Filing taxes for a small business in Arkansas can be complicated and confusing.
This ultimate guide promises to clearly explain all the key taxes, licenses, and regulations small business owners need to know to stay compliant in Arkansas.
You'll get a breakdown of sales taxes, income taxes, property taxes, and business license requirements, along with tips for registration, tax IDs, sales tax holidays, incentives, and more resources to simplify Arkansas small business taxes.
Introduction to Small Business Taxes in Arkansas
Small businesses in Arkansas need to be aware of several key taxes, including sales tax, income tax, payroll tax, and property tax. Understanding tax obligations is crucial for remaining compliant and avoiding penalties.
Defining a Small Business in Arkansas
The state of Arkansas defines a small business as one that has fewer than 100 full-time employees and generates less than $6 million in annual gross revenue. Qualifying small businesses may be eligible for certain tax incentives and programs.
Overview of Relevant Taxes for Small Businesses
The main taxes that small business owners need to pay attention to in Arkansas include:
- Sales tax - Charged on goods and certain services sold in Arkansas. The state sales tax rate is 6.5%. Additional city and county sales taxes may also apply.
- Income tax - Arkansas has a graduated personal and corporate income tax system with rates ranging from 0.9% to 6.9%. Pass-through business income is also subject to personal income tax rates.
- Payroll tax - Employers in Arkansas need to pay federal and state payroll taxes, including Social Security, Medicare, unemployment insurance and withholding taxes.
- Property tax - Levied annually by counties and municipalities on commercial real and personal property. Average effective property tax rate is around 1% of assessed value.
Understanding Economic Nexus and AR Code § 26-52-117
Arkansas requires out-of-state sellers to collect and remit sales tax once they exceed $100,000 in sales or 200 separate transactions in the state, under economic nexus laws as per AR Code § 26-52-117. This applies to businesses with no physical presence in Arkansas. Staying aware of this threshold can help small e-commerce businesses remain compliant.
What taxes do businesses pay in Arkansas?
Arkansas has a moderately complex tax structure for businesses. Some of the main taxes businesses pay in the state include:
- Sales tax: Arkansas has a 6.5% statewide sales tax rate. There may also be additional local sales taxes, bringing rates up to 9.46% in some areas. This applies to retail businesses selling goods.
- Income tax: Arkansas has a corporate income tax with rates ranging from 1% to 5.3%, depending on a corporation's income level. This applies to C-corps and S-corps.
- Property tax: Businesses owning real property in Arkansas are subject to property taxes. Rates vary widely across the state.
- Payroll tax: Businesses with employees must pay unemployment insurance taxes, as well as other payroll taxes like Social Security and Medicare. Rates vary based on number of employees and payroll size.
In addition to the taxes above, some businesses may need to obtain licenses and permits. For example, a business license is required in most cities and towns in Arkansas. Consulting with an accountant can help businesses understand their complete Arkansas tax obligations.
What is the sales tax for small business in Arkansas?
The state sales tax rate in Arkansas is 6.5%. This applies to all businesses operating in the state, regardless of size.
In addition to the state sales tax, there may also be local sales taxes that apply depending on where your business is located. Local sales tax rates in Arkansas range from 0-5.5%, with an average local rate of around 2%.
So the total sales tax rate for a small business can range from 6.5-12% depending on jurisdiction. You can use Arkansas' online sales tax lookup tool to find the exact sales tax rate based on your business address.
Some key things small businesses need to know about Arkansas sales tax:
- You need a sales tax permit if making taxable sales
- Sales tax is collected on retail sales of tangible personal property and certain services
- Use tax applies if you buy items for resale but then use them yourself
- Out-of-state online sellers may need to register if they exceed the economic nexus threshold
- Sales tax returns are generally due the 20th of the month following the reporting period
So in summary - all small businesses in Arkansas need to register for, collect, file, and remit sales tax in order to comply with state law. Be sure to factor the 6.5-12% sales tax rate into your pricing and financial projections. Use the state's online resources to lookup rates, file returns, and get guidance on sales tax compliance. Reaching out to an accountant or tax professional can also help ensure you meet all requirements.
How much do small business owners usually pay in taxes?
