Understanding your company’s tax obligations in the United States is crucial for any entrepreneur. This way, legal problems can be avoided. Below, you will learn about the main taxes for companies in the United States.
Those who already do business in Latin America know that it is mandatory by law to have the support of an accountant. However, in the United States, having an accountant is not mandatory. The entrepreneur will be the one to decide whether it is better to hire the services of an accountant or to manage this on his own.
However, it doesn’t matter which option you choose. The important thing in this case is that you know in detail what the main taxes are for companies in the United States. This way, you will be able to keep the tax aspect of your company up to date, avoiding tax problems.
How do taxes work for companies in the United States?
Although the U.S. tax system is complex and has more than 97 tax brackets, you don’t need to know them all.
For non-residents of the United States who own businesses in the country, it is important to know the 5 most important taxes:
- Federal Income Tax
- State Income Tax
- Sales Tax
- Tax Withholding
- Annual Report or Franchise Tax
It is also important to keep in mind that taxes may vary depending on the corporate structure of your company (LLC or Corporation). The industry in which your company operates or the state in which it is registered will also be elements that you will have to take into account. This is why you should always look for what suits the characteristics of your company.
Below, we present in detail the 5 most relevant taxes for entrepreneurs operating on US soil.
Taxes for companies in the United States: Federal Income Tax
Federal Income Tax is the federal income tax levied in the United States. This tax must be paid to the IRS (Internal Revenue Service) based on your company’s profits.
Since 2018, the profits of C CORP companies must be taxed at 21% and not in stages, as before.
When there is a distribution of profits to shareholders, the amounts that they will receive must also be declared. After receiving the dividends, non-residents will pay 30% of said income as natural persons.
In the case of LLCs, however, the tax rules applied are different.
Do LLCs have to pay Federal Income Tax?
If your company is an LLC, you will not have to pay this tax at the corporate level. The declaration in question will be filed by the partners – as a natural person and not as a corporation – after having distributed the company’s profits among themselves.
In this category of company, it is mandatory that the profits are distributed entirely among the partners, who will pay taxes between 10% and 37% depending on their share of the company’s profits. The taxes are shown in more detail at this link.
State Income Tax
The State Income Tax is the state income tax and can vary depending on the state in which your company is registered. Therefore, when opening your company on American soil, it is crucial that you analyze the conditions of each state to have a better insight on which is your best option; this must be able to adapt to the needs of your business.
In Florida, for example, individuals do not pay this tax. Corporations, on the other hand, must pay 4.458% annually, with an exemption on the first US$50,000 of income.
In California, a natural person pays between 1% and 12.3% in taxes, while a corporation pays between 4% and 9%. In Delaware, non-resident entrepreneurs are not required to pay State Income Tax; the same applies if the company does not have a physical presence in the state.
Sales Tax
Sales tax is also a tax that varies according to state laws. It is the tax that the consumer pays when purchasing consumer goods, and the type of product to which it is applied varies according to local legislation. For example, in several states, groceries and prescriptions are exempt, but it is possible to find other regions that do not require the collection of these taxes on clothing items.
Although it does not represent a cost for the company, it is the seller’s obligation to collect the Sales Tax and declare it to the state.
In practice, the Sales Tax works like this: for a US$100 item in a state that charges 7% Sales Tax, the seller must charge US$107 when selling the product. This is because it is the seller’s responsibility to include the value of the tax, in this case, US$7, in the final price of the product.
There are some factors that determine the collection of the tax; learn about them below.
3 factors that determine the collection of Sales Tax in the United States
State in which you registered your company
If your business is registered in Florida, for example, Sales Tax must be collected from all customers with addresses in the state. Delaware, on the other hand, does not have a Sales Tax, as do Alaska, New Hampshire, Montana and Oregon.
Physical presence in the state where you registered your company
For example, if the company has a warehouse in California but is registered in Florida, it must collect Sales Tax on sales to customers located in California.
Economic activity
After July 2018, states instituted economic nexus. Once you have a certain volume of transactions in a state within a 12-month period, you must collect sales tax there as well.
There is also recent legislation for the collection of Sales Tax for software or streaming subscription services.
Taxes for companies in the United States: Tax Withholding and Estimated Tax Payment
First of all, it is important to understand that this is not an additional tax but rather the collection of income tax that is done in advance throughout the year. Although the income tax declaration is annual, the Tax Withholding payment must be made every three months.
This tax works as a guarantee that at the end of a fiscal year you will file your tax return and pay the amount owed, obtaining a refund for what you have overpaid.
This withholding may vary between 10% and 37% of the profits for the period, depending on the corporate structure of your company and the tax situation of each partner.
Taxes for companies in the United States: Annual Report or Franchise Tax
Among the taxes for companies in the United States, the Annual Report or Franchise Tax is one of the most confusing. These are the names given to the annual declaration that every American company must file. The name (Annual Report or Franchise Tax) and the amount vary depending on the state and the corporate structure (LLC or Corporation).
In most cases, this tax is paid during the so-called Tax Season, when companies file their tax returns with the IRS (Internal Revenue Service), a period that usually occurs between the first half of January and the second half of April.
Some states, such as Wyoming, charge a state renewal fee on the anniversary of your business’s registration. In this case, if the business was opened in May, for example, your renewal must be done again in the same month of the following year.
It is very important that you are aware of which taxes your company must pay and their respective dates. One way to do this is to have tools that alert you of your company’s obligations. Globalf clients have access to the Compliance Calendar, a personalized and exclusive notification system where it is possible to follow the correct tax payment dates through it.
