Wisconsin State Income Tax

What kind of tax will you owe on Wisconsin 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.

Wisconsin has a corporate income tax (known technically, in most cases, as the corporation franchise tax) and a tax known as the “economic development surcharge.” Your business may be subject to one, both, or neither of these taxes depending on its legal form. In addition, if income from your business passes through to you personally, that income will be subject to taxation on your personal Wisconsin tax return.

Wisconsin taxes the net income of most traditional (C-type) corporations, including all Wisconsin corporations, through the corporation franchise tax. (The closely-related corporation income tax, which applies to a subset of non-Wisconsin corporations, is not covered here.) The rate for the franchise tax is 7.9%. Returns and payments are due by the 15th day of the third month following the close of a corporation’s fiscal year; for corporations with fiscal years that match the calendar year, this means March 15th. For purposes of comparison, note that Wisconsin generally taxes personal income at marginal rates ranging from 4.6% to 7.75%.

The economic development surcharge applies to most Wisconsin businesses that have at least $4 million in gross receipts, including traditional corporations, S corporations, LLCs, partnerships, and sole proprietorships. The surcharge is the greater of:

  • 0.2% of net business income attributable to Wisconsin; or
  • $25.

However, the surcharge may not exceed $9,800. The due date for the surcharge is the same as the due date for a business’s Wisconsin franchise or income tax return.

Let’s briefly look at additional details for five of the most common forms of Wisconsin business: corporations (i.e., C corporations), S corporations, LLCs, partnerships, and sole proprietorships.

Corporations. Wisconsin corporations are subject to Wisconsin’s corporation franchise tax and to the economic development surcharge.

Example: For the 2012 tax year, your Wisconsin corporation had taxable net income of $500,000. Also, the corporation’s Wisconsin gross receipts totaled $3,200,000. Other things being equal, the corporation will owe Wisconsin corporation franchise tax in the amount of $39,500 (7.9% of $500,000). Because Wisconsin gross receipts were less than $4 million, no economic development surcharge is due.

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.) Wisconsin recognizes the federal S election, and Wisconsin S corporations generally are not required to pay corporation franchise tax to the state. (Note that, as an exception to this general rule, S corporations must pay franchise tax on interest income.) Wisconsin S corporations are required to pay the economic development surcharge. Also, an individual S corporation shareholder will owe tax on his or her share of the corporation’s income.

Example: For the 2012 tax year, your S corporation had net income of $500,000. Also, the corporation’s Wisconsin gross receipts totaled $3,200,000. Because Wisconsin gross receipts were less than $4 million, no economic development surcharge is due. However, each shareholder will pay tax on his or her individual state tax return on his or her portion of the corporation’s net income; rates 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 Wisconsin; however, Wisconsin LLCs are required to pay the economic development surcharge. In addition, an individual LLC member will owe tax on his or her share of the company’s income.

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 Wisconsin’s corporation franchise 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. Also, the company’s Wisconsin gross receipts totaled $3,200,000. Because Wisconsin gross receipts were less than $4 million, no economic development surcharge is due. However, each LLC member will pay tax on his or her individual state tax return on his or her portion of the corporation’s net income; rates will vary depending on the member’s overall taxable income for the year.

Partnerships. Partnerships are pass-through entities and, generally speaking, are not required to pay income tax to either the federal government or the State of Wisconsin; however, Wisconsin partnerships are required to pay the economic development surcharge. In addition, each individual partner will owe tax on his or her share of the company’s income.

Example: For the 2012 tax year, your partnership had net income of $500,000. Also, the partnership’s Wisconsin gross receipts totaled $3,200,000. Because Wisconsin gross receipts were less than $4 million, no economic development surcharge is due from the partnership. However, each partner will pay tax on his or her individual state tax return on his or her portion of the partnership’s net income; rates 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. In addition, in Wisconsin, a sole proprietorship is subject to the economic development surcharge.

Example: For the latest tax year, your sole proprietorship had net income of $200,000. Also, your business’s Wisconsin gross receipts totaled $400,000. Because Wisconsin gross receipts were less than $4 million, no economic development surcharge is due from your business. The $200,000 in net income is distributed to you personally, and you pay tax on that income on your individual state tax return.

Note on Multistate Businesses and “Nexus”

Our primary focus here is on businesses operating solely in Wisconsin. 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 Wisconsin, it may be subject to Wisconsin 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.

Additional Information

For further guidance on Wisconsin’s corporation franchise and income taxes, and the economic development surcharge, check the Department of Revenue 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).

February 2013

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