The amount of taxes a small business owner pays can vary significantly depending on the business structure and net income reported. Here is a breakdown of typical taxes owed:
C corporation
- If no net income is reported, owes $800 annual franchise tax plus 6.65% Arkansas Alternative Minimum Tax (AMT)
- If net income is reported, owes corporate income tax of 6.5% on first $100,000 of income + 6.5% on income above $100,000 + $800 franchise tax
S corporation
- If net income is reported, owes no corporate income tax but shareholders owe personal income tax on their share of profits
- Owes $800 annual franchise tax if no net income, or 1.5% franchise tax if net income is reported
LLC taxed as a C corporation
- If net income reported, owes corporate income tax of 6.5% on first $100,000 + 6.5% on income above $100,000 + $800 franchise tax
- No personal income tax owed on profits
As shown, small business taxes can range from a few hundred dollars to thousands depending on profits. C corporations and LLCs taxed as C corps pay corporate income tax on profits and franchise tax. S corps avoid corporate tax but owners pay personal tax on profits. All structure pay at least $800 franchise tax if no profits.
How much should an LLC put away for taxes?
As a small business owner, it's important to properly budget for taxes to avoid any unexpected bills or penalties at tax time. According to NerdWallet, LLCs should plan to set aside around 30% of their net income to cover both federal and state taxes. Here are some tips:
Calculate Your Tax Burden
As an LLC, you need to pay both income tax and self-employment tax, which means your total tax rate may be around 30-35%. To estimate your rate:
- Determine your business's net income
- Calculate your federal and state income tax brackets
- Factor in 15.3% for self-employment tax
For example, if your net income is $100,000, you might pay:
- 25% federal income tax: $25,000
- 5% state income tax: $5,000
- 15.3% self-employment tax: $15,300
Total Tax Burden = 45.3%
Set Up Quarterly Estimated Payments
To avoid penalties, the IRS requires LLCs to pay taxes quarterly based on estimated profits. When setting funds aside, aim to overestimate rather than underestimate your tax burden.
- Pay online using the IRS Direct Pay tool
- Keep detailed records to reconcile against your annual returns
Automating payments through accounting software can help streamline the process.
Work With a Tax Professional
An accountant or tax attorney can help advise on business deductions, retirement plan contributions, and other ways to reduce your taxable income. They can also ensure you comply with all IRS rules and deadlines.
Proper tax planning is crucial for LLCs. Allocating 30% of net business income to taxes is a good starting point to cover your liability while avoiding any nasty surprises.
Navigating Arkansas Business License and Permit Requirements
Do I Need a Business License in Arkansas?
Determining whether your small business requires a business license in Arkansas depends on the nature of your business activities. Generally, most businesses operating in Arkansas need a business license, with some exceptions for certain professional services, agriculture, and vendors at special events.
You likely need a state business license if you:
- Sell taxable goods or services
- Hire employees
- Operate a storefront or office
Exempt businesses may include:
- Independent consultants/freelancers
- Farmers/ranchers
- Craft vendors at fairs/markets
Check the Arkansas Economic Development Commission for guidance on business license requirements for your specific business type.
Application for Arkansas Business Permit
To apply for an Arkansas business permit:
- Obtain your Federal Employer Identification Number (EIN) from the IRS
- Register your business name and structure with the Arkansas Secretary of State
- Apply for any required professional licenses and special permits
- Complete the business permit application form through the Arkansas Taxpayer Access Point
- Pay licensing fees
- Fulfill any other business-specific requirements
The full application process can take 2-4 weeks. Be sure to plan ahead and account for processing times when starting your Arkansas business.
Arkansas Business License Requirements
Typical documentation needed for an Arkansas business license:
- EIN confirmation
- Proof of business registration
- Professional/occupational licenses
- Local permits and zoning forms
- Financial statements
- Business plan
- Lease agreements or property deeds
Additional requirements may apply for certain business industries like food service, childcare, healthcare, construction, etc.
