Small business owners usually know that the IRS is going to take a chunk of their profits, but they also need to plan for their state tax obligations. If you do business in Massachusetts, you could run into a wide range of state taxes that further reduce your bottom line. Here’s what you need to know about the tax obligations imposed by the Massachusetts Department of Revenue and other arms of the state government.
How does Massachusetts tax corporations?
The state imposes an excise on “general business corporations” that own or use property, have employees, or otherwise do business in Massachusetts. A corporation can become subject to the tax from 1) regular or systematic visits to the state by employees or representatives of the corporation, or 2) economic or virtual contacts that exceed a certain dollar threshold (see below).
How is the corporate excise computed in Massachusetts?
The excise includes an income measure and a non-income measure. A minimum excise applies when those two measures combined are below a certain dollar measure for a taxable year.
Income measure: This measure is based on net income. The calculation of net income requires reducing your federal gross income by most federal tax deductions. Corporate tax credits are determined separately under Massachusetts law, and federal tax credits don’t apply in determining the Massachusetts income measure.
Non-income measure: In determining its non-income measure, a corporation must first perform a calculation to see whether it is a tangible property corporation or an intangible property corporation. These calculations (performed on Schedule B of Form 355, “Business/Manufacturing Corporation Excise Return”) are generally based on the relative amounts of the corporation’s tangible and intangible assets.
A tangible property corporation is taxed based on the value of its tangible property. An intangible property corporation is taxed based on its net worth.
What is the corporate excise tax rate for general business corporations?
The following corporate excise tax rates apply:
- Net income: 8%
- Tangible property or net worth: $2.60 per $1,000
- The minimum excise is $456.
How are S corporations taxed in Massachusetts?
An S corporation’s income, losses, and deductions are passed through to the shareholders and reported and taxed on their individual income tax returns. (Entities that are S corporations for federal income tax purposes are S corporations for Massachusetts purposes, with the exception of security corporations.)
S corporations are liable for the non-income measure of the corporate excise and are liable for the income measure of the corporate excise on any income that is taxable to the S corporation federally, at the full corporate excise rate. The amount of corporate excise tax that an S corporation is required to pay generally depends on the corporation’s gross receipts.
The following rates apply to S corporations:
- Total receipts $6 million or more but less than $9 million (net income): 2%
- Total receipts $9 million or more (net income): 3%
- Certain built-in gains that are taxable at the federal level and passive investment income taxable at the federal level: 8%
- Net income taxable at the federal level including certain built-in gains that are taxable at the federal level and on passive investment income taxable at the federal level: 8%
- Tangible property or net worth: $2.60 per $1,000
The minimum tax is $456.
Are any tax credits available?
Yes, Massachusetts offers several credits you may be able to leverage to offset your tax bills, including:
- Apprenticeship Tax Credit
- Brownfields Tax Credit
- Community Investment Tax Credit
- Economic Development Incentive Program Credit
- Economic Opportunity Area Credit
- Employer Wellness Program Credit
- Investment Tax Credit
- Research Credit
- Vanpool Credit
- Veteran’s Hire Credit
How should corporations pay the excise?
Form 355 is due on the 15th day of the fourth month for C corporations—including security corporations, financial institutions, and insurance companies—after the end of the corporation’s taxable year, whether calendar or fiscal.
Massachusetts S corporations must annually file Form 355S, “S Corporation Excise Tax Return.” S corporation returns, together with payment in full of any corporate excise due, must be filed on or before the 15th day of the third month after the close of the taxable year, calendar or fiscal.
Corporations are required to file returns and pay taxes electronically.
Can a corporation obtain an extension on its filing deadline?
Corporate excise taxpayers receive an automatic extension of time to file their tax returns as long they have paid the greater of:
- 50% of the total amount of tax ultimately due, or
- The minimum corporate excise by the original due date for filing the return.
Filing an extension with the IRS won’t count as filing an extension for Massachusetts. And remember that an extension is only an extension of time to file—you don’t have more time to pay. Any amount due will incur interest even if a valid extension is on file.
Does Massachusetts require estimated excise payments?
All corporations—both general business and S—that reasonably estimate their excise to be more than $1,000 for the taxable year are required to make estimated payments. Payments are made on Form 355-ES, “Corporate Estimated Tax Payment,” which must be filed electronically through MassTaxConnect.
Estimated taxes must either be:
- Paid in full on or before the 15th day of the third month of the corporation’s taxable year, or
- Paid in four installments.
Corporate estimated tax installments are due as follows:
- 40% of estimated tax is due on or before March 15
- 25% of estimated tax is due on or before June 15
- 25% of estimated tax is due on or before September 15
- 10% of estimated tax is due on or before December 15
Note: New corporations that 1) are in their first full taxable year, and 2) have fewer than 10 employees have different estimated payment percentages. They should pay 30%, 25%, 25%, and 20%, respectively.
Do partnerships have any income tax obligations?
Partners pay income taxes on their individual shares of partnership income, whether distributed or not, on their individual income tax returns. While partnerships aren’t directly subject to income tax, they may be required to file Form 3, “Partnership Return of Income.”
