Virginia Business Tax

How Much Is Business Tax in Virginia?

Virginia’s business tax has two main parts that define how much it is: a corporate income tax and a sales tax. The corporate income tax has a flat rate of 6% applied to your taxable corporate income. This means for every dollar of profit your corporation earns in Virginia, you’ll owe 6 cents in state income tax. Sales tax, however, is a bit more complex.

There’s a baseline state rate of 4.3%, but most localities add their own on top, with a mandatory 1% local add-on statewide. This means the combined sales tax rate you pay will change depending on your location, averaging around 5.77%. Some localities can have added business license taxes, too, so we recommend that you double-check with your local tax authority for the whole picture.

Virginia Business Tax Rate

Virginia’s business tax rate has state-level taxes and, possibly, local add-ons depending on where exactly you are. Here are all the things that go into it:

Corporate Income Tax

This is the main income tax levied on corporations in Virginia. The tax rate is a flat 6% applied to your taxable corporate income. This means for every dollar of profit your corporation earns in Virginia, you’ll owe 6 cents in state income tax. It applies to C corporations as they are taxed separately from their owners.

Sales and Use Tax

Virginia has a state sales tax rate of 4.3%, but the thing to note here is that localities within Virginia can add their own sales tax on top of the state rate. There’s also a mandatory 1% local add-on sales tax imposed statewide.

This means that the combined sales tax rate you pay can change a fair bit depending on the specific location of your business. The average for this rate, in Virginia, is around 5.7%, and it applies to most sales of tangible goods within the state unless specifically exempt.

Other Taxes to Know About

We’ve mentioned that some localities in Virginia can impose additional business taxes, which can include business license taxes. Make sure you’re aware that if your corporation conducts business in multiple states, including Virginia, you’ll likely need to file income tax returns in each state where you operate. Virginia has apportionment rules to determine how much of your total corporate income is taxable in Virginia.

Small Business Tax Rate Virginia

Virginia has a corporate income tax, but the way it applies to small businesses is a bit more nuanced. As a small business owner, the most important thing for you to look at is your business structure, which in turn defines its legal structure and the tax implications along with it.

If your small business is a sole proprietorship or a partnership, it’ll be considered a “pass-through entity.” The business itself doesn’t pay income tax. Instead, the business profit “passes through” to the owner(s) who report it on their personal income tax returns. Virginia has a graduated income tax rate, which is between 2.0% and 5.75%, depending on your taxable income.

Then there are corporations. First, looking at C corps, these are defined as separate legal entities from you, the owner. C corporations are required to pay the 6% corporate income tax on their taxable profits in Virginia. This only applies if you formally incorporated your business.

In the case of S corporations, which are a special type of corporation, your firm elects to be taxed like a pass-through entity. S corporations avoid double taxation (taxing both corporate profits and shareholder dividends), which is a major plus of the structure. This isn’t your only option to avoid that though – Virginia also has an alternative in the form of the Virginia Elective Pass-Through Entity Tax (PTET).

Virginia Elective Pass-Through Entity Tax (PTET)

The question of how an LLC is taxed in Virginia doesn’t have a simple answer, and PTET is one of the nuances that you have to look at while assessing your taxes in the state. PTET is an optional tax for S corporations, LLCs taxed as S corporations, and partnerships.

By electing the PTET, your business itself pays a flat tax of 5.75% on its taxable income instead of passing it through to you. You will then receive a credit against your personal income tax for a portion of the PTET paid by the business.

The decision of whether to elect the PTET depends on a number of things. Consider your business’s income, your income tax bracket (brackets, if multiple owners), and how much growth you’re expecting. Generally, the PTET is best if the business has a large revenue stream and the owners are in a lower income tax bracket. If you’re confused about how to evaluate each of these factors, consider speaking to a tax professional for personalized advice.

Sales and Use Tax

Regardless of business structure, small businesses in Virginia are generally responsible for collecting and remitting sales tax on taxable sales within the state. The baseline state sales tax rate is 4.3%, with the local add-ons and a mandatory 1% statewide addition as mentioned earlier, combining for an average of around 5.8%. You’ll need to register your business with the Virginia Department of Taxation to collect and report sales tax.

Is Virginia a Tax-Friendly State?

The state is considered better than most others in terms of its sales tax rate and the taxation mechanisms for retirees, but it’s not that simple, especially for businesses. To see if it’s tax-friendly for your own business, consider the following advantages:

Pass-Through Taxation

If your small business is a sole proprietorship, partnership, or elects S corporation status, you get to have pass-through taxation. This means the business itself doesn’t pay income tax, and the profits “pass-through” to the owners who report them on their personal income tax returns. Virginia has a graduated income tax with rates ranging from 2.0% to 5.75%, which is often less than the flat 6% corporate income tax. In this case, we’d say it’s tax-friendly.

