Taxes in Florida for Small Businesses: The Basics

Florida offers a host of advantages to prospective small business owners. Compared to many states, small business regulations in Florida are minimal, and the state imposes fewer barriers to entry for new businesses. Florida's labor force is expanding at an annual rate of greater than 3% compared to little to no growth at the national level. The state's unemployment rate, at 5.3% as of August 2015, is close to what most economists consider to be full employment. Lastly, and for some most importantly, Florida pays its workers and business owners an attractive bonus in the form of 12 months of warm weather, abundant sunshine and easy access to the country's most popular beaches.

Another big advantage of locating a small business in Florida is the business pays less in taxes there than perhaps anywhere in the United States. This is because the only businesses that pay state income taxes in Florida are traditional corporations, or C corporations. While small businesses sometimes later convert to C corporations once their growth reaches a certain level, very few small businesses just starting out are traditional corporations; most are S corporations, limited liability companies (LLCs), partnerships or sole proprietorships. None of these other business designations pay state income taxes in Florida. Moreover, individuals in Florida are not subject to state income taxes. This means a business owner in Florida is not taxed on income that passes through from his small business to himself.

Unless a small business is set up as a C corporation, Florida does not impose state income taxes on it. For corporations, state taxes in Florida are still low compared to most states. The standard corporate tax in Florida on federal taxable income is 5.5%, but exemptions often lower a corporation's effective tax rate significantly. A corporation is required to pay the higher amount of the standard rate minus all exemptions and credits, or an alternative minimum tax rate of 3.3%.

As of 2015, under both methods, the standard rate and the alternative minimum tax, the first $50,000 in income is exempt from Florida's corporate tax. A Florida corporation must remit its income tax on April 1 if it uses the calendar year as its tax year or on the first day of the fourth month after its tax year ends.

A lot of small business owners in Florida elect to set up their companies as S corporations, which provide many of the same legal protections as C corporations but do not subject the business to the state's 5.5% corporate tax.

S corporations are especially popular in Florida because they effectively shield a business and its owners from paying any state income tax, whether on the business's income or individual income. This designation provides many of the legal benefits of incorporation, such as protection of personal assets if a judgment is entered on the business. Unlike a C corporation, however, an S corporation is not subject to federal income tax, since the income earned by the business passes through to the business owners. Therefore, the owners must pay federal income tax on their income from the business at ordinary income tax rates.

As for state income taxes, the business owners pay nothing. Florida recognizes the S designation. The state does not treat S corporations as traditional corporations for tax purposes, nor does it tax the income that passes through to the business owners.

LLCs are pass-through entities that shield business owners from certain legal and financial risks. For tax purposes, most, but not all, LLCs are classified as partnerships or disregarded entities. When this is the case, an LLC does not pay state income tax in Florida because it is not a corporation. In rare cases, an LLC is also incorporated. In Florida, this results in state income tax at either 5.5% or the 3.3% alternative minimum tax.

Like S corporations, LLCs, except those that are also incorporated, are shielded from state income tax, and their owners pay no tax to the state of Florida on the personal income that passes through to them from the businesses. Setting up an LLC in Florida is fast, easy and inexpensive; it is highly recommended as a minimum step for small business owners who want basic protection of their personal assets while maintaining their zero state income tax liability.

Business partnerships come in many forms, including general partnerships, limited partnerships (LPs) and limited liability partnerships (LLPs). No matter the specific designation, partnerships are not subject to state income tax in Florida.

Income from partnerships is paid directly to the partners of the business. They pay federal income tax on this money at ordinary income tax rates the same as they do on income from a W-2 or contract job. Because Florida imposes no state tax on ordinary income, however, small business owners in the state whose companies are classified as partnerships are fully shielded from state income tax.

Sole proprietorships work similarly to partnerships, only instead of the business income being distributed to multiple partners, it is distributed to one person who is the singular business owner. This income is considered ordinary personal income for federal income tax purposes; the business owner is assessed federal tax on it at ordinary income tax rates.

Florida considers income distributed from a sole proprietorship to be ordinary personal income, which it does not tax. Because the business is not a corporation, it is not subject to state income tax, so the business owner is absolved from paying state taxes.

In some cases, small business owners whose companies are located in Florida but conduct significant business in other states must pay taxes in those states on any business income earned there. In these situations, the business is said to have nexus with those states. The distinction can be nebulous, which means any small business owner who might potentially land in this situation is advised to educate himself further on nexus rules and how they may apply to his business.