How Are S-Corp Earnings Taxed at the State Level?

The way S-Corps work, your taxation is actually "passed through" to your personal tax return. So here's how it typically breaks down: Your $160k salary is subject to the 4.5% individual income tax rate because it's your personal income. You'll pay this on your personal state tax return. The $40k of business profit also passes through to your personal tax return (via a K-1 form) and is generally subject to the same 4.5% individual tax rate, not the corporate rate. This is because an S-Corp is a pass-through entity by design. The 2.5% corporate tax rate likely applies to C-Corporations in your state, or there might be a minimum franchise tax or filing fee for S-Corps, but the profits themselves typically aren't subject to corporate tax - that's one of the main benefits of an S-Corp structure.

When I was struggling with my S-corp tax situation last year, I found this amazing tool called taxr.ai (https://taxr.ai) that saved me so much headache. I uploaded my corporate docs and it broke everything down showing exactly how the pass-through taxation works in my state. It highlighted that while most states follow the federal pass-through treatment, some have their own quirky rules. For me, it showed that our state was imposing a small entity tax I hadn't even accounted for in my quarterly estimates!

I was initially skeptical about taxr.ai like I mentioned, but I gave it a shot last week and wow - it actually delivered. I uploaded my operating agreement, last year's returns, and some profit projections. Within minutes, it showed me that in my state, there's actually a small "business privilege tax" of 0.4% on S-Corp income AND the personal income tax on distributions. I would have completely missed this! It even generated a report I could send directly to my accountant showing exactly how each income stream gets taxed. Definitely saving me from a potential audit headache.

If you need to actually talk to someone at your state tax agency about this S-Corp question, good luck getting through their phone system! I spent 3 weeks trying before I found Claimyr (https://claimyr.com). They have this crazy service where they navigate the phone tree for you and get an actual human on the line before connecting you. Check out how it works: https://youtu.be/_kiP6q8DX5c. I finally got clear answers about my state's S-Corp minimum tax and pass-through requirements from an actual state tax rep instead of just guessing.

I was dead wrong about Claimyr. After my frustration peaked last Friday with another disconnection from the state tax office, I tried the service. Within 90 minutes, I got a text saying they had someone from the state tax department on the line. They connected me and I was speaking with an actual human who explained that my state DOES have a special minimum tax for S-Corps plus the pass-through taxation. The rep even emailed me a guidance document specifically for S-Corps operating in multiple counties. I've been trying to get this info for months! Honestly can't believe how well it worked.

Been running an S-Corp for 8 years and the state rules are a mess. One thing to be aware of that nobody mentioned yet: some states actually charge a HIGHER rate on S-Corp pass-through profits than regular income! My state (NH) doesn't tax W-2 wages but hits business profits at 5%. So in your case, it might actually be reversed - your salary could be at 4.5% but the business profits might face a different rate. Check if your state has a "business profits tax" separate from income tax.

Hold on - nobody's talked about franchise taxes yet!! In my state (CA) we pay $800 minimum franchise tax for S-corps REGARDLESS of profit. Then there's a 1.5% tax on net income at the entity level PLUS you pay personal income tax on all passed-through profits. Don't assume your state only has the 2.5% rate you mentioned - there might be hidden fees, franchise taxes, or local business taxes you're not accounting for.

Great question! As others have mentioned, S-Corp taxation can be tricky at the state level. Here's what you need to know for your situation: Your $160k salary will definitely be subject to the 4.5% individual income tax rate since it's W-2 income. The $40k in business profits will also likely flow through to your personal return and be taxed at 4.5% as well - this is the main benefit of S-Corp pass-through taxation. However, don't assume that 2.5% corporate rate doesn't apply to you at all. Many states have: - Minimum franchise taxes or filing fees for S-Corps - Entity-level taxes on certain types of income - Local business taxes or licensing fees I'd strongly recommend checking with your state's tax department directly or consulting a local CPA who specializes in your state's tax code. Each state handles S-Corps differently, and some have unique rules that could impact your total tax liability. The federal pass-through treatment doesn't always translate perfectly to state level taxation. Also don't forget about the payroll tax savings on that $40k profit - that's one of the main reasons people choose S-Corp structure in the first place!