Business income tax by state: Rates, rules, and what small businesses need to know

Published Saturday 27 June 2026

Table of contents

• What is business income tax?
• Who pays business income tax by state?
• State corporate tax rates by state
• How nexus and apportionment work across states
• How pass-through entity taxes work by state
• How to estimate state business taxes from your books
• Simplify state taxes with Xero
• FAQs on business income tax by state

Key takeaways

• Most states require C-corporations to file and pay state corporate income tax, while pass-through entity owners report business income on their individual state tax returns.
• Some states also require C-corporations and certain pass-through entities to file and pay franchise, gross receipts, or business profits taxes.
• Businesses must file returns in any states where they have nexus, but apportionment rules ensure they aren't taxed on all their profits in multiple states.
• Rules vary by state and business structure. Rely on your state's revenue department for the most up-to-date guidance.

What is business income tax?

Business income tax refers to the taxes businesses pay on their profits, with rates, rules, and filing requirements varying by state and business structure. According to the Tax Policy Center, 44 states and the District of Columbia levy a corporate income tax, while a few others use gross receipts taxes instead.

However, there is no tax called a business income tax. Instead, businesses either pay corporate income tax on the entity level or their owners pay individual income tax based on the business's profits.

C-corporations pay corporate income tax to the IRS at the US business tax rate of 21%. They also face state corporate income tax in any states where they have a filing requirement.

Pass-through entities (sole proprietorships, partnerships, and S-corps) do not pay corporate or business income tax on the entity level to the IRS or most states. Instead, their owners pay individual income tax to the IRS and any states where they have a filing requirement, based on their share of the business's profits.

In other words, there are no partnership or S-Corp tax brackets. Instead, partnership and S-corp profits are taxed based on the partners' or shareholders' individual income tax brackets.

The IRS has more on how business structures affect your tax rates and filing requirements.

Who pays business income tax by state?

Corporations must pay corporate income tax directly to the state(s) where they have a filing requirement.

Pass-through entities typically must file an informational return with the state, but don't have to pay income tax to the state as a business. However, several states let partnerships and S-corporations pay Pass-Through Entity Tax (PTET) if desired. That allows these businesses to claim state business income tax as a deduction on their business income tax returns, helping business owners to get around the limits on deducting state taxes on their individual federal income tax returns.

Many states also assess gross receipts tax, franchise tax, or, in the case of New Hampshire, business profits tax. Gross receipts and franchise taxes are not business income taxes because they're not based on income or profits, but businesses must be aware of these requirements. State laws vary, but these taxes often apply to LLCs, certain types of partnerships, and S-corps based on their revenue, profits, or other factors.

The Tax Policy Center has more on how state and local corporate income taxes work.

State corporate tax rates by state

The majority of states require C-corporations to file and pay corporate income tax. According to the Tax Foundation, top rates range from 2% in North Carolina to 11.5% in New Jersey as of 2026. Here are the rates:

• Alabama: 6.5%
• Alaska: 0 to 9.4%
• Arizona: 4.9%
• Arkansas: 1 to 4.3%
• California: 8.84%
• Colorado: 4.4%
• Connecticut: 7.5 to 8.25%
• Delaware: 8.70%
• Florida: 5.5%
• Georgia: 5.19%
• Hawaii: 4.4 to 6.4%
• Idaho: 5.3%
• Illinois: 9.5%
• Indiana: 4.9%
• Iowa: 5.5 to 7.1%
• Kansas: 4 to 7%
• Kentucky: 5%
• Louisiana: 5.5%
• Maine: 3.5 to 8.93%
• Maryland: 8.25%
• Massachusetts: 8%
• Michigan: 6%
• Minnesota: 9.8%
• Mississippi: 4 to 5%
• Missouri: 4%
• Montana: 6.75%
• Nebraska: 4.55%
• New Hampshire: 7.5%
• New Jersey: 6.5 to 11.5%
• New Mexico: 5.9%
• New York: 6.5 to 7.25%
• North Carolina: 2%
• North Dakota: 3.55 to 4.31%
• Oklahoma: 4.9%
• Oregon: 4.6 to 7.6%
• Pennsylvania: 7.49%
• Rhode Island: 7%
• South Carolina: 5%
• Tennessee: 6.5%
• Utah: 4.5%
• Vermont: 6 to 7%
• Virginia: 6%
• West Virginia: 6.5%
• Wisconsin: 7.9%
• Washington, D.C.: 8.25%

Nevada, Ohio, Texas, and Washington apply a gross receipts tax instead of corporate income tax. Delaware, Oregon, and Tennessee have a gross receipts tax in addition to corporate income tax. South Dakota and Wyoming are the only states with no corporate income tax or gross receipts tax.

The Tax Foundation has more details on states' corporate tax rates and brackets.

How nexus and apportionment work across states

If you do business in multiple states, you need to understand nexus and apportionment.

