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Square cannot provide advice on tax issues. This article is for educational purposes and does not constitute legal, tax, or financial advice. For specific advice applicable to your business, please contact a professional.
If you have employees, make enough sales, or register in certain states, you may be required to file and pay a franchise tax. Here’s more information on what franchise tax is, states with franchise tax, and how franchise taxes work so you can take steps to stay compliant and avoid falling on the wrong side of the law accidentally.
What is franchise tax?
Franchise tax is a tax imposed on businesses by state governments as a fee for doing business in the state. The name “franchise tax” may be misleading – it is NOT a tax exclusive to franchises. Franchise taxes may also be known as privilege taxes. Only some states have franchise tax, including several that are popular for business registration, including California, Delaware, Illinois, and Texas.
A franchise tax may be imposed by your business’s home state or other states where you operate. The rules for who must pay franchise taxes and franchise tax rates vary widely by state.
Franchise tax isn’t the same as income tax, use tax, sales tax, or payroll tax. In some states you may owe a combination of these taxes, including franchise tax, so it’s not safe to assume that you don’t owe franchise taxes in a state until you, a trusted accountant, or another qualified financial professional confirms it’s not required.
If you don’t know where your business stands financially, log into Square Dashboard to check on recent sales, vendor expenses, payroll, and more.
States that require franchise taxes
Franchise taxes vary by state, and it’s important to note that franchise tax laws change regularly. Here’s a current list of states with franchise taxes as of 2024:
- Alabama
- Arkansas
- California
- Delaware
- Georgia
- Illinois
- Louisiana
- Mississippi (will be phased out by 2028)
- Minnesota (does not have a formal franchise tax but imposes a corporate income tax on businesses operating in the state)
- New York (certain entities)
- North Carolina
- Ohio
- Tennessee
- Texas
- District of Columbia
On the low end, you might owe a simple flat fee. For example, businesses registered in Delaware that don’t have other operations in the state would pay a minimum $175 franchise tax. However, larger companies could pay as much as $250,000 depending on the number of shares outstanding.
California requires a minimum $800 annual franchise tax, which applies if you are registered or based in the state, “engage in any transaction for the purpose of financial gain within California,” or surpass certain levels for state sales, property, or payroll taxes. Similarly, taxable entities formed in Texas or doing business in Texas must file and pay a franchise tax of 0.375% to 0.75% if annual revenues exceed $2.47 million.
How franchise taxes are calculated
As you can see, franchise tax can be complicated. Here’s a look at how to calculate franchise taxes in several popular states. There are other factors that affect calculations for some states; these examples do not account for all scenarios.
California
In California, the Franchise Tax Board enforces these business taxes for the state. The fee for corporations is the greater of $800 or your net business income after your corporate tax rate is applied. For C corporations (other than banks and financial institutions), the tax rate is 8.84% of profits. S corporations pay 1.5% with a minimum of $800. LLCs pay a flat fee of $800 for up to $249,000 in annual income or, for LLCs earning $250,000 or more, an annual tiered fee based on annual earnings that could result in a fee of $900 to $11,790 per year.
Delaware
Delaware offers a system where your franchise tax rates are determined by one of two methods. The simplest method is based on the number of shares outstanding. Companies with no stock pay a minimum annual $175 franchise tax. Companies with up to 5,000 outstanding shares pay the same $175 minimum. With up to 10,000 shares of stock, you’ll pay $250 per year, then a fee of $85 for each additional 10,000 shares up to $200,000 per year. The second method (Assumed Par Value Capital Method) is more complex and a tax professional should be consulted.
Texas
Texas franchise taxes are paid to the Texas Comptroller of Public Accounts. You’ll have to earn more than $2.47 million in a tax year before paying a franchise tax. Sole proprietorships and general partnerships are not subject to the tax, and other organizational structures, such as nonprofits, may apply for exemption. For other business entities, once you go over the minimum, you’ll pay 0.375% as a retail or wholesale business or 0.75% in most other industries. If you earn at least $20 million per year, you can use the EZ tax form tax rate of 0.331%.
How to pay franchise tax
If you operate in a state with franchise tax, your business may choose between electronic and paper filing. Depending on your business and the state, you may have one or both filing options. Tax software can streamline the filing process, so be sure to check for your state’s requirements if you choose to use one. Texas and California, among other states, share a list of approved software providers for filing franchise tax.
When filing electronically, your tax information is transmitted to the state using online systems. From that point, you can log in to the state payment system to make your tax payment or send in payment using another form as required.
Paper forms are more viable for some businesses, but they can be prone to more manual errors and slower processing times. Due to the added potential challenges of paper franchise tax forms, electronic filing is preferred by most businesses and states.
It’s your responsibility to stay on the right side of the law.
Business owners must be aware whether they are required to file and pay franchise taxes. If you do business in a state with franchise tax and neglect to file, you could wind up with fines and penalties, plus back taxes. It’s much better to stay ahead of franchise tax requirements than to risk consequences of failing to file and pay.
When you’re looking for critical data to file accurate and timely franchise taxes, Square is a helpful resource. With systems that offer data and automation for various business needs, Square makes it much faster and easier to prepare and file if you do business in a state with franchise tax.