Starting a Business in Arkansas Checklist
Key steps when launching a small business in Arkansas:
- Choose a business structure and register your company
- Obtain federal and state tax IDs
- Apply for licenses and permits
- Find a business location and fulfill zoning requirements
- Evaluate your tax obligations and responsibilities
- Set up bookkeeping and accounting
- Open a business bank account
- Understand employer regulations if hiring staff
- Develop a business plan and financial projections
- Research incentives, grants, subsidies, and other funding opportunities
Following this checklist can help ensure you complete all legal and operational requirements to successfully start your Arkansas business. Consider consulting with both legal and accounting professionals for guidance.
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Obtaining a Business License and Tax IDs in Arkansas
Applying for an Employer Identification Number (EIN)
To legally hire employees and pay taxes in Arkansas, businesses need to register for an Employer Identification Number (EIN) with the IRS. This is a unique 9-digit number that identifies your business for tax purposes.
Here are the steps to apply:
- Go to the IRS EIN Assistant site and select the option that best describes your business.
- Answer a few short questions about your business structure and activities.
- Review your information and submit the EIN application.
- You will receive an EIN immediately online. Record this number and keep it secure since it will be used for payroll tax filings and returns.
Arkansas Tax ID Number Lookup
If your business already has an Arkansas Tax ID number for sales tax purposes, you can verify it through an online lookup:
- Go to the Arkansas Secretary of State Business Search site.
- Enter your registered business name and search.
- Select your business listing and scroll down to view associated State Tax IDs listed.
If you do not have a State Tax ID yet, you will need to register for one (see next section).
Registering for State Tax IDs
To legally conduct business and collect/remit sales tax in Arkansas, you must register for state tax IDs:
- Sales Tax ID: Apply for a Sales and Use Tax Permit through the Arkansas Department of Finance to collect and file sales tax.
- Income Tax ID: Register for an Arkansas Withholding Tax ID for tax withholding and filing purposes.
- Other IDs: Depending on your business activities, additional tax IDs may be required such as Mixed Drink Tax, Tire Fee, etc. Refer to the Arkansas Tax Registration Packet for more details.
Be sure to display all required State Tax IDs as mandated by law at your physical business establishment or on invoices/receipts. Accurate tax reporting and payments rely on proper tax ID registration.
Understanding Sales Tax for Small Businesses in Arkansas
Small businesses in Arkansas need to understand the state's sales tax requirements to stay compliant. This includes knowing the tax rates to charge in different areas, how to properly collect and remit taxes, available exemptions, and recent legislative changes impacting taxes.
Sales Tax Rates across Arkansas
The statewide sales tax rate in Arkansas is 6.5%. However, when combined with city and county sales taxes, the total rate can reach as high as 11.625%. Small businesses should use Arkansas' online sales tax rate lookup tool to find the specific tax rate based on their business location and the delivery address. Rates can vary significantly across different cities and counties.
For remote sellers, economic nexus laws apply in Arkansas. This means out-of-state sellers with over $100,000 in sales or 200+ transactions delivered to Arkansas need to register and collect sales tax.
Collecting and Remitting Sales Tax
Small businesses must track all taxable sales and purchases to accurately calculate sales tax owed. Tax returns and payments are due monthly or quarterly depending on the business' average sales tax liability.
It's recommended to use sales tax automation software like AvaTax to simplify the process of collecting, calculating, filing, and remitting sales taxes in Arkansas.
Arkansas Remote Seller FAQs
Some common questions remote sellers have regarding Arkansas sales tax include:
- What sales threshold requires me to collect Arkansas sales tax? $100,000 in gross annual sales or 200+ separate transactions delivered into the state.
- When did the economic nexus law go into effect? July 1, 2019
- Are there any exemptions for remote sellers? No
- How often do I need to file Arkansas sales tax returns? Monthly or quarterly depending on your average monthly state sales tax liability.
Refer to the Arkansas Remote Seller FAQs page for more information.
Navigating Laws and Rules: HB 1002 and SB 576
Recent legislation has changed sales tax requirements for small businesses in Arkansas:
- HB 1002 (2019) established the economic nexus threshold for remote sellers.
- SB 576 (2021) adopted uniform sourcing rules determining which jurisdiction gets the sales tax revenue for a transaction.
