You know how to pay your business’s income tax, but do you know about state franchise tax? Some states require most businesses to pay state franchise taxes, while some only impose them on corporations. It can get a little confusing, which is why we’ve broken it down for you.
What is a State Franchise Tax?
A state franchise tax is a state government tax on business income. Some states tax most of their businesses, and some states only tax corporations. It’s commonly known as a “privilege” tax, as it is a privilege to do business in that certain state. It gets a little confusing, as state and federal taxes are paid in addition to franchise taxes. The franchise taxes are paid annually. Franchise taxes must be paid to prevent the business from being disqualified to sell in that state.
Why It’s Different Than Income Tax?
While all businesses pay income tax, not every business pays a franchise tax. Income taxes are based on business profits, while franchise taxes are usually a flat fee, depending on the state and industry. Some companies may pay both income and franchise taxes.
How to File?
1. Determine if Your Business Must Pay Franchise Taxes
Most businesses are subject to pay the franchise tax, and one thing to consider is that if your business operates in different states, you may have to pay franchise taxes in each state it’s registered in. But some businesses are not subject to franchise taxes. Some examples are sole proprietorships, estates of natural persons, and escrows. If you still aren’t sure, contact your state’s Department of Revenue.
2. File an Application
You can file an application with your state Department of Revenue for your industry.
3. Wait for Your State to Contact You
Your state will contact you with further steps for paying franchise taxes. Verify other state taxes with your Department of Revenue. Or else, you can file and pay for your franchise taxes [online] (https://papergov.com/services/pay-franchise-taxes)
Delaware has many business-friendly laws, which is why about half of the S&P 500 companies are incorporated there. Companies registered in Delaware have the luxury of conducting business in any state. They have flexible finance business laws that allow businesses to charge high-interest rates, and they are currently the leading domicile for public companies. They are also well-known for having an annual flat fee as the franchise tax for limited partnerships.
Remember that state tax laws are subject to change at any time, so check with your Department of Revenue to get the most up-to-date information for your state!