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The Best and Worst States for Business Taxes

“In this world, nothing can be said to be certain except death and taxes.” – Benjamin Franklin

Taxes are an unavoidable cost of doing business. No one enjoys the amount of labor involved in calculating taxes. Still, it is both a legal requirement and a duty businesses assume in exchange for the significant assistance society provides its people and businesses alike.

However, as an entrepreneur, you can ensure that you find the best ways to cut your expenses, take advantage of tax breaks or deductions when possible, file your taxes correctly and stay away from audits and fines. 

As a business, the first step toward survival and growth is understanding your federal, state, and local taxes. All businesses are required to pay business taxes, but the taxes you must pay and how you pay them depends on the sort of organization you own. They also depend on where your business is located in the United States. These rules vary between states and can change often based on congressional rulings. Hence, it is important to keep track of the federal tax code and comprehend the extent of your tax obligations. More importantly, before investing in a business, check out the best states for business taxes in the U.S. 

In this article, we will break down the different categories of business taxes entrepreneurs need to know about. We will look at the most business-friendly states in the U.S. and those that ranked at the bottom of the list in 2023.

The Primary Categories of Business Taxes

While individuals are primarily concerned with federal and state income taxes, businesses also need to consider other tax categories. Though the combination and percentage of taxes levied will vary in different states, the primary categories of business taxes are as follows:

1. Income Tax

All businesses, except for partnerships, must file an annual income tax return. The form you use will depend on how your company is set up. A pay-as-you-go tax is the federal income tax. You must pay the tax as you earn or receive money during the year. Typically, an employee’s compensation has income tax deducted from it. You may need to pay approximated tax if you do not pay your taxes through withholdings or if you do not pay enough that way. If projected tax payments are not required, you can pay any taxes due when you file your return. Some states, like Alaska, Wyoming, South Dakota, Florida, Texas, Nevada, Washington, and Tennessee, do not collect taxes on personal income.

2. Self-Employment Tax

The social security and Medicare taxes largely applied to those who work for themselves is known as the self-employment tax (SE tax). Your social security benefits are influenced by the SE tax payments you make. Retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits are all provided through social security coverage.

Generally, if one of the following applies, you must pay SE tax and submit Schedule SE (Form 1040 or 1040-SR).

  • If your self-employment net profits were $400 or greater.
  • If you work for a qualified church-controlled organization or a church that has chosen to exempt itself from social security and Medicare taxes, you are then subject to SE tax if your employer pays you $108.28 or more in wages (unless you are a minister or a member of a religious order).

3. Employment Taxes

You have various employment tax obligations when you have employees, including payments and documents to complete.

Taxes on employment include the following:

  1. Social security and Medicare taxes
  2. Federal income tax withholding
  3. Federal unemployment (FUTA) tax

4. Excise tax

If you do any of the following, you may be required to pay excise taxes

  • Produce or market-specific goods
  • Run specific commercial ventures
  • Utilize a variety of tools, resources, or goods
  • Obtain compensation for specific services

Considering the variation in taxation regulations, entrepreneurs must evaluate the laws to choose the best states for business tax.

What Makes a State Tax-Friendly for Businesses?

As an entrepreneur, the taxes you pay to the state are added to your overhead and can eat away at your profits. Hence, entrepreneurs will always look for ways to lower their business taxes and keep their companies profitable. In the US, different states have different tax regulations. Hence when entrepreneurs want to set up a new business or move their business location, they tend to choose states that are tax-friendly for businesses. These are the states that have the lowest tax rates.

Whether you are an employee or an entrepreneur, you’re probably not going to pick up and move simply to avoid state and local taxes. There are simpler ways to cut your tax bill, like saving for retirement, calculating business expenses, and taking advantage of education credits and deductions.

Top 10 Best States for Business Taxes

An independent tax research organization headquartered in Washington, D.C., the Tax Foundation released its annual report, the State Business Tax Climate Index for 2023, which ranks state tax regimes. This helps small business owners and entrepreneurs make the best choice possible when they want to set up new businesses or change the location of their existing companies. The Index provides a bird’s eye view of how different states structure their business taxation systems, providing a road map for improvement if required. 

StateCorporate tax, rankIndividual income tax, rankSales tax, rankProperty tax, rankUnemployment insurance tax rankState-Specific Benefits
Wyoming1163428No corporate or individual income tax.
South Dakota11341437No corporate or individual income tax.
Alaska 28152644No state-level sales tax.
Florida10121123No individual income taxes.
Montana222432118High proportion of college graduates in the labor market.
No state-level sales tax.
New Hampshire44914345Generous government resources.
No sales tax.
Residents earn more per person.
Nevada25544546No corporate or individual income tax.
Utah141022816Greatest approval rate for small business loans.
Indiana111519227Ranks as the best state to start a business due to low taxes + reasonable cost of living.
North Carolina517201310A 14,581 net increase in the number of new businesses since 2020.