A partnership must annually file the form if it:
- Has a usual place of business in Massachusetts, or
- Receives federal gross income of more than $100 during the taxable year.
Although no tax payments are made with Form 3, the partnership is subject to penalties for failure to file or late filing of this return. Form 3 returns are due annually, by the 15th day of the third month after the close of the partnership’s taxable year, calendar or fiscal.
Partnerships are granted an automatic six-month extension to file their calendar-year return on or before September 15 of the following year.
What is the pass-through entity excise?
Like several other states, Massachusetts has enacted a workaround in response to the $10,000 cap on the federal state and local tax deduction. The elective pass-through entity excise is generally available to:
- S corporations
- Limited liability companies (LLCs) that are treated as an S corporation or partnership
These businesses may elect annually to be subject to the pass-through entity excise at a rate of 5%. Qualified members of an electing entity are then eligible for a credit equal to 90 credit of a member’s distributive share of excise paid. The credit is refundable if claimed against personal income tax imposed, and any excess credit is treated as an overpayment.
To elect the excise, you must electronically file Form 63D-ELT, “Entity Level Tax,” your income tax return, and all schedules. Once the election is made for a particular tax year, it’s irrevocable for that year and binding on all qualified members of the pass-through entity. The pass-through excise must also be paid electronically.
A pass-through entity that files Form NRCR, “Nonresident Composite Return,” on behalf of its participating nonresident members can claim the sum of all of the credits allocable to the members who have elected to participate in the composite return.
What is pass-through entity withholding?
Pass-through entities that have non-resident owners must withhold income tax from distributive shares of income for those owners. This requirement applies to:
- General partnerships
- Limited partnerships
- Limited liability partnerships
- LLCs with members treated as a partner under Massachusetts tax law
- S corporations
As an alternative to withholding on members, a pass-through entity can file a composite return on behalf of its individual nonresident members. To participate, the members must be nonresidents for the entire tax year.
Nonresident members generally will be subject to withholding if they haven’t:
- Certified to the pass-through entity that they agree to file their own tax return reporting the pass-through entity income,
- Elected to participate in a composite return, or
- Certified that they are otherwise exempt from withholding.
Does Massachusetts have sales and use taxes?
The Massachusetts sales tax is 6.25% of the sales price or rental charge on tangible personal property.
The 6.25% business use tax applies to tangible personal property purchased for consumption, storage, or use in the state—including property purchased by phone, mail order, or online—where sales tax wasn’t collected or was paid at a lower tax rate. Massachusetts presumes that any tangible personal property purchased outside of the state and brought into it within six months is for use, storage, or consumption and is therefore subject to the use tax.
The business use tax might apply to purchases such as:
- Office supplies
But business use tax isn’t due when:
- Goods are purchased for resale within the normal course of business
- Goods are purchased for use as an ingredient or component part of an article of tangible personal property produced for sale
- Machinery and equipment are purchased for use in manufacturing operations
- Sales or use tax has been paid to another state or U.S. territory on tangible personal property to be used in Massachusetts
Generally, if you paid a sales tax of 6.25% or more to another state, you wouldn’t have to pay a use tax to Massachusetts.
Does the sales tax apply to remote sellers?
Remote sellers—those that sell into Massachusetts without having a physical presence in the state—must collect tax on sales of tangible personal property or services into Massachusetts when they have Massachusetts sales that exceed $100,000 in a calendar year.
How are sales and use taxes paid?
Payments are due with your Form ST-9 “Sales and Use Tax Return,” which is due 30 days after the end of each applicable filing period. Your filing period depends on the amount of sales and use taxes you collect:
- If you collect $100 or less in sales and use taxes per year, you can file annually.
- If you collect $101-$1,200 in taxes per year, you must file quarterly.
- If you collect $1,201 or more in taxes per year, you must file monthly.
Taxpayers with more than $150,000 in cumulative tax liability in the prior year must make advance payments.
If your business is registered to collect sales tax, use tax is reported on and paid with your sales tax return. If not, you’ll file Form ST-10, “Business Use Tax Return.” The form is due on or before April 15 for purchases made in the prior calendar year.
Sales and use tax returns must be filed online through MassTaxConnect.
How much do employers have to contribute to the Paid Family and Medical Leave program?
The contribution rate for employers depends on the number of covered employees. Contribution rates are set annually for January 1-December 31. The new contribution rate applies to wages earned on or after January 1 of each year. Employers must also withhold employees’ contributions from their wages.
For 2023, employers with 25 or more covered individuals must send a contribution of 0.63% of eligible wages, split between covered individuals’ payroll or wage withholdings and an employer contribution. The employer’s minimum share is 0.312%, as part of the 0.52% medical contribution. In addition to the medical contribution, there’s a .11% family contribution, but employers aren’t required to contribute to that portion.
Small businesses with fewer than 25 covered individuals must send an effective contribution rate of 0.318% of eligible wages. This contribution rate is less because small employers aren’t required to pay the employer share of the medical leave contribution. In other words, employers with fewer than 25 covered individuals can withhold the entire contribution from an employee’s eligible wages.
