The Best States for Small Business Taxes in 2017

Ben Johnson

Ben Johnson

Content Marketing Manager at Fundera
Ben Johnson is the Content Marketing Manager at Fundera. He specializes in data-driven and life hack pieces to help business owners prepare for the future.
Ben Johnson

Mark your calendar—April 18th is fast approaching!

While small business owners all across the country are busy sending off checks to Uncle Sam, there are certain states where entrepreneurs are dishing out a whole lot more to their local and state governments.

Which lucky small business owners pay less in taxes, and who pays more?

We wanted to examine and quantify how an entrepreneur’s location can affect the amount they’ll pay in taxes this 2017 tax season—so we turned to data.

So what did the data show?

Live in Alaska or South Dakota? You’ve got it pretty good when it comes to your total tax burden.

Live in the Garden State or the Empire State? You’re paying almost twice as much in taxes.

Where’d your state rank? Read our full report below!


The 10 Best States

alaska-top-state-business-tax

#1: Alaska

Average small business owner state & local taxes: $4,930.42
State tax burden (as % of income): 6.5%
Top state income tax bracket: No state income tax

south-dakota-top-state-business-tax
#2: South Dakota

Average small business owner state & local taxes: $5,391.10
State tax burden (as % of income): 7.1%
Top state income tax bracket: No state income tax

louisiana-top-state-business-tax#3: Louisiana

Average small business owner state & local taxes: $5,422.16
State tax burden (as % of income): 7.6%
Top state income tax bracket: 6%

wyoming-top-state-business-tax1
#4: Wyoming

Average small business owner state & local taxes: $5,428.41
State tax burden (as % of income): 7.1%
Top state income tax bracket: No state income tax

tennessee-top-state-business-tax
#5: Tennessee

Average small business owner state & local taxes: $5,584.58
State tax burden (as % of income): 7.3%
Top state income tax bracket: 5%

texas-top-state-business-tax
#6: Texas

Average small business owner state & local taxes: $5,759.25
State tax burden (as % of income): 7.6%
Top state income tax bracket: No state income tax

south-carolina-top-state-business-tax
#7: South Carolina

Average small business owner state & local taxes: $5,877.73
State tax burden (as % of income): 8.4%
Top state income tax bracket: 7%

new-hampshire-top-state-business-tax
#8: New Hampshire

Average small business owner state & local taxes: $5,987.03
State tax burden (as % of income): 7.9%
Top state income tax bracket: 5%

oklahoma-top-state-business-tax

#9: Oklahoma

Average small business owner state & local taxes: $6,011.25
State tax burden (as % of income): 8.6%
Top state income tax bracket: 5%

new-mexico-top-state-business-tax
#10: New Mexico

Average small business owner state & local taxes: $6,073.59
State tax burden (as % of income): 8.7%
Top state income tax bracket: 4.9%


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deductions-by-state

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Where Did Your State Rank?

Top Tax Bracket and Tax Burden (by State):

Maximum Deductions by State:

Tax Burden by State:

Taxable Salary and Taxes for the Average Entrepreneur:


Methodology

Fundera’s data for this study came exclusively from the Internal Revenue Service, the Tax Foundation, and the US Census Bureau

How’d we quantify how much a small business owner would pay in each state?

First, we looked at how each state treats state income tax. States collect income taxes in different ways—41 states tax wage and salary income, 2 exclusively tax dividend and interest income, and 7 states don’t even collect a state income tax!

We pulled the highest marginal tax bracket for each state and included it in our results above. It’s interesting to see as a comparison feature—but it doesn’t alone provide a full picture of what entrepreneurs are paying in taxes; hence it wasn’t used in our rankings.

Instead, we primarily focused this study on what the Tax Foundation (a nonpartisan think tank in Washington, D.C.) calls a “tax burden.”

A tax burden is calculated by looking at the total amount in taxes residents of a state pay, and then dividing that amount by the state’s total income. The tax burden shows the percent of total income an average resident (or business owner) is paying towards taxes rather than simply showing their income tax rate.

This index includes 26 individual tax measurements: income taxes, property taxes, sales taxes, motor fuels taxes, alcohol taxes, death taxes… the list goes on. It includes some taxes that may not be directly paid by small business owners. But in general, it’s a fairly accurate benchmark of what small business owners will have to pay.

How did we crunch the numbers?

We started with the average salary for a small business owner in the United States—$76,010.

Then we applied the maximum possible deduction for single individuals (this varied from $0 in some states to $14,500 in Connecticut) to get what the taxable income would be for the average business owner in that state.

Next, we multiplied this taxable income by the state’s tax burden to see what the average entrepreneur would pay in state and local taxes.

We used the most recent Tax Foundation Tax Burden estimate because it accounts for tax payments that are made by states’ residents to both their home state or another state. Taxes flow between borders. For instance, a Texan could travel to Hawaii and pay taxes while on vacation. This is why we can’t divide the taxes collected by a state by a state’s total income.     

And since over 90% of U.S. businesses are pass-through entities (sole proprietorships, partnerships, LLCs, and S Corps), these businesses report their income on the business owners’ tax returns but are taxed on the individual income tax. So to calculate how much the average small business owner pays in taxes, we were able to look exclusively at individual taxes rather than business taxes.

Limitations of this research

First off, it’s difficult to define an “average small business owner.”

An average salary is a good benchmark, but it’s certainly not a perfect measure. Salaries will differ by industry, location within in a state, and a business owner’s experience.

Secondly, applying a maximum deduction assumes that all small business owners are only deducting the standard deduction from their income.

But many business owners have deductions, exemptions, and credits that decrease the amount of taxes they pay. To compare states, we needed a control for the study—so we assumed the typical small business owner takes the maximum deduction available for a single filer.

Finally, this study only looks at income earned from a primary business. In reality, entrepreneurs have multiple income streams: capital gains, rental income, second jobs, and other sources. For the sake of this study, we limited our purview on primary income.

Why should small business owners care about their tax burden?

Tax burden is an important measure for small business owners—it shows what percentage of their income they are spending on taxes rather than reinvesting in their own companies. With less of their income going to local and state taxes, entrepreneurs have more capital to reinvest in their business and potentially start new business ventures.

There are certainly other factors entrepreneurs should consider when deciding where to open up shop—population growth, access to capital, local laws, competitors, and so on—but looking at tax data is a great place for an aspiring business owner to start.

If you choose to locate your business one state over, you could save thousands a year in taxes and hundreds of thousands over the course of your career!

Be sure to stop by Fundera tomorrow for the 2nd half of this study: The 10 Worst States for Small Business Taxes.


Additional Resources

Fundera — 21 Overlooked Small Business Tax Deductions You Need to Know
Fundera — The Definitive List of 35 Home Business Tax Deductions
SBA — Filing & Paying Taxes
Tax Foundation — Center for State Tax Policy
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.
Ben Johnson

Ben Johnson

Content Marketing Manager at Fundera
Ben Johnson is the Content Marketing Manager at Fundera. He specializes in data-driven and life hack pieces to help business owners prepare for the future.
Ben Johnson

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