States that rank higher in these studies often have one thing in common – they lack a significant business tax, which greatly improves their overall score. While every state imposes property and unemployment insurance taxes, some do not levy a corporate or individual income tax, like Nevada, South Dakota, or Wyoming. Similarly, no state-level sales taxes are levied in Alaska, New Hampshire, or Montana, while no individual income taxes are levied in Florida or Tennessee. 

According to Forbes, many other states also have distinct advantages over others. For example, due to their business-friendly policies, 

  • Washington has a year-to-year business survival rate of 89%, which is the highest in the country. 
  • Texas has an increasing number of IT, energy, and healthcare businesses that apply for business licenses annually, leading to a net increase in new businesses of 15,656 since 2020.
  • Kentucky has the lowest business formation fee in the US, at just $40, encouraging entrepreneurs to set up new companies. 

The quality and quantity of the workforce also play an important role in business survival. With over 40% of their workforce having a college degree, Massachusetts, Colorado, and Connecticut are poised for success. Meanwhile, California, Alaska, and Colorado boast the largest working populations.

Top 10 Worst States for Business Taxes

The Tax Foundation also releases a list of the worst states for business taxes every year, which revealed results for 2023 included in the table below:

StateCorporate tax, rankIndividual income tax, rankSales tax, rankProperty tax, rankUnemployment insurance tax rankMost Prohibitive Disadvantage
Alabama1830501819Strict business compliance regulations
Rhode Island4033244149Shortest average work week
Hawaii1946273230Low business survival rate
Vermont4139174817High business start-up costs
Minnesota4343293134High corporate tax rate
Maryland3345304241High labor costs
Connecticut2747235023Regulatory obstacles
California4649471924High overhead expenses
New York2450434940High costs of living
New Jersey4848424532High corporate tax rate

In addition, Forbes noted that some states struggled to maintain healthy business growth. For example, 

  • New York, with a high cost of living, high unemployment rate, and a relatively low business survival rate of 79%, saw the largest decrease in business, with 3,550 fewer businesses in 2021 than in 2020.
  • Hawaii has the lowest business survival rate at just 75%.
  • Startups in Massachusetts have to shell out the most cash to get started, with the highest formation fee across the nation at $500.

The states at the bottom of the list usually have complex, non-neutral taxes with comparably high rates. For instance, New Jersey has some of the nation’s highest property tax, the highest corporate income taxes, some of the highest individual income taxes, a particularly harsh approach to treating foreign income, an inheritance tax, and some of the worst structured individual income taxes.

The Best States to Launch a Business

Taxes affect a company’s profitability, the location of a business, and the creation and retention of jobs. If taxes eat a higher portion of profits, the expense is transferred to customers, staff, shareholders, or a mix of these parties. As you might expect, businesses are more drawn to states with lower taxes.

According to Forbes, the list below includes the top states to launch a business in 2023. 

  • Business costs: They evaluated the expenses incurred to establish and operate businesses in the state.
  • Business climate: They examined the economic environment surrounding industries, which included the government and political attitude toward labor organizations, and their financial stability. 
  • Financial accessibility: They determined whether entrepreneurs or companies could avail of financial services easily. The evaluated factors included credit, loans, insurance, and other risk management services. 
  • Economy: They evaluated factors like consumer behavior, rate of growth and development, inflation, interest, and unemployment rates, to get an overall picture of economic conditions that could affect businesses in these regions. 
  • Workforce: They analyzed the level of education across the workforce-age population, determining which states had the highest number of skilled or trained workers available for local hiring. 
RankStateBusiness CostsBusiness ClimateFinancial AccessibilityEconomyWorkforceTotal Weighted ScoreScore out of 100
3North Dakota7310553096
5South Dakota6610442992
6North Carolina786342990

According to a study that evaluated several federal and state government reports, independent studies, and responses from real business owners from all over the US, the states that make it most feasible to launch a startup include:

StateMost Business-Friendly Feature
TexasBest overall for starting a new business
UtahBest for Business Financing
MontanaBest for Business-friendly Policies
GeorgiaBest for Cost of Labor
FloridaBest State for Starting a Business for Tax Purposes
CaliforniaBest for Innovation
OklahomaBest for Cost of Doing Business
IdahoBest for Real Estate
North CarolinaBest for Starting an LLC
DelawareBest for Privacy Protection


The state and local taxes you pay annually can significantly impact your company’s financial health. They affect the expansion of employment and the local economy in your company’s area. Due to the marked differences in taxation across various states, you may find it challenging to decide where to register your business or change locations if needed. As a result, it’s critical to understand the taxes you must pay as a business owner and ask for expert advice when you need it!


To ensure compliance with requirements imposed by the IRS, we hereby inform you that any information contained in this blog is not intended or written to be used, and cannot be used, for the purpose of avoiding tax-related penalties under federal, state, or local tax law.