Nexus means connection. You only need to file business tax returns in states where you have nexus, but the rules vary based on the state and the type of tax. For instance, a business may have nexus for sales tax in a certain state but not for corporate income or franchise tax in that same state.

All states have different nexus laws, but generally nexus falls into two categories:

• Physical nexus: property, assets, or employees in a state
• Economic nexus: sales or revenue over a certain threshold in a state

Businesses must meet tax obligations in all states where they have nexus. But most states use apportionment to ensure that businesses don't face excessive state taxes.

Apportionment determines which portion of a business's income is subject to a state's business income tax based on the business's activities in that state compared to other states. Typically apportionment is based on one of the following:

• The business's sales in a state compared to its total sales
• The business's payroll, property, and sales in a state compared to its total payroll, property, and sales, with equal weight given to each factor
• The business's payroll, property, and sales in a state, with sales having more weight than the other two factors

Some states also require combined reporting, which means related corporations must file a single combined return that reflects the income of the entire corporate group. According to the Institute on Taxation and Economic Policy, most states with a corporate income tax now use some form of combined reporting.

Because all states have different rules, businesses may need to calculate apportionment separately for every state where they do business.

Typically, only corporations need to worry about apportionment. If an individual taxpayer needs to report pass-through income in multiple states, they'll use a similar process, called allocation, to divide up their income between the states.

How pass-through entity taxes work by state

Pass-through entities do not pay business income tax directly to the IRS. Instead, they report their business income on an information return or a schedule attached to their individual return. Then, they report their portion of the business's income and pay tax to the IRS with their individual income tax return.

It often works the same way on the state level. The business files an information return with the state, and then the owners report the business income and pay state income tax with their individual state returns. However, state taxes can get a lot more complicated.

Businesses often need to file informational returns in multiple states. For example, most states require partnerships to file informational returns if they operate in the state, and some states require partnerships to file informational returns if a partner resides in that state, even if the business doesn't operate there.

Business owners may also need to file multiple individual state income tax returns. Most states with income tax require returns from state residents as well as anyone who earns income in the state.

Additionally, as indicated above, some states require standalone returns from pass-through entities for franchise, excise, business profits, or gross receipts taxes. Requirements vary based on the structure of the business, its profits, revenue, assets, or multiple other factors.

The most effective way to learn about business income tax by state is to check with the Department of Revenue in the state(s) where you reside and do business. The IRS has links to state revenue agencies to help you get started.

How to estimate state business taxes from your books

Wondering how much business tax you'll pay to the state? Follow these steps to get a rough estimate:

1. Research the tax rules in the state you reside in and any states where you conduct business. Make sure to check states where you sell goods, provide services, own property, and employ workers, as the rules vary significantly.
2. Identify the effective business income tax rate for your situation. Depending on the scenario, that may be your personal income tax rate, the state's corporate tax rate, or a rate based on another state business tax.
3. Pull a profit-and-loss report from your accounting software and multiply the effective rate by your business's profits.

For example, say your corporation has $100,000 in profit in a state with a 5% corporate tax rate. Your estimated state business income tax is $5,000.

Simplify state taxes with Xero

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FAQs on business income tax by state

You should consult with a tax pro whenever possible, but in the meantime, keep learning by reading the answers to these frequently asked questions.

Which states don't have corporate income tax?

Six states don't have a corporate income tax: Nevada, Ohio, South Dakota, Texas, Washington, and Wyoming. However, Nevada, Ohio, Texas, and Washington charge a gross receipts tax, which is a tax based on business revenue rather than profits.

Which state has the highest business tax?

New Jersey has the highest corporate income tax rate at 11.5% as of 2026. But C-corp tax rates are only part of the picture when it comes to business taxes. You also must consider individual, property, sales, unemployment, and other taxes as well as how the state's rules on business deductions differ from the IRS.

The Tax Foundation ranks New York, New Jersey, and California as the three worst states for business tax competitiveness.

What state has the lowest taxes for an LLC?

South Dakota and Wyoming have the lowest taxes for LLCs. These states don't assess corporate income tax, individual income tax, or gross receipts or franchise taxes, meaning LLCs don't face any state-level business income tax. Alaska and Florida don't tax LLCs set up as pass-through entities because they don't have individual income tax, franchise tax, or gross receipts tax, but they do assess a corporate income tax on LLCs taxed as C-corps on the federal level.

Do I file business taxes in every state I sell to?

Not necessarily. It depends on the state's rules, which vary based on business structure, volume of sales, and other factors such as whether you have a physical presence or employees in the state. In some states, you may not need to file anything if your sales are under a certain threshold (often $100,000 but it varies), while in others, you may need to file and pay sales, corporate income, franchise, gross receipts, or business profit taxes.

What is the difference between corporate income tax and franchise tax?

Corporate income tax is based on a corporation's profits. Franchise tax is generally not based on profits, but instead may be a flat fee or based on revenue, assets, or other factors. Corporate income tax only applies to C-corporations, while franchise taxes may apply to a variety of entities, including LLCs, partnerships, or S-corps depending on the state's laws.