The United States corporate tax regime is very different from that of the UK and European Union. Legal and tax systems also vary from state to state. When opening a subsidiary of your company in the United States there will be a myriad of federal, state, and local tax laws your US corporation will need to comply with and pay, all on varying schedules.
Below are further details of the eight taxes US corporations typically must manage and pay.
1. Federal Corporate Income Tax
The United States Federal Government taxes the profits of US corporations. Profits, or earnings, are generally defined as revenue less costs of goods sold (COGS), general and administrative expenses (G&A), sales and marketing expenses, research and development expenses, other operating expenses, and depreciation. The Federal tax rate on corporate profits in the United States is 21%. This tax is paid annually. Given the complexities and regular changes to the tax code in the US, most US corporations hire a Certified Public Accounting (CPA) firm to calculate and file their federal taxes each year.
2. State Corporate Income Tax
44 states in the US tax the profits of corporations domiciled in their state. State corporate income tax rates vary in range from a low of 2.5% in North Carolina to a high of 11% in New Jersey. This tax is paid annually. Since the process and calculations are very similar to Federal Corporate Income Tax, most US corporations also use a CPA firm to calculate and file their state income taxes.
3. Federal Insurance Contribution Act (FICA) Tax
The Federal Insurance Contributions Act Tax is a Federal payroll based tax used to fund the Social Security and Medicare social benefit programs. Both the corporation and the employee pay FICA taxes equally. The corporation is required to deduct the employees portion of FICA taxes from their wages each pay period. The corporation is responsible for reporting and paying the FICA taxes to the Federal Government for both the corporation and the employee. The Social Security tax is 6.2% of payroll wages (up to $147K in earnings per individual). The Medicare tax is 1.45% of payroll wages. This tax is accrued each payroll period and is paid quarterly.
4. Federal Unemployment Tax Act (FUTA) Tax
The Federal Unemployment Tax Act is a payroll based tax the Federal government collects then distributes to the states. Unemployment benefit programs provide temporary income to employees who have lost their jobs. Unemployment benefit programs are managed and administered by individual states. The FUTA tax is 6% of payroll wages (up to $7K in earnings per individual). This tax is paid quarterly.
5. State Unemployment Insurance (SUI) Tax
States collects a payroll based tax to fund their unemployment benefit programs. These taxes are commonly referred to as either SUI or SUTA taxes, but they are the same tax. Unemployment benefit programs provide temporary income to employees who have lost their jobs. The state unemployment tax rates, programs, and benefits vary greatly from state to state. Corporations must pay unemployment taxes in each state where they have employees and per each state’s specific SUI program. The number of unemployment claims a specific corporation has or doesn’t have will directly impact their SUI tax rate over time. The process of determining a corporation’s SUI tax rate is commonly referred to as the Experience Rating. SUI taxes are typically paid quarterly.
In North Carolina for example, the SUI tax rate varies from .06% to 5.75% on the first $28K of earnings per employee and is based on the individual corporation’s Experience Rating. New corporations in North Carolina are assigned a SUI rate of 1%. The corporation’s SUI tax rate will then vary annually based on their Experience Rating.
6. Sales Tax
45 states collect taxes on sales. Several states also have local sales taxes. US corporations are required to collect and pay sales taxes based on each individual state’s sales tax regulations. Sales taxes range from the low of 0% in Alaska to the high of 7.25% in California. This tax is typically paid quarterly. Historically, sales taxes were only required to be collected by a state when a corporation had a physical presence (retail location, office, warehouse) within that state. Sales taxes were previously not required to be collected on cross-state sales transactions. In 2018 The State of South Dakota filed suit against online retailer Wayfair to collect sales tax on ecommerce sales within the state even though Wayfair had no physical presence in the state. South Dakota won the lawsuit and the US Supreme Court upheld that ruling. Now, economic nexus laws allow states to collect sales tax on sales transactions in their states, even when the corporation selling the product or service doesn’t have a physical presence in that state. Each individual state now has its own, and sometimes very different, regulations corporations must follow to stay in compliance when collecting sales taxes. This chart provides an overview of the sales tax nexus rules on a per state basis. The complexities of sales tax compliance in the US have given rise to consultancies and software solutions corporations can use to automate and manage their sales tax collection and payment processes.
7. Property Tax
Property taxes in the Unites States are typically collected locally at the county or municipality level. There are two types of property taxes. The first is Business Property Tax. This is a tax on land or real estate owned by the corporation. The second is Business Personal Property Tax. This is a tax on any tangible assets like computers, furniture, or equipment owned by the corporation. Property tax rates vary widely. This tax is typically paid annually.
8. Franchise Tax
Some states charge a Franchise Tax to corporations that are incorporated in their state (Delaware being common) but have their corporate office headquarters in another state. Since the state of incorporation can’t collect State Corporate Income Tax or Property Tax on companies that don’t have physical operations in their state, they charge a Franchise Tax. The formulas for Franchise Tax calculations vary widely by state. Using the number of Authorized Shares in the corporation or a rate based on the corporation’s net worth are two methods.
The various corporate tax agencies, jurisdictions, rules, and payment frequencies in the United States may make it seem all but impossible to keep your US corporation in compliance. But it’s not! With the right guidance and partners, it’s all very manageable. If you have questions or want to know more about US corporate taxes, feel free to contact us. We are always to talk.