Taxes in New York for Small Business: The Basics

New York offers a wide array of benefits to prospective small business owners. The state is home to New York City, which is considered to be the epicenter of the world's economy. The global economy is complex and powered by many economic engines, but the biggest and most powerful of these are housed in New York City. New York is home to many elite colleges and universities that turn out new graduates every spring and send them into the business world, where they provide immense value. Because graduates often prefer to settle down where they went to school, small businesses in New York are well-positioned to recruit this talent.

While New York confers a host of benefits to small businesses, the state has a few drawbacks that prospective business owners must consider. Most notably, New York is known for a business tax code that is costly and complicated. Depending on the breakdown of a business's financial statements, its required taxes may be calculated via several methods – and the state requires it to use the method that results in the highest tax bill. While the worst tax treatment in New York is aimed at C corporations, the state still expects small businesses to maintain some skin in the game.

Most small businesses are not traditional C corporations, but many make the transition after their growth reaches a certain level. Understanding how corporations are taxed at the state level can help a business owner decide the best place to locate.

In New York, corporations must pay a corporation franchise tax. While this is standard across many states, New York makes it more complex for a business to determine how much tax is due. Moreover, the state attempts to close as many financial reporting loopholes as possible that businesses use to minimize taxes. For this reason, New York imposes four ways to calculate tax due, each based on a different metric, and the state requires the business to pay the highest amount of the four.

The simplest calculation is based on entire net income, which, for the most part, equals the federal taxable income. The state makes a few esoteric adjustments to this amount and taxes the resulting amount at 7.1%. However, small businesses with net incomes of less than $290,000, along with qualified manufacturers, get a bit of a break, paying only 6.5%. Businesses with net incomes of less than $390,000 pay only 6.5% on the first $290,000.

A corporation may also be taxed based on its business and investment capital, minus liabilities. The tax rate applied to this amount is 0.15%, with a cap of $1 million in taxes. Qualified manufacturers taxed using this method are capped at $350,000.

Another possibility is minimum taxable income, which is net income with certain federal adjustments added back in. The tax rate on this amount is 1.5%; for qualified manufacturers, the tax rate on this amount is 0.75%.

The fixed dollar minimum method taxes corporations on their gross receipts. This method sets tiers for gross receipts and assigns each tier a flat dollar tax amount. These amounts range from $25 for businesses with gross receipts of under $100,000, to $5,000 for businesses with gross receipts of over $25 million.

An S corporation is a traditional corporation with a special designation, known as S status, which allows income to pass through the company to its owners. Since the business owners then pay personal income tax on this money, many states do not tax S corporations. New York, however, is not one of these states; it requires S corporations to pay the corporation franchise tax. However, S corporations may use the gross receipt method to calculate taxes, and they are taxed at slightly lower rates than traditional corporations. The effective maximum corporation franchise tax on S corporations in New York is $4,500.

Any New York business seeking S status must file an additional form with the state in addition to filing the federal designation form. Failure to do so results in the business being taxed as a traditional corporation, which means a much higher tax bill, in all likelihood.

The net income from the S corporation passes through to the business owners, and New York also taxes this income. State tax rates on personal income range from 4 to 8.82%, as of 2015.

Like S corporations, limited liability companies (LLCs) pass through income to their owners, who then pay personal income tax on it. LLCs are unique because they can be classified in one of several ways: as a partnership, as a corporation or as the default classification, a disregarded entity. New York LLCs classified as corporations pay the corporation franchise tax under the same rules as traditional corporations. LLCs of any other classification are not subject to this tax, but they must pay state filing fees. These fees are calculated based on gross income, and range from a minimum of $25, which applies to LLCs with gross incomes of less than $100,000, to a maximum of $4,500, which applies to LLCs with gross incomes of greater than $25 million.

Partnerships are another business designation that pass income through to the individuals who own them. As such, they do not pay federal income tax or state tax in most places, including New York. Like LLCs, however, they are subject to the state filing fee, which is calculated using the same formula based on gross income. New York partnerships get even more of a break than S corporations, as they are only subject to the filing fee if their gross income exceeds $1 million. The business owners must pay state income tax as individuals on their share of income that passes through from the partnership.

Sole proprietorships in New York do not pay any corporation franchise taxes or filing fees. The sole proprietor who owns the business pays personal income tax, which ranges from 4 to 8.82% in New York, on his taxable income from the business.