Taxes on Business Income in Hawaii
Hawaii assesses a corporate level income tax and a personal income tax. So, if you operate a business in Hawaii, then it is very likely that you or your business will be responsible for paying at least one of these taxes. We recommend that you review the following discussions to determine taxes will apply to your business.
In Hawaii, you're generally free to choose to operate your business as a C corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship. However, the entity type you select for your business may, in some cases, decide whether you or your business pays income taxes on the business income.
Corporations Are Subject to Corporate Tax
For 2011 tax years, all C corporations are required to pay an annual corporate tax that is determined by the following bracket schedule:
|Taxable Income ||Tax |
|Not over $25,000 ||4.4% |
|Over $25,000 but not over $100,000 ||5.4% |
|All income over $100,000 ||6.4% |
Alternatively, taxpayers with $100,000 or less of gross sales within the state may pay 0.5% on such sales. However, this "gross sales option" is available only to taxpayers that have no business activity in the state other than sales and do not own any property within the state.
S Corporations Are Taxed At Individual Rates
If you meet the federal tax law requirements to operate as an S corporation, the IRS allows your business to "pass through" its income to the shareholders. This means that your business will not pay any federal corporate level income tax. However, you'll have to claim your entire share of the business income on your personal federal income tax return even if you did not take any money out of the business.
In Hawaii, the law extends this favorable tax treatment to state corporate income tax liability. Therefore, S corporations will not be subject to the corporate income tax. However, your S corporation will be required to withhold personal income tax on amounts paid to nonresident shareholders.
Partnerships Are Taxed At Individual Rates
If you operate you business as a partnership, you will be subject personal income tax on your distributive share of the partnership's net income. The partnership itself is not subject to a partnership-level tax.
Limited Liability Companies (LLCs) Are Taxed According to Federal Election
Hawaii recognizes businesses operating as limited liability companies (LLCs). As an LLC, you will be treated, for tax purposes, exactly like a partnership if you are classified as a partnership for federal income tax purposes. Accordingly, your LLC will not be taxed on its net income. Instead, members must include in their Hawaii taxable adjusted gross income their distributive share of LLC income. If you elect to have your LLC taxed as a corporation for federal tax purposes, Hawaii will honor that election.