The Worst 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

It’s everyone’s favorite day of the year… Tax Day!

Tax day is normally on April 15th, but this year that falls on a Saturday. Monday is a holiday in Washington, D.C., so that pushes the date back to today… April 18th!

Americans pay a lot of taxes—the IRS collected more than $3.3 trillion from taxpayers in 2016. And while federal income tax is a great expense for entrepreneurs, it’s consistent across state lines.

But when it comes to state and local taxes, there’s much more variation. That made us wonder:

How much does the average entrepreneur actually pay to state and local taxes?

And how much does the average entrepreneur actually pay to state and local taxes?

We decided to look at tax burdens state by state to see if we could pinpoint the places where entrepreneurs are dishing out the most money to their local and state governments.

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

While these 10 states topped our list, it’s important to note that they lead the pack only for the average entrepreneur.

What did we learn from the data?

Live in Louisiana or Wyoming?

You’ve got it pretty great when it comes to taxes. Yesterday we published the first section of this study and found that Louisiana and Wyoming’s small business owners have it the best when it comes to taxes.

Own a business in New Jersey or New York?

You’re paying almost twice as if you lived in a different state.

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


The 10 Worst States for Small Business Taxes

new-jersey-worst-state-taxes

#1: New Jersey

Average small business owner state & local taxes: $9,279.68
State tax burden (as % of income): 12.2%
Top state income tax bracket: 8.97%

new-york-worst-state-taxes1

#2: New York

Average small business owner state & local taxes: $8,652.48
State tax burden (as % of income): 12.7%
Top state income tax bracket: 8.82%

illinois-worst-state-taxes

#3: Illinois

Average small business owner state & local taxes: $8,349.68
State tax burden (as % of income): 11%
Top state income tax bracket: 3.75%

maryland-worst-state-taxes

#4: Maryland

Average small business owner state & local taxes: $8,073.92
State tax burden (as % of income): 10.9%
Top state income tax bracket: 5.75%

california-worst-state-taxes

#5: California

Average small business owner state & local taxes: $7,883.32
State tax burden (as % of income): 11%
Top state income tax bracket: 13.3%

massachusetts-worst-state-taxes

#6: Massachusetts

Average small business owner state & local taxes: $7,805.71
State tax burden (as % of income): 10.3%
Top state income tax bracket: 5.1%

connecticut-worst-state-taxes

#7: Connecticut

Average small business owner state & local taxes: $7,760.00
State tax burden (as % of income): 12.6%
Top state income tax bracket: 6.99%

pennsylvania-worst-state-taxes

#8: Pennsylvania

Average small business owner state & local taxes: $7,743.42
State tax burden (as % of income): 10.2%
Top state income tax bracket: 3.07%

oregon-worst-state-taxes

#9: Oregon

Average small business owner state & local taxes: $7,642.56
State tax burden (as % of income): 10.3%
Top state income tax bracket: 9.9%

minnesota-worst-state-taxes

#10: Minnesota

Average small business owner state & local taxes: $7,560.69
State tax burden (as % of income): 10.8%
Top state income tax bracket: 9.85%


Where Did Your State Rank?

Top Tax Bracket and Tax Burden (by State):

Maximum Deduction by State:

Tax Burden by State:

Taxable Salary and Taxes for the Average Entrepreneur:


Yesterday, we published the first section of this study which examines the best states for small business taxes. That article included the full methodology and limitations our research.

If you missed it, here’s what you need to know:

Methodology

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

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.

Enjoy this article? Be sure to take a look at The Best States for Small Business Taxes in 2017.  


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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