Most small businesses do not file taxes outside their hometown. This is simply because they are usually local and have no physical location or connection to any other state. But in today's virtual, interconnected world, small businesses can reach not only employees in other states, but also employees around the world. Hiring a contractor in a different country may have its own impact, but fortunately, it does not affect the company's taxes in the United States. Hiring employees or contractors in different states can be problematic because it is easy to establish contacts in these states. Recent marketplace sales tax rules have sparked a hot topic: Small business owners may not realize that owning a contractor in another state will not only create a sales tax relationship, but a relationship as well. income tax. This means that you must not only collect sales tax, but also report and pay income tax. In most cases, multi-state tax planning applies to large companies that are taxed as C companies. If you own a business that flows through tax, it is unlikely that you will benefit from multi-state taxes, but you have yet to resolve this problem. The following are steps business owners can take to manage tax compliance and impact in various states.

Register in your home state

Your business must be registered in the state where you live. Unless your involvement in the business is nil, you are connected in the state of residence. For most small businesses, registering in a different state means more state registration fees. Although there are no tax savings, you can increase taxes. Registering in a different state is only useful in very special circumstances and can only be implemented after it has been discussed with the CPA.

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Watch out for extra taxes

The increased tax burden of small businesses operating in multiple states may mean double taxation. Not all states provide credits for taxes paid to another state. It is entirely possible to pay taxes on the same income in two different states. If you live in a state with no income tax, such as Texas or Florida, it may mean that you must pay state income tax on part of your income.

Manage filing costs

Small business owners do not have the tax preparation budget of large companies. Unfortunately, the cost of tax preparation for multi-state filings can be high. Once you determine in which state you should apply, you may find that your share rate is zero, so you have no taxable income. Therefore, you must decide whether to submit. If you try to comply with all state laws that each state expects, the cost may be higher than the potential fine for not submitting an application.

When in doubt, collect sales taxes

If you can have a connection, then you should levy sales tax. Remember, sales tax usually does not affect your sales. There is no way to go back to your customers and ask them to pay sales tax for past purchases. When not levying sales tax, the government will assume that sales tax is built-in. If you sell a product with a small profit, this may mean the difference between making money and losing money.

Don’t believe the gossip

Ideas and gossip about setting up businesses in State X and State Y always circulate in the corporate world. For example, some Californians mistakenly believe that a Wyoming LLC can save them taxes. Unless you have your own business on WY, this strategy will only allow you to pay the additional application fee paid to WY. If you are a California resident, regardless of the state in which your business is registered, you will pay taxes on the income it generates. So are there situations where businesses can benefit from multi-state tax planning? The short answer is yes, but only if your business is taxed as a Type C corporation with offices and employees in different states. For other small business owners who benefit from tax flows, multi-state taxes will mean higher administrative costs and potentially more taxes. Pay attention to where you may have a link, and make sure to pass the information to your tax preparer or CPA to ensure compliance.