Florida offers a host of advantages to prospective small business owners. Small business regulations in Florida are minimal, and the state imposes few barriers to entry for new businesses. Florida's labor force is expanding at an annual rate of 3%, compared to 2% at the national level, as of September 2023. The state's unemployment rate, meanwhile, stands at 5.1%, half the 10.2% national average. Lastly, and for some most importantly, Florida pays its workers and business owners an attractive bonus in the form of 12 months of warm weather, abundant sunshine and easy access to the country's most popular beaches.
Another big advantage of locating a small business in Florida is taxes. The only businesses that pay state income taxes in Florida are traditional corporations, or C corporations. While small businesses sometimes later convert to C corporations once their growth reaches a certain level, very few small businesses just starting out are traditional corporations; most are S corporations, limited liability companies (LLCs), partnerships or sole proprietorships. None of these other business designations pay state income taxes in Florida.
Moreover, individuals in Florida are not subject to state income taxes. This means business owners in Florida are not taxed on income that passes through from their small business to themselves.
Key Takeaways
- Florida is a tax-friendly state that does not impose an income tax on individuals, and has a 6% sales tax.
- Corporations that do business in Florida are subject to a 5.5% income tax.
- LLCs, sole proprietorships, and S corporations are, however, exempt from paying state income tax.
Corporate Taxes in Florida
Unless a small business is set up as a C corporation, Florida does not impose state income taxes on it. For corporations, state taxes in Florida are still low compared to most states. The standard corporate tax in Florida on federal taxable income is 5.5%, but exemptions often lower a corporation's effective tax rate significantly.
Previously, a corporation was required to pay the higher amount of the standard rate minus all exemptions and credits, or an alternative minimum tax (AMT) rate of 3.3%. However, the Tax Cuts and Jobs Act (TCJA) repealed corporate AMTs.
As of 2023, the first $50,000 in income is exempt from Florida's corporate tax. For tax years ending June 30, the due date is on or before the first day of the fourth month following the close of the tax year. For all other tax year endings, the due date is on or before the first day of the fifth month following the close of the tax year.
S Corporations in Florida
A lot of small business owners in Florida elect to set up their companies as S corporations, which provide many of the same legal protections as C corporations but do not subject the business to the state's 5.5% corporate tax.
S corporations are especially popular in Florida because they effectively shield a business and its owners from paying any state income tax, whether on the business's income or individual income. This designation provides many of the legal benefits of incorporation, such as protection of personal assets if a judgment is entered on the business. Unlike a C corporation, however, an S corporation is not subject to federal income tax, since the income earned by the business passes through to the business owners. Therefore, the owners must pay federal income tax on their income from the business at ordinary income tax rates.
As for state income taxes, the business owners pay nothing. Florida recognizes the S designation. The state does not treat S corporations as traditional corporations for tax purposes, nor does it tax the income that passes through to the business owners.
LLCs in Florida
LLCs are pass-through entities that shield business owners from certain legal and financial risks. For tax purposes, most, but not all, LLCs are classified as partnerships or disregarded entities. When this is the case, an LLC does not pay state income tax in Florida because it is not a corporation. In rare cases, an LLC is also incorporated. In Florida, this results in a state income tax of 5.5%.
Like S corporations, LLCs, except those that are also incorporated, are shielded from state income tax, and their owners pay no tax to the state of Florida on the personal income that passes through to them from the businesses. Setting up an LLC in Florida is fast, easy, and inexpensive; it is highly recommended as a minimum step for small business owners who want basic protection of their personal assets while maintaining their zero state income tax liability.
Partnerships in Florida
Business partnerships come in many forms, including general partnerships, limited partnerships (LPs), and limited liability partnerships (LLPs). No matter the specific designation, partnerships are not subject to state income tax in Florida.
Income from partnerships is paid directly to the partners of the business. They pay federal income tax on this money at ordinary income tax rates the same as they do on income from a W-2 or contract job. Because Florida imposes no state tax on ordinary income, small business owners in the state whose companies are classified as partnerships are fully shielded from state income tax.
Sole Proprietorships in Florida
Sole proprietorships work similarly to partnerships, only instead of the business income being distributed to multiple partners, it is distributed to one person who is the singular business owner. This income is considered ordinary personal income for federal income tax purposes; the business owner is assessed federal tax on it at ordinary income tax rates.
Florida considers income distributed from a sole proprietorship to be ordinary personal income, which it does not tax. Because the business is not a corporation, it is not subject to state income tax, so the business owner is absolved from paying state taxes.
Multistate Businesses
Small business owners whose companies are located in Florida but who conduct significant business in other states may have to pay taxes in those states where they earn business income, even if they don't have a physical presence there. In these situations, the business is said to have "nexus" with those states.
Whether a business owes sales taxes to a particular government depends on the way that government defines a nexus. Florida, for example, has a a $100,000 economic nexus threshold, whereas in California the threshold is $500,00. Any out-of-state business that exceeds those thresholds in a calendar year will be required to register and pay any applicable taxes.
Small businesses generating revenue from different states are advised to look into the nexus rules of the states where they do business.
Do Small Businesses Pay Taxes in Florida?
Most small businesses are structured as either limited liability companies (LLCs), sole proprietorships, partnerships, or S corporations. These types of entities are exempt from paying Florida income tax.Florida does not impose an income tax on individuals and has a 6% sales tax, making it an attractive place for small businesses to set up shop.
What Taxes Do LLCs Pay in Florida?
If the LLC is not incorporated, there is no income tax to pay at the state level. LLCs are shielded from state income tax, and their owners pay no tax to the state of Florida on the personal income that passes through to them from the business. That means most LLCs only need to pay federal self-employment tax of 15.3%, Florida’s 6% sales tax, and any applicable additional local taxes.
What Is the Self-Employment Tax in Florida?
Sole proprietors and partnerships do not pay tax at the state level in Florida. That leaves the federal self-employment tax, which stands at 15.3%. The majority (12.4%) goes to Social Security, with the rest (2.9%) allocated to Medicare.
The Bottom Line
Florida is often ranked as one of the best states for small businesses to set up shop. It’s fairly easy to start a business there, regulation is minimal, the local economy is flourishing, and the tax environment can be very favorable. In the Sunshine State, S corporations, non-incorporated limited liability companies (LLCs), and partnerships or sole proprietorships don’t pay state income taxes.