It's important for small businesses to stay updated on legal changes impacting sales tax in Arkansas. Resources like the DFA laws and rules page can help.
Using sales tax software that automatically applies rate changes and new legislation can further simplify compliance for small businesses.
Income Taxes for Arkansas Small Businesses
An Overview of Business Income Taxes in Arkansas
All businesses operating in Arkansas must pay income tax on their profits. The amount of tax owed depends on the business structure:
- Sole proprietors and partnerships report business income on their personal tax returns using Schedule C or Schedule E. Personal income tax rates apply.
- S-corporations and LLCs file business returns to report income. Owners pay personal income tax on their share of profits.
- C-corporations file business returns and pay taxes on profits. Owners pay personal income tax on dividends.
Tax rates range from 0.9% to 6.6% depending on income level. Certain deductions and credits may reduce tax liability.
Filing as a Sole Proprietorship or Partnership
Sole proprietors report income and expenses from the business on Schedule C and include it with their personal 1040 tax return. The owner's personal income tax rate applies.
Partnerships must file a Form 1065 informational return showing income, deductions, and partner distributions. Partners receive a Schedule K-1 to report their share on personal returns.
Both sole props and partnerships may need to make quarterly estimated income tax payments if expecting to owe $1,000 or more. Form 1040-ES is used to calculate required installments.
Key forms:
- Schedule C (Form 1040), Profit or Loss from Business
- Schedule E (Form 1040), Supplemental Income and Loss
- Form 1065, U.S. Return of Partnership Income
- Schedule K-1 (Form 1065), Partner's Share of Income
Partnerships may also need to register and file returns with the state. Check the Arkansas Secretary of State website for current requirements.
Property Taxes for Small Businesses in Arkansas
Property taxes can be a significant expense for small businesses in Arkansas. Understanding how they are calculated, what exemptions may apply, and the appeals process can help businesses manage this cost.
How Property Taxes are Calculated for Small Businesses
Property taxes in Arkansas are based on two main factors:
- Assessed value - This is a percentage of the market value that the county assessor determines. For commercial property, assessment rates range from 20-33% depending on the county.
- Millage rates - Millage rates are tax rates that are applied to the assessed value to determine taxes owed. Millage rates vary across Arkansas counties and cities.
To calculate property taxes, multiply the assessed value by the applicable millage rates. For example, if a property has an assessed value of $100,000 and millage rates of 25 mills, the taxes would be $100,000 x 0.025 = $2,500.
In addition to county and city millage rates, small businesses may pay additional millages for services like libraries, hospitals, transit, and more.
Understanding Property Tax Exemptions
Arkansas offers some property tax relief for small businesses:
- New business facilities - Qualified new businesses or expansions may receive full or partial exemptions for up to 7 years. This aims to promote economic development.
- Inventory tax credit - Businesses may receive a tax credit up to $2,000 for county and city personal property taxes paid on business inventory.
To claim exemptions, small businesses must file applications with the county assessor's office by specific deadlines. Proper documentation like permits, licenses, inventory reports, and more are typically required.
If a small business disagrees with the property's assessed value or denial of an exemption, they can file an appeal with their county equalization board. Having documentation to support claims is key in this process.
Understanding Arkansas property taxes, exemptions, and appeals procedures can help small businesses properly budget for this expense. Consulting with an accountant or tax advisor can also help navigate property tax planning.
Sales Tax Holidays and Incentives for Arkansas Businesses
Overview of Arkansas Sales Tax Holidays
Arkansas offers two annual sales tax holidays that can provide tax savings for small businesses:
- Back-to-School Sales Tax Holiday: During the first weekend of August each year, the sales tax is not collected on certain back-to-school items like clothing, school supplies, computers, and other qualifying products. This tax break applies to both individuals and businesses purchasing these items.
- Energy Star Sales Tax Holiday: On the Saturday before the last Monday in October, the state does not collect sales tax on certain Energy Star certified products like air conditioners, refrigerators, clothes washers and dryers, and water heaters that cost under $2,500.
Targeted State and Local Incentive Programs
In addition to the sales tax holidays, Arkansas offers industry-specific tax incentives that small business owners can leverage for savings:
- Research and Development Tax Credit: Provides income tax credits up to 33% of qualified research expenditures for startup companies focused on science and technology R&D.
