth-highest number of business owners in the nation, Montana appears to understand the importance that businesses add to the state. The state's high proportion of college graduates in the labor market and lack of a sales tax are further benefits for any enterprise owner.

The amount of state and local taxes you pay annually can have a significant impact on the financial health of your company. They affect the expansion of employment and the local economy in the area where your company is situated. As a result, it's critical to understand the taxes that you, as a business owner, must pay.

Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any information contained in this blog is not intended or written to be used, and cannot be used, for the purpose of avoiding tax-related penalties under federal, state or local tax law. 

Category: Management Advice