Small businesses are finding it easier to establish nexus across states, which is exposing them to tax liability.
Create Your Own Business
Send your email to receive a glimpse at Chapter 3. “Good Idea!” What is the best way to know if I have a great idea for my business?
Read for 4 minutes
Opinions expressed by Entrepreneur contributors are their own.
Most small businesses do not file taxes in other states. Because they’re often local, and have no physical connections or locations in other states, the majority of small businesses don’t file taxes outside their home state. Small businesses can access employees in any state, as well as around the world in today’s interconnected virtual world. Although hiring a contractor from a foreign country may have some implications, it will not affect your U.S. tax returns.
It can prove difficult to hire an employee in another state or contractor. This is because it creates a nexus between the states. Small-business owners may not be aware that in addition to creating a sales tax nexus, having an employee or contractor from another state could also create income tax nexus. You will need to not only collect the sales tax but also pay and file income taxes.
Multistate tax planning can be used for companies with large tax bases that are C-corporations. Multistate taxation is not likely to be beneficial for businesses that have flowed through taxation. However, it’s something you should address. These are some tips for business owners to help manage tax compliance in different states.
Register for your state
You must register your business in the state where you reside. You have to register your business in the state where you reside unless you are actively involved in it. Small businesses will find that registering in another state results in higher state registration fees, no tax savings and potentially higher taxes. Only very specific situations will allow you to register in another state. This should be discussed with your CPA.
Be on the lookout for additional taxes
Small businesses operating in more than one state can be subject to double taxation due to the additional tax burden. Some states do not offer credit for taxes that are paid in another state. You can pay the same tax in different states for the same income. It is possible to be subject to income tax in some states, such as Texas and Florida.
Reduce filing fees
Owners of small businesses don’t often have the same tax preparation budget as large corporations. Multistate tax filings are expensive. You might discover that your state is the one you must file. This means you won’t be able to have any taxable income. You must decide whether you’ll file. You might not be able to follow all the state laws.
If in doubt, you can collect sales taxes
Sales taxes should be collected if you have any kind of nexus. Sales taxes won’t usually have an impact on your sales. It is impossible to ask your clients to pay sales taxes for purchases made in the past. If you do not collect sales tax, the government will presume that they are included in your purchase price. This can make the difference between earning money and losing it, if you are able to sell a little.
Do not believe all the gossip
There are many stories and opinions about whether to establish your business in a state X or Y. Some Californians mistakenly think that Wyoming LLCs will help them save money on taxes. This strategy, unless you are operating the business in Wyoming yourself, will not save you any money on tax. California residents will be subject to tax regardless of where their company is located.
Are there situations where multistate tax planning can be beneficial to companies? Yes, provided your business is classified as a corporation and has offices or employees in different states. Multistate taxation will have a negative impact on small business owners who benefit from flow-through taxation. This could lead to higher administration costs as well as potentially greater taxes. To ensure compliance, pay attention to any possible nexus.
Related: Income Tax Basics for Your Startup
Publited Fri, 13 August 2021 at 15:44.32 +0000