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Ohio Business Tax – Complete Guide
When you register a business and make it operational in the state, there will be several things to consider, from products and services offered to revenue and expenses. One of the important types of costs that are necessary to keep track of is the state business taxes or federal taxes. Once you form a new business, it becomes mandatory to file some form of Ohio business tax as a part of annual state requirements. This article has been created to provide you with an insight into how different entities in the state will be taxed, using an Ohio business tax calculator and understanding various tax liabilities based on entity structure.
Ohio Business Tax
Most forms of businesses, like LLCs and corporations, may be required to file annual tax returns at the federal and state levels. When we talk of Ohio business tax, then it is important to understand that this does not refer to a single tax but several forms of taxes that are levied on various entities within this state. Business taxes, in general, are small charges that the state or federal governments place on the earnings, profits, or capital of a business. Some taxes will have a flat rate, while for some taxes, you may need to use the Ohio business tax calculator. There is no one tax for all business entities, but taxes may vary according to entity structure, activity, earnings, and even location.
What taxes do businesses pay in Ohio?
Entrepreneurs consider the state of Ohio to be one of the best states in which to start a new business. This is more so because of several factors, including strategic location, rich history, robust transportation infrastructure, talented workforce, and diverse culture. On top of this, businesses can benefit from tax credits and other forms of small business incentives, including the Ohio Opportunity Zones Tax Credit. One of the salient advantages of incorporating in this state is that there are corporate income tax or Ohio Corporation taxes.
It is unnecessary to form an entity that everyone prefers, such as a corporation or an LLC. You can choose to create a partnership or a sole proprietorship company as well. You can even register a foreign entity in this state. It is important to note, though, that the Ohio business tax for your entity would be different from that of another entity structure. The most common form of taxes applicable in the state is:
Commercial Activity Tax (CAT)
The Ohio commercial activity tax (CAT) is the most important state tax that new and existing businesses are required to file. This is also known as an annual privilege tax that is measured based on taxable gross receipts emerging from most forms of business activities. This can be categorized as Ohio LLC Taxes or corporation taxes as it is levied for the privilege of doing business in the state of Ohio.
According to the 2022 Ohio Revised Code, Title 57 – Taxation, OH Rev Code § 5751.03 (2022), each taxpayer benefits from excluding the first $1 million of taxable gross receipts during a calendar year. You would obviously need an Ohio business tax calculator to compute the Commercial Activity Tax rate. This is because businesses that generate $150,000 or more in Ohio gross receipts in a calendar year will be required to file Ohio commercial activity tax. This includes entities like C Corporation, S corporation, sole proprietorship, LLC, etc., and service providers like accountants, attorneys, and physicians.
If you are an out-of-state business or a foreign company, you will need to file Ohio commercial activity tax only if your Ohio-based gross receipts are $500,000 or more and if you invested more than $50,000 in personal or real property in Ohio during a calendar year.
Sales and Use Tax
One of the important Ohio corporation taxes or LLC taxes is the sales tax as well as the use tax. According to the 2022 Ohio Revised Code, Title 57 – Taxation, OH Rev Code § 5739.01 (2022), essentially, sales tax will be levied on individuals and businesses that are involved in selling, buying, or using tangible personal property. It is also applicable to certain services like laundry and dry cleaning services, private investigation and security services, and telecommunications services, among others. The sales tax rate state-wide is 5.75 percent, although certain cities, counties, or even local or municipal authorities may choose to apply additional sales and use tax rates that vary from 0.75 to 2.25 percent.
The use tax is a type of Ohio business tax that complements the sales tax. A buyer or purchaser normally owes the use tax on a transaction where the vendor has not collected any sales tax, especially when the item or service being bought is taxable. The buyer must file the use tax using the consumer’s use tax return.
Local Ohio taxes
Apart from the use tax, several different forms of local taxes may be applicable to businesses operating in this state. The local Ohio business tax will vary according to the business activity.
For Example – According to the 2022 Ohio Revised Code, Title 57 – Taxation, Chapter 5741, there can be additional county use taxes on the storage and consumption of tangible personal property. Similarly, there is a type of tax most commonly known as the Financial Institution Tax. As the name suggests, this tax will be filed by any business that operates as a financial institution in this state pursuant to OH Rev Code § 5726.02 (2022). You will need to use an Ohio business tax calculator to file different local taxes.
