Alabama small business taxes

Pay Your Alabama Small Business Taxes

Most small businesses are required to pay state taxes. Learn about your Alabama business taxes and how we can help you stay compliant.

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Keeping your Alabama business legally compliant means understanding and fulfilling your business’s tax obligations at the local, state, and federal levels. If this sounds scary, we’re here to help. Read on to learn more about the types of state business taxes you might need to pay as an Alabama small business, how to pay them, and when they are due. 

Our Worry-Free Compliance Service keeps track of your business’s important filing and compliance deadlines and alerts you when a deadline is coming.

If you’re looking for information about federal taxes, head over to our page on federal taxes for small businesses to learn more.

Step 1: Establish your Alabama business’s corporate income tax obligations

As a responsible business owner, you probably keep a close eye on how much money your business makes. This is not only important for maintaining your daily operations and making a living, it’s also important for determining how much money you will likely owe in state income taxes. The state of Alabama levies taxes on almost all business entities operating within its borders, but the way each business is taxed depends on its structure. 

In general, the state of Alabama taxes corporate income the same way the federal government taxes corporate income. The state taxes both the corporate profits and the dividend distributions that shareholders receive. This is the “double taxation” you’ve probably heard about in reference to corporations. The Alabama business tax rate for corporate income is 6.5%. 

The due date for your corporate income tax returns is a little tricky. You have multiple options when defining your fiscal year, which dictates when your income tax returns are due. Your corporation’s fiscal year can run from January 1 to December 31 (a calendar year), from July 1 to June 30, or it can be a unique range of dates. Depending on the fiscal year you choose, your income tax return due date might be:

  • Your income tax due date is April 15 if your fiscal year is a calendar year.
  • If your fiscal year ends on June 30, your income tax due date is September 15.
  • If your fiscal year ends on a date other than December 31 or June 30, your income tax due date is the 15th day of the fourth month after your fiscal year ends.

Choosing a unique fiscal year might seem like a hassle when it comes to determining tax due dates. But choosing one can also be beneficial if it properly tracks the seasonal ebbs and flows of your business. 

For sole proprietorships and pass-through business entities, the members or owners are normally taxed as individuals on their personal income tax returns. In Alabama, pass-through entities include: 

  • General partnerships
  • Limited partnerships
  • Limited liability partnerships 
  • Limited liability limited partnerships
  • Limited liability companies (LLCs) with more than one member

If any members of a pass-through entity aren’t residents of Alabama, the business has to file returns and pay taxes on any income nonresidents make from business distributions. The income tax rates for owners of sole proprietorships and pass-through entities vary by the amount of income they make from the business. The tax rate ranges from 2% to 5%. You file these sole proprietor and pass-through entity state income tax returns at the same time you file your federal income tax returns. 

Step 2: Determine your Alabama business’s withholding taxes

If you have employees, the state of Alabama requires you to withhold taxes from your employees’ wages. Basically, these are your business’s employment taxes. Alabama law defines the employer-employee relationship the same way the IRS defines it, where the business controls the behavioral and financial aspects of a worker’s daily activities and provides benefits such as pensions and health insurance.

The withholding tax rates for employees’ wages depend on the amount each employee makes. Also, you might have to withhold multiple amounts in a paycheck. Alabama’s withholding tax rates are:

  • 2% for the first $0 to $500 earned
  • 4% for earnings over $500 and up to $2,500
  • 5% for earnings over $3,000

The due date of these taxes depends on how often you file tax returns for your business. 

The due dates for your Alabama withholding taxes are as follows: 

  • Your withholding taxes are due by the 15th day of the month after you close if your business files monthly returns
  • If your business files quarterly returns, your withholding taxes are due by the last day of the month after your quarter ends
  • If your business files annual returns, your withholding taxes are due by January 31 after the withholding year ends

As you can see, there are a lot of dates associated with your Alabama small business taxes. Organization and foresight are key to keeping your business compliant. 

Step 3: Establish your Alabama business’s additional state tax obligations

When many people think about taxes, they normally think about income taxes and withholding taxes. As a business owner in Alabama, you likely need to think about many more taxes if you want to keep your venture above board. Other common types of taxes that apply to many Alabama businesses include: 

  • Sales taxes
  • Business privilege taxes
  • Unemployment taxes
  • Excise taxes

Some of the above-mentioned taxes depend on the nature of your business, while others apply to almost all businesses in the state.

