Vermont State Income Tax
What kind of tax will you owe on Vermont business income?
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Most states tax at least some types of business income derived from the state. As a rule, the details of how income from a specific business is taxed depend in part on the business’s legal form; more particularly, in most states corporations are subject to a corporate income tax, while income from “pass-through entities” such as S corporations, limited liability companies (LLCs), partnerships, and sole proprietorships is subject to a state’s tax on personal income. Tax rates for both corporate income and personal income vary widely among states; corporate rates, which more often are flat regardless of the amount of income, generally range from 4% to 9%, and personal rates, which generally vary depending on the amount of income, can range from 0% (for small amounts of taxable income) to around 9% or more in some states.
Currently, four states, Nevada, South Dakota, Washington, and Wyoming, do not have a corporate income tax, and the same four states, along with Alaska, Florida, and Texas, have no personal income tax. Individuals in New Hampshire and Tennessee are only taxed on interest and dividend income.
Apart from taxing business income through a corporate income tax or a personal income tax, many states impose a separate tax on at least some businesses, sometimes called a “franchise tax” or “privilege tax;” this is frequently defined as a tax simply for the right or “privilege” of doing business in the state. As with state taxes on business income, the specifics of a state’s franchise tax often depend in part on the legal form of the business. Franchise taxes are generally either a flat fee or an amount based on a business’s net worth.
Vermont has a corporate income tax, which applies to traditional (C-type) corporations, and a business entity tax (a.k.a. business entity income tax), which applies to various other legal forms of business. In addition, income from your business that passes through to you personally will be subject to taxation on your personal state tax return.
The corporate income tax applies to the Vermont net income of traditional corporations, and has several marginal rates, as follows:
- net income $10,000 or less = 6.0% rate (or minimum tax based on Vermont gross receipts)
- net income $10,001 to $25,000 = $600 plus 7.0% of excess over $10,000; and
- net income $25,001 and over = $1,650 plus 8.50% of excess over $25,000.
The 8.50% top marginal rate places Vermont’s corporate income tax among the higher corporate tax rates in the country.
As indicated in the first item on foregoing list, there is also a minimum tax on corporations based on Vermont gross receipts; the amount of the tax varies as follows:
- gross receipts $2,000,000 or less = $300 tax
- gross receipts $2,000,001 to $5,000,000 = $500 tax; and
- gross receipts $5,000,001 and over = $750.
Returns are due on the 15th day of the third month after the end of the corporation’s tax year; for a corporation whose tax year is the same as the calendar year, this means returns are due by March 15th. For purposes of comparison, note that Vermont taxes personal income at rates ranging from 3.55% to 8.95%.
The business entity tax applies to S corporations, LLCs, and partnerships. These types of business entities must pay a flat annual tax of $250.
Note: Vermont also has an optional franchise tax that applies to so-called “digital business entities;” companies electing to pay the tax are subject to either:
- a .02% tax on total assets; or
- a tax based on the number of authorized shares of stock, with a minimum tax of $250 and maximum tax of $500,000.
Let’s briefly look at additional details for five of the most common forms of Vermont business: corporations (i.e., C corporations), S corporations, LLCs, partnerships, and sole proprietorships.
Corporations. Vermont corporations are subject to the corporate income tax.
Example: For the 2012 tax year, your Vermont corporation, which is not a digital business entity, had net income of $525,000. Other things being equal, the corporation will owe Vermont franchise tax in the amount of $44,150 ($1,650 plus 8.50% of $500,000).
S Corporations. An S corporation is created by first forming a traditional corporation, and then filing a special form with the IRS to elect “S” status; unlike a traditional corporation, an S corporation generally is not subject to separate federal income tax. Rather, taxable income from an S corporation is passed through to the individual shareholders, and each individual shareholder is subject to federal tax on his or her share of the corporation’s income; in other words, S corporations are “pass-through” entities. (Note that a shareholder’s share of the S corporation’s income need not actually be distributed to the shareholder in order for the shareholder to owe tax on that amount.) Vermont recognizes the federal S election; however, Vermont S corporations are required to pay the state’s business entity tax. In addition, an individual S corporation shareholder will owe tax on his or her share of the company’s income.
Example: For the 2012 tax year, your S corporation had net income of $500,000. The corporation will owe the $250 business entity tax. In addition, the corporation’s net income will be allocated among the various shareholders and each shareholder will pay tax on his or her portion on his or her individual state tax return; the rate will vary depending on the shareholder’s overall taxable income for the year.
Limited Liability Companies (LLCs). Like S corporations, standard LLCs are pass-through entities and, generally speaking, are not required to pay income tax to either the federal government or the State of Vermont. However, Vermont LLCs are required to pay the state’s business entity tax. In addition, income from the business is distributed to individual LLC members, who then pay federal and state taxes on the amount distributed to them.
Also, while by default LLCs are classified for tax purposes as partnerships (or, for single-member LLCs, “disregarded entities”), it is possible to elect to have your LLC classified as a corporation. In that case, the LLC would also be subject to Vermont’s corporate income tax.
Example: For the 2012 tax year, your multi-member LLC, which has the default tax classification of partnership, had net income of $500,000. The company will owe the $250 business entity tax. In addition, the company’s net income will be allocated among the various members and each member will pay tax on his or her portion on his or her individual state tax return; the rate will vary depending on the member’s overall taxable income for the year.
Partnerships. Generally speaking, income from partnerships is distributed to the individual partners, who then pay tax on the amount distributed to them on both their federal and state tax returns. However, Vermont partnerships are required to pay the state’s business entity tax.
Example: For the 2012 tax year, your partnership had net income of $500,000. The partnership will owe the $250 business entity tax. In addition, the partnership’s net income will be allocated among the various partners and each partner will pay tax on his or her portion on his or her individual state tax return; the rate will vary depending on the partner’s overall taxable income for the year.
Sole Proprietorships. Income from your business will be distributed to you as the sole proprietor, and you will pay tax to the state on that income. No business entity tax is due.
Example: For the latest tax year, your sole proprietorship had net income of $200,000. The $200,000 in net income is distributed to you personally, and you’ll pay tax on that income on your individual state tax return; the rate will vary depending on your overall taxable income for the year.
Note on Multistate Businesses and “Nexus”
Our primary focus here is on businesses operating solely in Vermont. However, if you’re doing business in several states, you should be aware that your business may be considered to have “nexus” with those states, and therefore may be obligated to pay taxes in those states. Also, if your business was formed or is located in another state, but generates income in Vermont, it may be subject to Vermont taxes. The rules for taxation of multistate businesses, including what constitutes nexus with a state for the purpose of various taxes, are complicated; if you run such a business, you should consult with a tax professional.
For further guidance on Vermont’s corporate income tax and franchise tax, check the Department of Taxes website. For information on business-related taxes in other states, check Nolo’s 50-State Guide to Business Income Tax. And, if you’re looking for detailed guidance on federal income tax issues, check Tax Savvy for Small Business, by Federick Daily (Nolo).