If you’ve ever tried to wrap your head around your state tax obligations and ended up more confused than when you started, you’re not alone. State taxes often feel like a maze of rules, exceptions, and surprise requirements. But you don’t need to be a tax expert to stay compliant.
Understanding the basics, such as what triggers tax obligations in different states, what types of taxes might apply, and how to build a system to manage it, can save you from costly surprises. By the end of this article, you’ll know how to identify where your business might have responsibilities and what steps to take next with confidence.
What is nexus?
Let’s start with the concept that affects everything else: nexus.
Nexus means your business has a legal connection to a state that creates tax responsibilities.
There are two main ways that can happen:
- Physical presence nexus: This includes having an office, employee, warehouse, inventory, or equipment in the state, even temporarily
- Economic nexus: You don’t need to set foot in a state to owe taxes there. If your sales to customers in a state exceed a certain threshold, such as $100,000 in revenue or 200 transactions, that’s often enough to create a tax obligation.
A 2018 Supreme Court case, South Dakota v. Wayfair, gave states the authority to enforce economic nexus. As a result, even online businesses may owe taxes in places where they have no physical footprint.
Does my business structure affect state taxes?
Yes, the type of business you operate has a direct impact on how and where you pay state taxes.
Here’s how the most common structures compare:
- LLCs: These are flexible. Your tax obligations depend on how your LLC is classified: sole proprietorship, partnership, or corporation. That classification affects both what you pay and where you file.
- Sole proprietorships and partnerships: Business income passes through to the owners, who pay state income tax where the business operates and where they live. If those are two different states, you may owe taxes in both.
- S-Corporations: Like partnerships, S-Corps pass income through to their shareholders. That means the individual owners pay state taxes personally in the states where the income is sourced.
- C-Corporations: C-Corps pay state corporate income tax in every state where they have nexus. The business is taxed at the entity level, not through the owners.
What state taxes could my business owe?
Once your business has nexus in a state, several types of taxes might apply.
Here are the most common:
- Income tax: Most states tax business profits. This could happen at the business level or pass through to the owner, depending on your structure.
- Sales and use tax: If you sell goods or certain services, you may need to collect sales tax in states where you have nexus. Use tax may apply if you buy items out of state and use them in a state that collects tax.
- Franchise tax: Some states charge a flat fee or percentage just for the right to do business there. This applies even if your business doesn’t make a profit.
- Employment taxes: If you have employees working in a state, you’ll need to register for payroll withholding and pay state unemployment taxes
State rules vary, so it’s worth creating a simple chart, or working with your accountant, to track which taxes apply in which states.
What if I sell across state lines?
Selling products or services outside your home state can create tax obligations in other states, even if you never step foot there.
This usually depends on something called economic nexus. Most states set a threshold that triggers tax responsibilities. Common thresholds include $100,000 in sales or 200 separate transactions within a state during a calendar year. If your business meets or exceeds that, you may be required to register and collect sales tax there.
If you sell through marketplace platforms like Amazon, Etsy, or Shopify, those companies may collect sales tax on your behalf in some states. But that doesn’t always cover every obligation. You might still need to register or file returns separately depending on the platform and the state.
It’s smart to prioritize reviewing the rules in states where you make the most sales. These are the most likely to require action on your part.
What if my employees work in multiple states?
Having employees in different states adds another layer of complexity to your tax obligations.
Even one remote employee working from another state can create nexus. Once that happens, you are typically required to register with that state’s tax agency and withhold state income tax from the employee’s wages. You may also owe state unemployment tax in that state.
One common oversight is forgetting about employees who travel or temporarily relocate. In many cases, states still expect you to comply with tax rules regardless of how long the employee is there.
To stay compliant, keep clear records of where your team members are working and update your payroll systems accordingly. What starts as a short-term arrangement can quickly turn into a long-term filing requirement if you don’t stay ahead of it.
How do I stay on top of state taxes?
Keeping up with state tax obligations doesn’t require mastering every rule in every jurisdiction. What matters most is having a consistent, repeatable process. Here’s how to build one:
- Make a list of every state where you operate
This includes any state where you have an office, warehouse, remote employee, contractor, or even consistent customer base. - Check the tax requirements in each state
Look for nexus thresholds, filing requirements, and types of taxes that apply. State websites or a tax advisor can help you confirm the details. - Track business activity by state
Use a spreadsheet, accounting software, or internal system to log where your employees are located, how much revenue you’re generating in each state, and whether you’ve crossed any economic nexus thresholds. - Review this information regularly
Plan a quarterly review to catch changes early. For growing businesses, a monthly check-in may be more appropriate. - Work with a professional when needed
If you’re entering a new state, scaling quickly, or simply unsure about your obligations, loop in an accountant or tax advisor. It’s easier to stay compliant than to fix mistakes later.
This isn’t about perfection. It’s about creating visibility so you can take action before a small issue becomes a bigger problem.
The Bottom Line
State tax rules can be complex, but getting a handle on the basics gives you control. You don’t need to know every detail about every state. What matters is having a simple, repeatable process to stay organized, monitor changes, and act early when something shifts.
Make it a habit to revisit your tax footprint, especially if you expand into new states, hire remote workers, or change your business structure. Small shifts in how you operate can lead to big changes in your tax responsibilities.
If you’re not sure where your business has obligations, or how to manage them, schedule a free call with our team. We’ll help you get clarity and create a plan that keeps you compliant without the stress.
