It's an exciting time for business owners when they take their small businesses to the next level, expanding to other locations.
While there are many moving parts when opening a new office or store in the same state, business clients have additional tasks to tackle when branching out into other states. As a trusted accounting and tax resource, you will likely be their go-to for answers when they have questions about what's involved in those efforts.
In this post, I will cover three important compliance components of setting up shop in another state.
Foreign qualification
Foreign qualification is the process of registering an entity that exists in one state as a foreign entity in another state to legally allow it to conduct business there. Different states have different
After a company has foreign qualified, it must fulfill the state's business compliance requirements — e.g., obtain licenses, file annual reports, comply with employment laws, and pay applicable state (and possibly local) taxes.
State income tax
State income tax is a state-mandated tax that most states collect on business income and employees' pay. Any business with employees in the state is responsible for withholding SIT from employees' gross wages or salaries and remitting that money to the correct state tax agency. Typically, state tax rates vary by state and differ for business entities and individuals.
Currently, nine states do not levy an individual income tax, and a few also do not have a corporate income tax:
- Alaska (no individual income tax, but has a graduated corporate income tax);
- Florida (no individual income tax, but has a corporate income tax);
- Nevada (no individual income tax; no corporate income tax, but levies a gross receipts tax on business entities with gross revenue exceeding $4 million in a fiscal year);
- New Hampshire (doesn't tax individual's wage income and is eliminating the tax on dividends and interest income for the 2025 tax year; has a business profits tax and entities with gross receipts over $298,000 are subject to a business enterprise tax);
- South Dakota (no individual or corporate income tax);
- Tennessee (no individual income tax; no corporate income tax, but has a business tax, a privilege tax for doing business by making sales of tangible personal property and services, which usually consists of two taxes: a state business tax and a city business tax);
- Texas (no individual income tax; no corporate income tax, but has a franchise tax, a privilege tax on business entities formed in or doing business in the state);
- Washington (no individual income tax; no corporate income tax, but imposes a business and occupation or public utility tax on gross receipts); and,
- Wyoming (no individual income tax or corporate income tax, but has a business entity license tax).
Note that cities and counties in some states charge their own income tax as well, even if the state does not levy income tax.
Before withholding SIT and local income tax from employees' pay in a state, an employer must register for a state-issued employer identification number and follow the local government's rules for registering to withhold and remit its income tax. Businesses must pay close attention to meeting the state and local payroll reporting and payment deadlines to avoid fines and penalties.
State unemployment insurance
Businesses with employees in a state with its own unemployment insurance program must also register to contribute to that program. Like the federal unemployment program, state unemployment insurance (or SUI, also known as SUTA) provides temporary payments to workers who become unemployed due to no fault of their own. A few states — Alaska, New Jersey and Pennsylvania — require employees to pay a portion of the SUI. The laws of the state establish the taxable wage threshold and the unemployment tax rate.
Employers must pay federal and state unemployment insurance for each employee based on the employee's wages or salary. The 6% FUTA tax applies to the first $7,000 paid (after subtracting any FUTA-exempt payment amounts) to each employee during a calendar year. Please note most states have a credit reduction amount that reduces the 6% FUTA tax; the credit reduction rates can change each year for each state. States' SUI rates vary, with each state determining the wage base, or threshold, for when SUI kicks in. Businesses can anticipate that SUI tax rates might change from year to year in response to economic conditions.
To register for SUI, businesses must register with the state department (e.g., the Department of Revenue or Department of Employment Security) responsible for unemployment taxes. Businesses need an EIN from the IRS to set up an account with the state for filing and remitting SUI taxes. Generally, states require businesses to report and pay their SUI quarterly.
There's more
Also, inform business clients that some states require employers to pay or withhold additional payroll taxes. For example, employers in California must pay an employment training tax, which provides money to train employees in specific industries and withhold or pay state disability insurance from employees' paychecks, which temporarily pays workers when they're ill or injured due to non-work activities or for pregnancy, and paid family leave benefits. In Kentucky, many counties and cities impose an occupational license fee on individuals' payroll and the net profits of a business.
Also, businesses with workers on payroll in a state must pay for workers' compensation insurance; no portion of that cost may be deducted from employees' pay.
The bottom line
As your clients' trusted tax advisor, I encourage you to provide the most clear and comprehensive expertise that your licensing allows so your clients understand their tax and payroll obligations when they expand their operations to other states and localities. Also, make them aware that states' rules and regulations vary for companies registering as foreign entities within their jurisdictions. It's critical that your business clients research the requirements that apply to them and get the professional legal guidance they need to fully understand and comply with their responsibilities.
