What Is the State’s Tax Rate?
The massive increase in remote work has opened up tremendous tax saving potential for business owners. Moving from high to low tax states could be saving you thousands every year. This map crunches all the taxes your business is exposed to across all 50 U.S. states to reveal your potential savings. By including all taxes, not just income tax, we find your real effective state tax rate.
Effective state tax rate equals all taxes incurred as a result of your business activity divided by your business income.
In this article you’ll learn how we calculate state taxes and how much they can impact your overall tax rate. You’ll also learn how other costs, besides income taxes, can sometimes have large differences across states. Some states also impose expensive business privilege taxes that can drive up the effective tax rate of some businesses. This calculator runs all these major taxes for you and soon you’ll be able to use it to fully explore huge savings.
Calculating State Tax Rates
There’s 3 major groups of taxes we consider to calculate your total tax: income, unemployment, and business privilege. We run your business income, along with other business factors, through each group of taxes. Let’s discuss what factors impact each of these groups.
Most small businesses are pass-through entities and will frequently encounter income tax as their largest state level tax. It’s important to know the states that do not levy an income tax.
Pass-Through Entity: businesses where profits flow through to owners or members and are taxed under the individual income tax. This includes sole proprietorships, partnerships, limited liability companies, and S-corporations.
We automatically apply deductions and exemptions to your state taxes based on your filing status. These usually have the effect of slightly reducing your state income tax, however not all states have them. Because income taxes are often the largest state level tax, states without any are often your best choice for tax purposes (note: income taxes are highly circumstantial, so please speak to a CPA about your unique situation for an accurate amount).
Business owners will encounter Unemployment (SUTA), as well as similar taxes such as Family Leave, whenever they pay themselves a W-2 salary, as if they were an employee. This is usually done as part of a tax strategy to reduce federal taxes. Some states have higher unemployment taxes than others and you will have to pay these taxes to the state you or your employee works from.
You can reduce unemployment taxes by moving your business and/or employees to a state with lower SUTA rates. These are generally states that have a lower unemployment tax rate, but not always. For example, a single S-Corp owner, earning a reasonable salary of $40,000 moving from Minnesota to Arizona could save up to $1,169. An extreme example, but tremendous savings are possible.
Some major states of concern for this tax group are: Oregon, New York, Hawaii, and Minnesota.
Business Privilege Taxes
Some states levy a tax for the privilege of doing business there. While states have different names for this tax(es), often it depends on factors such as: business entity, revenue, and/or net worth of the company. While most sole proprietors and partnerships will not normally worry about this tax group, some businesses can be hit hard.
For LLC’s taxed as S Corps certain states like Alabama and Louisiana are essentially a deal-breaker. To check and see if your state is S Corp friendly, make sure your business is an LLC then open the advanced section and change your tax classification to “S Corp”. We’ll run your taxable income though each state’s business taxes, which gets factored into your total tax and effective tax rate. Just be sure to provide your revenue and net worth as well!
Some major states of concern for this tax group are: Nebraska, New Hampshire, Arkansas, Tennessee, Louisiana, and Hawaii.
No Income Tax States
There are 7 states that have no personal income tax. These are usually going to be your best bet when finding a lower tax zone for your, pass-through, business income. These states are:
- South Dakota
Two other states worth mentioning are New Hampshire and Tennessee, which don’t tax income. There's an important caveat here especially for business owners. These states do have a tax on investment income and interest, however they may eliminate these taxes soon. Unfortunately, both these states impose heavy business taxes on the S Corp, making them mixed bags from a tax perspective.
Most Progressive Income Tax States
While income taxes are circumstantial, certain states consistently impose higher tax burdens on business owners. These are the 2019 states with the highest income tax brackets for single filers:
|State||Maximum Tax Bracket|
Other Taxes to Consider
We’ve included all taxes that apply directly to your business income, however there’s some other important taxes to consider:
Sales taxes exist in every state and vary dramatically. In 2020 Sales taxes range from Alaska’s low 1.76% rate to Tennessee's high 9.53% (these include state + local). To calculate these taxes you’ll have to know where exactly in a state you’ll live and what you’ll be purchasing. Obviously this is no easy task, so we have not included this information in the map.
Property taxes are a major factor for real estate owners. These taxes vary extensively down to the county level of each state. If your business is involved in real estate understanding these taxes is very important. Please see this interactive map for 2019 property tax data. These taxes are not included in the above tax map.
When considering moving your business for tax purposes these taxes should be part of your due diligence. Please discuss these important taxes with your CPA or financial professional before making any decision.
Owing Tax to Multiple States
Owe taxes in multiple states can happen when you move or operate your business in a new state. If you have employees or pay yourself as an employee you may also have to withhold taxes for multiple states. For most small business owners you’ll likely just pay each state’s income tax.
These situations quickly get complicated, so diligently document how long and how much you earned in each state. This information can be used by tax professionals to keep you compliant and claim tax savings as well. The above tax map can be used for multi-state tax payers, however be sure to account for business privilege taxes that apply to the state you incorporated.
This tax map will give you a high level overview of what states can save you taxes. As the U.S. continues it’s migration to remote work, business owners stand to reap tremendous savings. While taxes should not be your only concern when choosing your home state, it certainly cannot be left out of the picture.
Once you have some states in mind it’s time to create your full tax profile. You can use our Small Business and LLC Tax Calculator to see federal taxes and savings. Again please speak with a CPA before making any decisions regarding your taxes, this free service should not be considered financial or tax advice. You can put out a request to the Before Tax CPA network to find a qualified small business accountant for help.