- Manufacturing Machinery and Equipment Sales Tax Exemptions: 100% exemption from state and local sales taxes on purchase of certain manufacturing machinery and equipment.
- Arkansas Sports Event Tourism Incentive: Offers state income tax credits up to $500k per year for communities hosting amateur sporting events that attract out-of-state visitors.
Checking state and local resources regularly for the latest incentive programs can help small business owners maximize their tax savings. The economic development commission websites provide up-to-date details on eligibility and applications.
Leveraging Tools and Resources for Arkansas Business Taxes
Arkansas Taxpayer Access Point (ATAP)
The Arkansas Taxpayer Access Point (ATAP) is an online portal provided by the Arkansas Department of Finance and Administration that allows businesses to manage their sales tax accounts and filings. Key features of ATAP include:
- Registering for sales tax permits
- Filing and paying sales tax returns
- Managing contact information and account settings
- Viewing payment history and past returns
ATAP offers a convenient way for small businesses to handle their Arkansas sales tax compliance obligations in one centralized online system. The portal has detailed user guides and FAQs to assist taxpayers.
Third-Party Software for Sales Tax and Payroll
In addition to ATAP, small businesses can leverage third-party software to simplify Arkansas tax compliance:
- Sales tax software like Avalara AvaTax automatically calculates sales tax rates for different products and locations in Arkansas. This saves the manual work of checking constantly changing jurisdictional tax rules. These programs integrate with POS systems and ecommerce platforms.
- Payroll software like QuickBooks Payroll and Gusto can automatically handle state and federal payroll tax filings and payments for W-2 employees. This relieves small business owners from manually tracking employee withholdings and submitting payroll taxes.
Popular options like Wave, FreshBooks, and Xero also provide accounting, invoicing, and tax tools for streamlining compliance.
Free Economic Nexus Tool and Avalara AvaTax
The Arkansas Department of Finance and Administration provides a free economic nexus tool to help businesses determine if they meet the economic nexus threshold for collecting Arkansas sales tax.
Businesses that exceed $100,000 in annual Arkansas sales or make 200 or more separate transactions with Arkansas customers must register to collect sales tax.
Pairing the economic nexus tool with sales tax software like Avalara AvaTax provides an automated solution for managing sales tax compliance in Arkansas based on economic nexus rules.
Streamlined Sales Tax (SST) and Simplified Sales Tax Registration System (SSTRS)
Arkansas is a full member of the Streamlined Sales Tax (SST) initiative, which aims to standardize and modernize sales tax administration across multiple states. A benefit for small businesses is the Simplified Sales Tax Registration System (SSTRS).
The SSTRS allows small businesses to register for sales tax permits in all SST member states through a single application process. This saves the hassle of applying with each state individually. Once registered, businesses can manage their account and file returns through each member state's centralized online system like ATAP.
Leveraging resources like the SSTRS and tools like ATAP, Avalara, and payroll software can greatly alleviate the tax compliance burden for small businesses in Arkansas.
Conclusion and Next Steps for Arkansas Small Business Taxes
Key Takeaways on Arkansas Small Business Taxes
- Arkansas has sales tax, income tax, payroll tax, and other tax obligations that small businesses must comply with
- It's important to register for the proper licenses and permits depending on your business activities
- Sales tax rates and rules can vary across the state; be sure to understand economic nexus laws
- Free resources like the Arkansas Taxpayer Access Point (ATAP) can help manage tax compliance
Recommended Next Steps for Compliance
To stay compliant with Arkansas small business tax requirements:
- Obtain all necessary registrations and licenses for your business
- Understand if you have economic nexus and sales tax obligations
- Consult the Arkansas Department of Finance and Administration website for up-to-date tax information
- Use tax management software to simplify filing and payment processes
- Record all tax-related transactions accurately in your bookkeeping
- File and pay taxes on time to avoid penalties and interest
Following these best practices will help Arkansas small business owners efficiently manage their tax obligations. Reach out to a trusted tax professional if you need help understanding your business' specific tax responsibilities.
