How to calculate state taxes for a small business?

Running a small business comes with many moving parts, and one of the trickiest is figuring out what you owe in state taxes. Unlike federal taxes, which apply nationwide, every state sets its own rules. The good news is that once you know your business structure and the types of state taxes that apply, the math becomes much easier.

Know Your Business Structure

Your entity type changes how state taxes are calculated:

• Sole Proprietor / Single-Member LLC
  Profits “pass through” to your personal return. You’ll pay state income tax at individual rates.
• Partnership / Multi-Member LLC
  Profits pass through to the partners, who each pay state income tax.
• S Corporation
  Income passes through to shareholders, but some states also charge a separate filing fee or franchise tax.
• C Corporation
  The corporation pays state corporate income tax directly, based on net profits.

👉 Example: If your LLC earned $80,000 in profit, and your state has a flat 5% income tax, you’d owe $4,000 in state income tax on your personal return.

Identify the Types of State Taxes You May Owe

Most small businesses face a mix of these:

1. State Income Tax
   • Flat or progressive rate depending on the state.
   • Some states (like Texas, Florida, Wyoming) have no income tax.
2. Sales and Use Tax
   • Collected from customers on taxable goods or services.
   • Must be remitted to the state—this is not business income.
3. Payroll Taxes
   • If you have employees, you’ll withhold state income tax (where applicable).
   • Employers also pay State Unemployment Tax (SUTA), and some states require disability insurance contributions.
4. Franchise or Excise Taxes
   • Charged in some states for the privilege of doing business, even if you don’t turn a profit.

Calculate Your State Taxable Income

The basic flow looks like this:

Gross Revenue – Deductible Business Expenses = Net Income
Net Income × State Tax Rate = State Tax Liability

Example:

• Gross revenue: $120,000
• Expenses: $40,000
• Net income: $80,000
• State rate: 5%
• State tax liability = $4,000

Apply State-Specific Rates

• Flat Tax States (e.g., Arizona 2.5%) → Multiply income by the flat rate.
• Bracketed States (e.g., California up to 13.3%) → Apply rates progressively to portions of income.
• No Income Tax States (e.g., Texas) → You may still pay franchise tax or gross receipts tax.

Don’t Forget Sales and Payroll Obligations

• Sales Tax Example: You sell a product for $100 in a state with 6% sales tax. The customer pays $106, and you remit $6 to the state.
• Payroll Example: If you pay an employee $50,000 in New York, you’ll withhold state income tax, plus contribute to SUTA and disability insurance.

Example Scenario: Comparing Two States

Business Income	State	Tax Type	Estimated Liability
$100,000 LLC	Arizona	Flat 2.5% income tax	$2,500
$100,000 LLC	California	Bracketed up to 9.3%	~$6,500
$100,000 LLC	Texas	No income tax, but franchise tax	~$800

Compliance and Filing

• Income Taxes: Often due annually, usually aligned with federal filing.
• Sales Tax: Paid monthly, quarterly, or annually depending on revenue.
• Payroll Taxes: Filed quarterly with state agencies.

Missing deadlines can trigger penalties, so check your state’s schedule.

Frequently Asked Questions

1. How do I know which state taxes apply to my business?
Check your entity type, where your business operates, and whether you sell taxable goods or services.

2. Do LLCs pay state income tax?
LLCs are usually pass-throughs, so members pay on their personal returns. Some states charge annual franchise fees.

3. How often do I need to pay sales tax?
It depends on your state and revenue volume—usually monthly or quarterly.

4. What payroll taxes do I owe as an employer?
At minimum: state income tax withholding, unemployment insurance, and possibly disability contributions.

5. What states don’t have income tax?
As of now, Texas, Florida, Nevada, Washington, Wyoming, South Dakota, Alaska, and Tennessee.