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. 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 most often are flat regardless of the amount of income, generally range from roughly 4% to 10%. 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, six states – Nevada, Ohio, South Dakota, Texas, Washington, and Wyoming – do not have a corporate income tax. However, four of those states – Nevada, Ohio, Texas, and Washington – do have some form of gross receipts tax on corporations. Moreover, five of those states – Nevada, South Dakota, Texas, Washington, and Wyoming – as well as Alaska and Florida currently 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 justified as a tax simply for the 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, state tax status, and gross receipts. 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 fourth month following the close of a corporation’s fiscal year. For corporations with fiscal years that match the calendar year, this means returns are due on April 15th.
Wisconsin’s 7.9% corporation franchise tax also applies to S corporations with certain interest income attributable to Wisconsin.
For purposes of comparison, note that in recent years Wisconsin has taxed personal income at marginal rates ranging from 4.6% to 7.65%.
The economic development surcharge applies to C corporations and most S corporations when they have at least $4 million or more in gross receipts. (As of 2013, LLCs and partnerships no longer are subject to the surcharge.) The surcharge is the greater of:
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 (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 2018 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.) Most Wisconsin S corporations also 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 2018 tax year, your S corporation had net income of $500,000. Also, the corporation’s Wisconsin gross receipts totaled $3,200,000. There was no interest income subject to the corporation franchise tax. 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, 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 2018 tax year, your multi-member LLC, which has the default tax classification of partnership, had net income of $500,000. 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, each individual partner will owe tax on his or her share of the company’s income.
Example: For the 2018 tax year, your partnership had net income of $500,000. 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.
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 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.
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).