For fledgling entrepreneurs hoping to see their ventures take flight, Alabama is a great place to start a small business.
A low cost of doing business combined with a low cost of living means that your dollar stretches further here than it might in other states. Additionally, small businesses make up 99.4% of all businesses in Alabama. The Heart of Dixie is truly an entrepreneur-friendly place.
So, if you’re thinking of setting up shop in this state, keep reading to learn what you need to know about small business taxes in Alabama.
What small business taxes do you have to pay in Alabama?
The kinds of taxes a small business pays in Alabama ultimately depend on criteria like its business type, industry, employment structure, and location. However, most businesses with employees can expect to pay a franchise tax (known as the Alabama Business Privilege Tax), income tax, sales tax, withholding tax, and unemployment insurance tax.
Individual income tax
The state of Alabama requires business owners of sole proprietorships, partnerships, and other pass-through entities to pay business income taxes through their personal tax returns. The Alabama state individual tax rate for 2023 ranges from 2% to 5%.
How to pay Alabama income tax
Individual income tax returns and payments are due on the same day as federal income tax returns: April 15. If the tax filing deadline falls on a weekend or holiday, the deadline is moved to the next business day.
Individual income tax returns (Form 40) can be submitted electronically or by mail to the Alabama Department of Revenue. Those who plan on filing electronically can do so online through the My Alabama Taxes (MAT) platform. If you plan to submit your return by mail, visit the Department of Revenue website to find the correct address for your filing situation.
Corporate income tax
Incorporated businesses and limited liability companies (LLCs) with a C-corporation tax election must pay Alabama corporate income taxes, also known as business income taxes. Alabama’s corporate tax rate is 6.5% in 2023.
How to pay corporate income tax and file your return
The due date for filing and paying corporate income taxes depends on your fiscal year:
- If your business’s fiscal year follows the calendar year, your income taxes are due on April 15.
- Companies that use a July 1 to June 30 fiscal year must file their corporate taxes by September 15.
- If your company uses an alternate fiscal year, your corporate tax deadline is the 15th day of the fourth month following the end of your fiscal year.
Most corporations will use Form 20C to file their corporate income tax returns. Corporations with an income tax liability of $750 or more must submit payment via Electronic Funds Transfer (EFT). Tax returns submitted without payment can then be mailed to:
Alabama Department of Revenue
Income Tax Administration Division
Corporate Tax Section
PO Box 327430
Montgomery, AL 36132-7430
Businesses with tax payments of less than $750 must submit their tax return form, payment voucher Form BIT-V, and payment by mail to:
Alabama Department of Revenue
Income Tax Administration Division
Corporate Tax Section
PO Box 327435
Montgomery, AL 36132-7435
Additionally, corporations who expect to have a tax liability of $5,000 or more for the tax year must pay estimated income tax each quarter. These payments must be made by the 15th day of the fourth, sixth, ninth, and 12th months of the fiscal year.
Business Privilege Tax
Some states require businesses to pay an annual tax, called a franchise tax, in order to do business in that state. In Alabama, that tax is known as the Alabama Business Privilege Tax.
This tax applies to all corporations, LLCs, and disregarded entities that are registered with the Alabama Secretary of State or do business in the state of Alabama.
The tax rate applied to your business ranges from $0.25 to $1.75 for each $1,000 of net worth, depending on your business’s taxable income. Generally, the minimum tax businesses can expect to pay is $100.
How to pay the Alabama Business Privilege Tax
For new businesses, the initial Business Privilege Tax return and payment are due two and a half months after you form your business or register to do business in the state of Alabama. After the first year, all other tax returns have the following deadlines:
- For C-corps with a fiscal year ending on December 31: Three and a half months after the start of the fiscal year
- For C-corps with a fiscal year ending on June 30: Two and a half months after the start of the fiscal year
- For C-corps with a fiscal year ending other than December 31 or June 30: Three and a half months after the start of the fiscal year
- For LLCs: Two and a half months after the start of the fiscal year
The tax return form you’ll use depends on your situation. Find the form you need and full instructions here.
Business owners can pay the Business Privilege Tax by mail, online, or over the phone. Taxpayers with a tax liability of less than $750 can mail their tax return, payment voucher Form BPT-V, and a check or money order to this address:
Alabama Department of Revenue
Business Privilege Tax Section
P.O. Box 327320
Montgomery, AL 36132-7320
Alternatively, business owners with a MAT account can submit payment on the platform. For more information on other ways to pay your Business Privilege Tax, visit the Alabama Department of Revenue website.
Alabama sales tax
Most businesses that sell goods in Alabama, as well as certain service-based businesses, must pay a state sales tax to the Department of Revenue. This tax is collected by the business at the point of purchase.
Alabama’s state tax rate in 2023 is 4%. However, local governments are allowed to impose an additional sales tax of up to 7.5%, resulting in an average combined state and local sales tax rate of 9.25%.
How to pay sales tax
To determine whether your business must collect sales tax, check with your accountant and the Alabama Department of Revenue. Note that most states will not impose sales tax on necessities like food, medicine, gas, and clothing.
