Expanding abroad

Which taxes are you liable for?

As soon as you land in the US you will be subject to taxation, and tax-related questions will increasingly become a consideration in many of your commercial decisions.
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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

Products subject to Sales Tax

Corporation Tax by State

Payroll Tax by 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

 


https://www.ssa.gov/news/press/factsheets/HowAreSocialSecurity.htm

https://www.ssa.gov/policy/docs/quickfacts/prog_highlights/RatesLimits2018.html

https://taxmap.irs.gov/taxmap/pubs/p15-013.htm

https://www.nolo.com/legal-encyclopedia/collecting-unemployment-benefits-california-32504-2.html

https://wallethub.com/edu/best-worst-states-to-be-a-taxpayer/2416/

 

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