Who pays franchise tax?

As a business owner, there are a ton of taxes you need to keep on your radar. One tax you may need to pay to your state is franchise tax. But, what is franchise tax?

Franchise tax, sometimes known as privilege tax, is a tax certain business entities have to pay to conduct business and operate in specific states. States charge businesses franchise taxes for the privilege of incorporating or doing business in the state.

Franchise tax is different from a tax imposed on franchises. And, it is not the same as federal or state income taxes. Business owners must pay franchise taxes in addition to business income taxes.

Depending on where you do business, you may have to pay franchise taxes to multiple states. For example, you may need to pay franchise taxes in other states where you do business or own property (which we’ll get into later). A business entity typically has to pay the franchise tax in its “home” state.

If your state has franchise tax, you must pay it. Typically, businesses must pay franchise tax annually. Failure to pay privilege taxes to the state can result in a company becoming disqualified from doing business in the state and other penalties. Penalties can vary from state to state.

Franchise taxes do not replace federal and state income taxes, so it's not an income tax. These are levies that are paid in addition to income taxes. They are usually paid annually at the same time other taxes are due. The amount of franchise tax can differ greatly depending on the tax rules within each state. Some states calculate the amount of franchise tax owed based on an entity's assets or net worth, while other states look at the value of a company's capital stock. Still, other states may charge a flat fee to all businesses operating in their jurisdiction or calculate the tax rate on the company’s gross receipts or paid-in capital.