Employers must contribute at least the minimum share of the contribution, but you can opt to cover a larger share of the contribution for some or all of your employees.
Are any exemptions from the contributions available?
Employers that offer an approved private plan with paid leave benefits that are equal to or more generous than those provided under the Paid Family and Medical Leave program may be exempt. You can apply for an exemption through MassTaxConnect.
In addition, certain employers are automatically excluded, without applying for an exemption.
Does Massachusetts have any other excise taxes?
Massachusetts has several different excise taxes, including the:
Does Massachusetts tax business personal property?
Partnerships, LLCs, and other unincorporated entities that aren’t treated as corporations for federal income tax purposes generally are subject to tax on all personal property they own. This includes LLCs and other unincorporated entities treated as disregarded entities for federal income tax purposes. Partnerships include limited partnerships and limited liability partnerships.
Property that’s subject to an alternative tax or assessment (for example, motor vehicles that are subject to excise) may be exempt. In addition, cities and towns may opt to exempt personal property from tax if the value of the personal property account doesn’t exceed a minimum threshold established by the municipality. The established threshold can’t exceed $10,000 in value.
Corporations are taxable on their networks of poles, underground conduits, wires, and pipes as personal property. Corporations are specifically exempt from local taxation for all other personal property, except machinery.
What are employers’ withholding responsibilities in Massachusetts?
Massachusetts employers must withhold state personal income taxes from 1) all Massachusetts residents’ wages for work done either in or outside the state, and 2) nonresidents’ wages for work done in the state (this is in addition to federal withholding obligations to the IRS). New employers must file returns and pay withholding taxes electronically on MassTaxConnect.
Owners of sole proprietorships generally aren’t considered to be employees for withholding purposes and don’t need to register for withholding solely to pay their own taxes. But, if you expect to owe more than $400 in Massachusetts state income tax on the income you receive from your business, you must make individual estimated income tax payments.
The amount to withhold from an employee’s pay is based on:
- The employee’s taxable wages,
- The number of exemptions claimed, and
- Any additional withholding amounts requested on Form M-4, “Massachusetts Employee’s Withholding Exemption Certificate”
You can calculate withholding amounts using either the withholding tables provided in Circular M or the percentage method described in Circular M. The methods may be applied on a daily, weekly, biweekly, semi-monthly, or monthly basis.
The filing and payment schedule for your withholding returns (Form M-941, “Employer’s Return of Income Tax Withheld”) turns on your projected annual withholding tax collected from all employees:
- $100 or less: Due annually, by January 31 of the following year
- $101-$1,200: Due quarterly, on or before the last day of the month following the close of the calendar quarter (April 30, July 31, Oct. 31, and Jan. 31)
- $1,201–$25,000: Due monthly, on or before the 15th day of the following month except for the payments for March, June, September, and December, which are due on the last day of the following month
- More than $25,000: Due quarterly, on or before the last day of the month following the close of the calendar quarter. When Massachusetts income tax withheld is $500 or more by the 7th, 15th, 22nd, and last day of a month, you must pay within three business days after those listed dates (the 7th, 15th, 22nd, and last days of a month).
How do unemployment insurance taxes work in Massachusetts?
Generally, the Massachusetts unemployment insurance law requires you to contribute to the Unemployment Insurance (UI) Trust Fund if you:
- Have one or more employees working on a permanent, temporary, or part-time basis, on one or more days in 13 weeks during a calendar year, or
- You pay wages of $1,500 or more in any calendar quarter.
The weeks of employment don’t need to be consecutive, nor must the employees remain the same. (The state unemployment tax is in addition to the federal unemployment tax.)
You must register online to report quarterly wage data to UI Online. You’re required to file even if you have no employees and no wages to report for a quarter. Once you submit your quarterly employment and wage detail report, UI Online will calculate your balance due. Contributions are due by 3:00 p.m. on or before the quarterly due dates:
- Quarter 1: April 30
- Quarter 2: July 31
- Quarter 3: Oct. 31
- Quarter 4: Jan. 31
New employers contribute at an assigned rate for the first three calendar years. In the fourth year, you’ll receive a true experience rating using the formula prescribed by law. The current new employer rate for employers in a non-construction industry is 1.45%, under UI Tax Rate Schedule A. The rate is 5.55% for new employers in construction.
The experience rating is based on the two-step reserve ratio method:
- A reserve percentage is calculated by dividing your account balance by the three-year wage average.
- The reserve percentage is applied to the annual rate schedule currently in effect, and the experience rate is determined for the coming year.
Once an experience rate is assigned, that rate is applied to the applicable wage base. The current taxable wage base is $15,000 in wages, so you’ll apply the rate just to the first $15,000 in wages for each employee.
Interest will accrue on any unpaid principal balance at the rate of 12% per year from the applicable quarter due date until the balance is fully paid. If you have outstanding debt and can’t pay the full amount due, you can request a payment plan. This will allow you to pay the outstanding debt in installments (interest will continue to accrue).
Staying up-to-date on all of your federal and state tax obligations can eat up a lot of your time and resources. Gusto’s payroll service can simplify matters by making it easier to pay employees and automatically file your payroll taxes.