Depending on where you live and do business, these may be very simple or very complicated.
Federal taxes are, despite the IRS’s best efforts, intricate stuff. But state taxes have reached an entirely new level. There are different rules everywhere you go, and if you’re doing business across multiple states, things get very intricate, very quickly.
How do you know when and where to file a state tax return? Depending on where your business has assets, payroll, and revenue, you may have to file in more states than you think.
The basics
- You must file a state income tax return in the state in which your business is physically located
- Any states in which you earn income, you might be required to file an income tax return. This can be tricky because every state dictates what earning income that state means (and it might be completely different than what you think!)
- Our opinion: any state in which you are registered to do business or file anything with the state government (think payroll tax returns, sales tax returns and so on), you should file just to be safe
- You might have income in certain states that you don’t realize belongs there
- These rules apply to businesses, it may or may not work differently for individuals depending on a multitude of fun and complicated parameters
Wait, states have their own taxes?
When we think taxes, we think IRS. But that’s only part of the equation. In addition to the federal taxes we all know and love, each individual state and many local municipalities can levy taxes of their own (known as State and Local Taxes or SALT).
41 states have their own income tax, and specific localities can also collect smaller income taxes (i.e. multiple cities in Pennsylvania, St. Louis, Washington D.C., New York City, etc). States and individual localities both also have the power to collect sales taxes.
Types of state tax filings
Just because you are (or are not) filing an income tax return in a particular state doesn’t mean you are exempt from filing other forms of tax returns in that state. You may have to file returns for several different types of tax in one state, which could include any of the following.
- Sales tax: A sales tax is exactly what it sounds like – a tax levied upon the sale of a good or service. It’s typically collected by the seller from the consumer at the time of purchase.
- Franchise tax: Some states require businesses to pay a tax for the right to operate within their state.
- Payroll tax: Typically collected to fund things like social security, these taxes are paid by employers or employees as a percentage of wages.
- Property tax: Often a key source of revenue for local governments, property taxes are levied based on the value of property owned. This is typically real estate but can sometimes include things like equipment or intangible property.
With the way business is currently done, a qualified CPA with an understanding of multi-state tax complexities is becoming a necessity.
Do I need to file state taxes separately?
Yes, you sure do! Unfortunately, the IRS does not handle state taxes, and you have to file those separately from your federal tax returns.
It is also very possible, depending on what you’ve been up to that year, that you will have to file a tax return in multiple states, file multiple tax returns in one state, or both.
This is very simple, and nobody has ever been confused by this.
| 👩🏫Note: In New Hampshire, individuals owe income taxes on dividends and interest but not on any other forms of income. In New York, if a sale is closed in the state or by a New York salesperson, you’ll owe taxes in New York as well as wherever the income was earned (as defined by the applicable state or states). That’s how complicated and specific this can get. Feel like giving us a call yet? |
When does my business need to file state income taxes?
Income tax is the big fish out of all the possible state taxes you might owe. States want to know when your business has activity within its borders.
If your business is registered in a state, you should definitely file an income tax return there. But the rules can be a little hard to follow past that point.
For a quick and easy way to determine whether your business may need to file an income tax return in a particular state, it’s helpful to look at revenue, payroll, and assets.
Revenue
Easy, right? If your business is making money in a state, that’s revenue. The most obvious examples here would be the sale of goods or services within the state, but it’s not just sales you should be thinking about. Revenue can also include rental income or interest from lending. Shipping goods to someone in the state could also count, even if the billing address is elsewhere.
Payroll
Is your business paying employees in that state? Although the money comes from the employee’s paycheck, the business handles payroll taxes. If you’re filing payroll taxes in a state, there’s a good chance you’ll be required to file an income tax return as well. We’re just talking about pay to employees – payments to independent contractors are a business expense, not payroll – but business expenses
Assets
Does your business own or rent property in that state? This could be real estate or an office, but it could also include inventory and other fixed assets. It gets tricky, too: what if you have inventory sitting in a third-party warehouse? Yes, that counts. If it’s your stuff, you have assets in that state.
You should file just to be safe
Not every state requires you to file for everything. But we recommend filing a state tax return anywhere that your business has assets, payroll, or revenue, even if it’s not legally required. In fact, if you’re filing paperwork or are otherwise in contact with the state, for any reason, you should go ahead and file an income tax return there.
You might be wondering why you’d want to spend the time and energy on filing an income tax return when you don’t have to, but it could turn out to be the easy option in the long run.
If a state knows you are there – because you file payroll tax returns, because you rent a building there, because your named showed up on a check, etc – they might question why you’re not filing an income tax return. States can audit you basically whenever they want, and you shouldn’t ignore any requests for information.
That’s why it’s better to file an income tax return saying “Hey, we have no income in your state, and here’s the paperwork.” They’ll appreciate the check-in and that paper trail could be key to avoiding a costly and time-consuming audit.
State taxes for individuals
Filing state taxes on an individual basis works mostly like state business taxes … except when it doesn’t.
Due to the way most businesses are structured (we recommend an LLC taxed as a partnership or S corp to just about everybody, which means your business income will likely be very relevant to your individual tax return) you may need to file individual tax returns in whatever states in which your business is required to file.
Sometimes, the business can elect to pay the tax on behalf of the individual owner, but this varies from state to state and often changes from year to year. We recommend utilizing a tax professional to cut through the confusion (we’ve heard DiMercurio Advisors does good work).
Bottom line
State taxes are completely separate from federal taxes. And whether we’re talking sales, employees, or physical premises, if you’re doing business in a particular state there’s a very good chance you need to file taxes there. The rules vary wildly from state to state, and often from city to city as well, so make sure you’re up to date on the requirements and avoid any trouble.
Basically, state taxes are complicated. And we can help! Schedule a call with DiMercurio Advisors and we can take care of the frustrating parts for you.