For most businesses, sales tax is paid on a monthly basis, with returns and payments due by the 20th day of the following month. However, businesses that meet certain criteria can request to file on a quarterly, bi-annually, or annual basis.
If your sales tax payment is over $750 for the filing period, you must pay electronically through MAT ONE SPOT. Keep in mind that payment must be submitted by 4pm Central Standard Time on or before the due date to be considered on time.
Business owners who owe less than $750 in one filing period and want to submit payment by mail can send their check to this address:
Alabama Department of Revenue
Sales & Use Tax Division
P. O. Box 327790
Montgomery, AL 36132-7790
Business personal property tax
Businesses must also pay personal property tax on property owned or leased by the business. More specifically, property that is located in the state of Alabama on October 1 will be taxed (unless exempted) at 20% of its market value.
In this state, a business’s personal property—meaning tangible property that isn’t real estate—includes items like:
- Aircraft
- Computers
- Furniture
- Machinery
- Safety deposit boxes
- Signs
- Telephone systems
- Tools
- Vehicle add-on equipment
How to pay personal property taxes
Businesses owning personal property must report it to the Department of Revenue by October 1, with taxes on the property due the following October 1.
To start the process, mail a complete and itemized list of all your business’s tangible personal property (Form ADV-40) to your county assessing official’s office or file your business personal property tax return form online. Some businesses may also receive a paper return form from their taxing jurisdiction.
Once your county or local tax authority receives your return, it will be reviewed and your tax liability calculated. You will then receive your tax bill the following year.
The Alabama Department of Revenue provides an appraisal manual to help standardize all personal property appraisals conducted in the state. For more information on how to file your return, see these instructions.
Alabama withholding tax
Employers that do business in Alabama must withhold taxes from each employee’s wages and submit them on a regular basis to the state’s Department of Revenue. Your withholding tax rate for each employee depends on the amount each individual makes.
Here’s how the tax rate breaks down:
- 2% for the first $0-$500 earned
- 4% for income over $500 and up to $3,000
- 5% for income over $3,000
How to pay withholding tax
How often you pay withholding taxes depends on how often you file tax returns for your business:
- If you file returns on a monthly basis, your taxes are due on the 15th day of the following month.
- If you file returns on a quarterly basis, your taxes are due on the last day of the month after the end of the quarter.
- If you file returns annually, your taxes are due on January 31 of the following year.
Employers with a tax liability of $750 or more must submit their tax return and payment electronically through MAT. The Department of Revenue also encourages all other taxpayers who don’t meet the tax threshold to file through MAT. However, if they decide not to, they must file the appropriate paper forms or face a penalty.
For more details on Alabama’s withholding taxes, including which tax forms to use, review the instructions on the Department of Revenue website.
Alabama unemployment insurance tax
Employers in Alabama are required to pay taxes to cover unemployment payments for eligible employees who leave the company. The 2023 tax rates vary between 0.2% and 5.4% for established businesses, but new businesses pay 2.7% on the first $8,000 of each employee’s wages.
How to pay Alabama unemployment taxes
Alabama employers must submit quarterly Contribution and Wage Reports and pay unemployment taxes by the last day of the month following the end of the quarter.
First, you’ll need to create an eGov account with the Department of Labor. From there, you can fill out your reports and pay unemployment taxes on the eGov platform.
Other industry-related and local taxes
Depending on your industry and where your business is located, you may be subject to a variety of other taxes and duties. For instance, some cities, municipalities, and counties impose additional income taxes and sales tax on local businesses.
Some businesses must also pay industry-specific state taxes, such as:
- Rental tax
- Lodgings tax
- Mobile telecommunications service tax
- Nursing facilities tax
- Pharmaceutical provider tax
For more details on which industry and local taxes your business is responsible for, get in touch with the Alabama Department of Revenue, your accountant, or your tax advisor.
Alabama business tax breakdown by business type
This chart offers an at-a-glance look at different business types and their federal and Alabama state tax obligations:
| Business type | State income taxes | Business Privilege Tax | Sales tax | Withholding tax | Property tax | Unemployment insurance tax | Federal taxes |
| C corporation | Yes, 6.5% corporate income tax rate | Yes | Yes, if applicable | Yes, if you hire employees | Yes, if applicable | Yes, if you hire employees | Yes |
| S corporation | Yes, 6.5% corporate income tax rate | Yes | Yes, if applicable | Yes, if you hire employees | Yes, if applicable | Yes, if you hire employees | Yes (pass-through) |
| LLC with C corp election | Yes, 6.5% corporate income tax rate | Yes | Yes, if applicable | Yes, if you hire employees | Yes, if applicable | Yes, if you hire employees | Yes |
| LLC | Yes, dependent on income | Yes | Yes, if applicable | Yes, if you hire employees | Yes, if applicable | Yes, if you hire employees | Yes (pass-through) |
| Partnership | Yes, dependent on income | Yes, if applicable | Yes, if applicable | Yes, if you hire employees | Yes, if applicable | Yes, if you hire employees | Yes (pass-through) |
| Sole proprietorship | Yes, dependent on income | No | Yes, if applicable | Yes, if you hire employees | Yes, if applicable | Yes, if you hire employees | Yes, by way of income tax |
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