Which taxes are you liable for?
Corporation Tax
Corporation Tax is collected at Federal, State and sometimes District level.
It is applied at graduate rates to the net profits (not until you’re profitable). In 2018 the Federal level of the US corporation tax rate is a flat 21% due to the passage of the “Tax Cuts and Jobs Act” on December 20, 2017. Additional State tax varies from 0-12%.
Social Security & Medicare
These two separate taxes are often referred to as payroll taxes and are typically deducted from payroll on an ongoing basis. They are processed by a PEO or payroll provider. Social security is currently charged as 12.4% on an employee’s salary up to a maximum cap of $128k1.
Medicare contributions account for an additional 1.45%2 tax on an employee’s salary.
Unemployment Tax
An employer must contribute at State and Federal level for Unemployment Tax. In 2017 this was charged at 6% of an employee’s salary, but with 5.4% of this refundable if an employer paid unemployment tax at a State level.3
The maximum amount is capped at $450 per employee.4
Sales Tax
Sales Tax is a pass-through tax similar to VAT in the UK that a merchant must collect from customers.
Sales Tax is payable in all but 5 States and varies from 0% to 15%.5
Most businesses offering ‘services’ do not pay sales tax but where tangible goods or software are involved you should definitely factor the sales tax into your pricing.
You should check whether you are liable for Sales Tax in each State.
Sales Tax on e-commerce
As of June 2018, the US Supreme Court decided that States can require e-commerce companies to collect sales tax, overturning a 1992 decision in Quill Corporation vs. North Dakota which did not let States ask companies without a physical location in the State to collect sales tax.
Franchise Tax
Franchise Tax is paid to the State and reflects the privilege to operate in a given geography.
In addition, your State of incorporation will typically expect franchise tax.
Franchise Tax varies significantly between States – e.g. in Delaware it is linked to the total number of authorized shares up to a cap of $180k, whereas in Alabama it is a graduated tax of 0.175% on income over $2.5m up to a cap of $15k.
Property Tax
A State level tax is paid on all tangible property and some States also include a tax on intangible property.
This tax has increasingly shifted from being a State level tax to a district or city level tax.
Specialists in the Field
Given the specialist and technical nature of these topics, speaking to accountants and advisors such as those below is strongly advised:
Eric Collins – Frank Hirth
Bradley Smallberg – Schissel Smallberg
Don Dismuke – Dixon Hughes Goodman
Michael Hamilton – KPMG
Alexander Wang – Marks, Paneth & Schron
Matthew Foreman – Foreman Tax Law
More Resources
Understanding US Corporate and Federal Tax
Understanding US Sales, Franchise and Property Tax
Sales Tax Agencies in each US State
“ Make sure the company has the right advice and the team has support on state tax; for example, each state has a different set of interpretations on whether SaaS companies need to pay state tax” – Tim Brown, Maxymizer
1 https://www.ssa.gov/news/press/factsheets/HowAreSocialSecurity.htm
2 https://www.ssa.gov/policy/docs/quickfacts/prog_highlights/RatesLimits2018.html
3 https://taxmap.irs.gov/taxmap/pubs/p15-013.htm
4 https://www.nolo.com/legal-encyclopedia/collecting-unemployment-benefits-california-32504-2.html
5 https://wallethub.com/edu/best-worst-states-to-be-a-taxpayer/2416/
