State and local tax basics for small businesses

The part people miss

Federal taxes get the headlines, so owners set up for the IRS and forget that states and cities tax business too. Then a sales tax letter arrives, or a city license fee, and it feels like a surprise. It is not a surprise. It is just the layer below the federal one, and it varies by where you work.

Why it varies

The United States has no single state tax system. Each state sets its own income, sales, and franchise rules, and cities add licenses and sometimes their own taxes. Two businesses a county apart can owe different things. That is why a fixed national list is never your answer. The official source for your location is.

The taxes to look for

1. 1

   State income or franchise tax

   Most states tax business income. A few have no income tax but charge a franchise or privilege tax to exist there. Even pass through businesses can owe state tax at the owner level.

2. 2

   Sales tax on what you sell

   If you sell physical goods, you likely collect sales tax and send it to the state. Some states also tax certain services. The rule and the rate are set per state, and many now require registration before your first sale.

3. 3

   Local licenses and permits

   Cities often require a business license to operate, plus permits for specific work. The fee is usually small but the deadline matters. Check city hall, not just the state.

4. 4

   Local business or gross receipts tax

   Some cities charge a tax on revenue (gross receipts) rather than profit. It applies even in a losing month, so know if your city is one of them before you celebrate a busy quarter.

5. 5

   Payroll and withholding

   If you have employees, you withhold state income tax and pay state unemployment tax. Rates and forms differ by state, so the state labor and revenue sites are the place to confirm.

Tools that help

• Your state revenue department

  The official source for rates, registration, and filing dates where you operate.

• Your city business license office

  Local licenses and permits, often missed, often cheap, often dated.

Summary

• •State and local tax sits below federal. It varies by where you work.
• •Look for state income or franchise tax, sales tax, local licenses, and maybe a city gross receipts tax.
• •Sales tax usually applies to goods, sometimes to services, set per state.
• •A gross receipts tax hits revenue, not profit, so know if your city uses it.
• •Confirm every rate with your state and city. A general list is a start, not your answer.

Frequently asked questions