Top 5 Things you Need to Know About Hawai'i’s Business Income Tax
Taxes are a part of life and if you’re like most people they are not your favorite subject. Business taxes are often complex; the trick is to know the rules in your state so you can get them filed accurately and on time.
The following five questions and answers provide some basic information about Hawaii’s business income tax.
What taxes are owed on Hawaii business income?
Like most states, Hawaii has a corporate income tax from income earned in the state but unlike several other states Hawaii does not impose a franchise or privilege tax on its businesses. This means that generally speaking unless your business is a traditional corporation (a C corporation), your business itself will not be subject to a state tax on income or net worth. One thing to note is that if part of your business profits flow into personal income then that income will be taxable on your personal state tax return.
In most states, corporate tax rates range from about 4% to 10%. Personal income tax rates usually range from 0% (for amounts that are under a certain amount) to about 9% in some states.
When are Hawaii state tax returns due?
State tax returns are due on the 20th day of the fourth month after the close of the businesses’ tax year. For businesses whose tax year lines up with the calendar year, their returns are due on April 20th.
How does the legal status of my business affect Hawaii business income tax?
Hawaii taxes each corporation’s income at a series of marginal rates ranging from 4.4% to 6.4%. Click here for a more specific breakdown. On top of this, the state of Hawaii taxes corporate net capital gains at an alternative rate of 4%.
An S corporation is usually not required to pay separate federal income tax because it is a pass-through entity. This means that taxable income from an S corporation allocated to the individual shareholders, and each individual shareholder must pay federal tax on their share of the corporation’s income.
Limited liability companies (LLCs):
Like S corporations, standard LLCs are pass-through entities and are not required to pay income tax to either the federal government or the State of Hawaii. Income from the business is distributed to individual LLC members, who are then required to pay federal and state taxes on the amount given to them.
Note that if your LLC is classified as a corporation rather than the default partnership, your LLC would be required to pay Hawaii’s corporation income tax.
Income earning in partnerships is dispersed to the individual partners, who must pay tax on the amount distributed to them on both their federal and state tax returns.
Income from your business is given to you as the sole proprietor, and you will then pay tax to the state on that income.
What taxes do I pay if I have a multistate business generating income in Hawaii?
If your business operates in multiple states, your business may be considered to have nexus with those states and therefore may be obligated to pay taxes in those states. If your business was formed or is located in another state, but makes income in Hawaii, it may be subject to Hawaii taxes. Because of the complexity of taxation rules for multistate businesses we recommend that you consult with a tax professional.
What is transient accommodations tax Hawaii?
Transient Accommodations Tax (TAT) is a tax levied on short-term rentals by the State of Hawaii. It is basically a “hotel tax” that also applies to vacation rentals. The tax is generally applied to the gross rental or gross rental proceeds.
Effective January 1, 2018, the TAT in the State of Hawaii was increased by 1%; raising the TAT from its previous rate of 9.25% to 10.25%.
What is Hawaii General Excise Tax (GET)?
The Hawaii General Excise Tax is an added tax on a business's gross income, meant to ensure that a portion of all business transactions go to the state. It is Hawaii’s biggest income source and is our version of a sales tax.
Who has to pay GET?
Most businesses that have a physical presence in Hawaii are required to pay GET: service providers, retailers, freelancers, and small business owners are all required to pay GET although some business types are exempt and some pay a different rate.
The majority of businesses pass the cost of GET onto their customers as a surcharge on the bill.
For further guidance on Hawaii’s business income tax, visit the State of Hawaii Department of Taxation.
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