Sales Taxes 

If your business sells goods, you likely need to pay sales tax. Sales tax rates differ by the kinds of goods you sell. Some of the most common Alabama’s sales tax rates are:

  • 1.5% for machinery and parts used in farming, manufacturing, processing, compounding, quarrying, and mining.
  • 2% for automobiles, truck trailers, semi-trailers, and manufactured homes.
  • 3% of retail sale prices for vending machine foods.
  • 4% for entertainment and amusement proceeds and sales of all other tangible personal property that isn’t exempt.

You pay your sales taxes monthly, and you must pay by the 20th day of the following month. You can find additional tax rates on the Department of Revenue’s website. 

Business Privilege Taxes

Many entities organized under Alabama law or doing business in Alabama have to pay a business privilege tax. Your rate for this tax depends on many factors. To determine your rate, you start with your federal taxable income, multiply that amount by your apportionment rate, and apply it to Alabama’s rate schedule. 

Your initial business privilege tax return is due 2.5 months after you form your business or receive authority to run your business in Alabama. Subsequent returns are due as follows:

  • For C corporations that define their fiscal year as a calendar year or a year that doesn’t end on June 30, Business Privilege tax returns are due within 3.5 months after the beginning of the fiscal year.
  • For C corporations that end their fiscal year on June 30, business privilege tax returns are due within 2.5 months after the beginning of the fiscal year.
  • Business privilege tax returns for limited liability companies are due within 2.5 months after the beginning of the fiscal year.

Filing this return requires attachments such as federal tax returns or balance sheets and income statements. 

Unemployment Taxes

Employers pay unemployment taxes to cover unemployment payments for eligible, former employees. The state of Alabama considers several employer characteristics when determining the tax rate, but new businesses pay 2.7% for the first $8,000 of each employee’s wages. Quarterly Contribution and Wage Reports are due by the last day of the month after your quarter ends.

Excise Taxes

In Alabama, financial institutions pay excise taxes that are distributed to a general fund and local governments. 

Step 4: Prepare to file and pay your Alabama business taxes

After you determine what taxes to pay and the corresponding amounts, you need to know who to pay. Alabama’s tax agency is the Department of Revenue. However, you open Alabama Unemployment Tax accounts through the Department of Labor.

To fulfill many of your tax obligations, you can use the Department of Revenue’s online portal. To properly file your returns, you need to gather and organize your business’s relevant financial information. This can include sales receipts, invoices, employee wage information, and legal documents. 

We can help you keep track of your relevant tax documents with our ZenBusiness Money App. Our app not only helps you organize your financial documents when tax season comes, it helps you get paid quickly with easy transfers and custom invoices. 

Do I need an accountant? 

Regardless of do-it-yourself options, most small businesses need the help of a professional accountant. Federal and Alabama small business taxes can get complicated quickly, and the consequences for those who file incorrect returns can be severe. 

Hiring a tax professional can cost you, but that cost pales in comparison to possible tax penalties and sanctions. It’s a good idea to consider hiring a tax professional even if you think you know how to file small business taxes in Alabama. If you don’t know where to start in your search for the right tax professional, you can check the IRS’s webpage on understanding tax professional credentials and qualifications. 

How We Can Help

Tax obligations are serious and often difficult to understand. If your head is spinning with thoughts of different rates and deadlines, we can help you relax and focus. With our ZenBusiness Money App, we not only help your business receive payments quickly, but we also keep your financial documents in order for when the tax authorities come knocking. We keep an eye out for your business documents and filing needs, so you can focus on your daily operations. If you’re just forming your business, we can make it easier with our Alabama LLC Formation service or Corporate Formation Service.

Disclaimer: The content on this page is for information purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

FAQs

  • How much can an Alabama small business make before paying taxes?

    The lowest tax rate applied to taxable income of an Alabama business is 2%. This rate applies to owners or members of pass-through entities who make $0 to $500.

  • What percentage does an Alabama small business pay in taxes?

    The percentage an Alabama business pays in taxes depends mainly on its business activities, business structure, and income. Alabama business income tax rates can range from 2% to 6.5%. Your business may also have to pay other Alabama taxes.

  • How does an Alabama small business pay taxes?

    In many cases, you can use the Department of Revenue’s online portal, or you can send your returns by mail. Remember that you may also need to open an Alabama Unemployment Tax account with the Department of Labor.

  • Do I have to file taxes for my small business in Alabama?

    If you conduct business in Alabama and your business isn’t exempt, you need to file Alabama tax returns.

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