Are you thinking of forming a new company in Ohio?
How are Ohio Businesses taxed?
Whatever entity structure you prefer to operate in the state of Ohio, one of the foremost annual requirements will be that of filing Ohio business tax returns. There are different types of taxes that any new or existing company may be required to file, although the good news is that Ohio corporation taxes, like the corporate income tax, are nonexistent in this state. You may be required to file more than one form of tax return, depending on the business activity and location. Let us look at the various entities and their tax obligations in Ohio.
Taxes for an LLC
If you are planning to start a limited liability company in Ohio, it will be considered a pass-through entity for taxation purposes, and hence, Ohio LLC taxes or state taxes will not be applicable. This simply means that the income will pass through to the owners and other members, and they will have to file individual income tax returns. It is important to note that Ohio has a progressive income tax.
A limited liability company operating in Ohio may be subjected to Ohio commercial activity tax if the taxable gross receipts in a calendar year are more than $150,000. Most employers conducting business in this state are also responsible for withholding individual income tax and it can be withheld quarterly or monthly.
Apart from this, some of the other Ohio LLC taxes that may be applicable for your company include sales and use tax, where the maximum average combined state and local sales tax rate is 7.24 percent.
Taxes for a C Corporation
If you are considering establishing an Ohio C Corporation, your company will be subject to the Ohio Commercial Activity Tax (CAT). This is a type of annual privilege tax that applies only if the taxable gross receipts from most business activities are more than $150,000.
Ohio corporation taxes may also include employer withholding tax. This is mandatory only if your company has employees. Your C Corporation may also be subjected to sales and use tax. There is a state-wide sales tax rate of 5.75 percent, although this may vary according to the location. If your company is situated in Wayne County, then the total state and local tax rate would be 6.5 percent, but if your company is operating from Cleveland, then the rate would be 8 percent. Sales tax will be levied on tangible products and this also includes certain services as well as digital products.
Taxes for S Corporation
If you elect S Corporation tax status in Ohio, although it will not be subjected to corporate income tax but is a pass-through entity, the owners or shareholders will be required to file personal income tax. An S Corporation will be subjected to Ohio commercial activity tax (CAT) as well. This is a type of mandatory tax, although applicable only if the gross receipts of the said company are more than $150,000 annually.
An S Corporation may also be required to withhold on the shareholders and hence be subjected to withholding tax. Some of the other Ohio corporation taxes that your company may be subjected to include sales tax and use tax. The company may also be subjected to different local taxes depending on the business activity as well as the county or city it is operating from.
Taxes for a Sole Proprietorship
One of the easiest businesses that you can form and operate in Ohio is a sole proprietorship. A sole proprietorship is a single owner-run business and is, hence, considered to be a small business. As a sole trader, your business will be subjected to Ohio commercial activity tax, as this privilege tax applies to all types of entities formed in this state. Apart from this, you will also be required to file graduated individual income tax with the rate varying from 2.765 percent to 3.990 percent. The taxes for a sole proprietorship are quite similar to that of Ohio LLC taxes, and hence you may be required to file local taxes like the sales tax or the use tax.
Taxes for Partnerships
If you form a partnership company in the state of Ohio, then such a company will be required to file taxes similar to Ohio LLC taxes. Ohio treats partnerships as pass-through entities, and hence partners or owners will be required to file their individual tax returns based on the income earned by the said business. A partnership company will be required to file Ohio commercial activity tax if its gross receipts are over $150,000. They will also be subjected to withholding taxes if the company has employees. Locally, sales and use tax may also be applicable.
Ready to Incorporate your Ohio Company?
You can form different types of entities in Ohio, from a partnership company to a C Corporation. You can also elect for S Corporation status. The new business formation process can be exhaustive depending on the type of structure you choose. You will also need to file all applicable Ohio business taxes each year. IncParadise, one of the top incorporation service providers in the state, can provide you with meaningful assistance. We can help to register your LLC or corporation in Ohio.
Once you have formed a new business, your company will need to comply with several important annual requirements. Hence, IncParadise offers additional services to fulfill such requirements, such as foreign qualification and filing a DBA.