Virginia Elective Pass-Through Entity Tax (PTET)

This option for S corporations, LLCs taxed as S corporations, and partnerships is a fancy (and effective) alternative to pass-through taxation. It lets your business pay a flat 5.75% tax on its taxable income, and owners receive a credit against their personal income tax for a portion of this. If your business is raking in a lot of revenue but you (and any other owners) are in a lower income bracket, you’ll find this to be a very tax-friendly policy.

Relatively Low Sales Tax

Virginia’s state sales tax rate of 4.3% is considered pretty low, and it’s definitely lower than the national average. The caveat here is the add-ons that combine to make the average closer to 5.8%. While not the lowest, it’s still a competitive rate compared to other states that have higher base sales tax rates.

There are disclaimers to these rates as well. If your business is a C corporation, you’ll have to pay the full 6% corporate income tax on your taxable profits. The combined sales tax rate you pay can also change depending on where you are in Virginia. Lastly, don’t forget to consider other taxes that affect your business in Virginia, which include property taxes and unemployment insurance taxes.

Virginia’s tax system is definitely tax-friendly for some small businesses, particularly those structured as pass-through entities or those with high income and owners in lower tax brackets, but it’s not the best for all businesses. The 6% corporate income tax and possibly higher local sales tax rates can bring expenses up rather than down.

Is Virginia a No Income Tax State?

No, Virginia is not a no-income-tax state. Virginia has a graduated income tax system, meaning tax rates increase as taxable income rises. As we’ve discussed, the rates range from 2.0% for the lowest tax bracket to 5.75% for the highest. This applies to both residents and non-residents who earn income in Virginia.

Reasons Why Virginia Isn’t a No Income Tax State

Income tax is a significant source of revenue for any state government, including Virginia. This revenue funds important public services like education, infrastructure, and public safety. Virginia also keeps income tax in a ‘progressive’ way through its graduated income tax system, meaning those with higher incomes pay a larger share of taxes.

This keeps things more equal for everybody in the state. Virginia residents with income above a certain threshold have to pay state income tax based on their income bracket. This tax applies to wages, salaries, interest, dividends, and other types of taxable income.

What Is Not Taxed in Virginia?

While Virginia has its share of taxes, there are some categories of income and purchases that are exempt from taxation as they are in other states. The following are generally not taxed in Virginia.

Social Security Benefits

Virginia does not tax Social Security benefits. This is one of the reasons the state is called tax-friendly for retirees and low-income earners who rely on Social Security income. There’s an important caveat, though.

If your total income from all sources exceeds a certain threshold set by the federal government, a portion of your Social Security benefits may become taxable on your federal tax return. Keep that in mind.

Necessities

Virginia exempts sales tax on some essential goods to ease the burden on residents. For instance, groceries. Most unprepared food items, including fruits, vegetables, dairy products, and bakery goods, are exempt from sales tax. Prepared foods and restaurant meals are still taxable though.

Prescription drugs and medical equipment are also kept exempt. These are things considered necessary for maintaining a healthy body, so they’re exempt from sales tax. The same goes for educational items. School supplies priced at $20 or less per item are exempt from sales tax during the annual sales tax holiday (typically held in early August) in Virginia.

Government Purchases

Purchases made by the federal government, state government, or their political subdivisions are generally exempt from sales tax in order to help make government spending a bit simpler.

Occasional Sales

Occasional sales, as defined by Virginia law, are not subject to sales tax. This applies to situations where someone who isn’t a retailer sells personal belongings infrequently. For example, a family selling used furniture at a garage sale wouldn’t owe sales tax on it, which makes a lot of sense. There are also exemptions for sales by non-profit organizations of food and meals on fewer than 23 occasions a year.

Intangibles and Services

Sales tax generally doesn’t apply to intangible goods and services in Virginia. This includes things like your financial services, software licenses, and memberships. These are general exemptions, though, and there might be specific exceptions or qualifications that may come up depending on the nature of your business.

Pay Virginia Business Taxes Online

Paying your business taxes online in Virginia is not only possible but can be done in multiple ways. In this section, we’ll cover each of these and help you select the one that’s best suited for your needs.

Method 1: Using the Virginia Business Online Services Account

Go through the following steps to pay your business taxes with the online services account. If you don’t already have one, start with enrollment:

1. Enrollment (if you don’t have an account): Head to the Virginia Department of Taxation website and then to the “Business Online Services” section. Click on “Enroll Now” and follow the prompts. You’ll need your Federal Employer ID Number (FEIN), your 15-digit Virginia Tax account number (if you have one), and information from your most recently filed Virginia tax return (if applicable).
2. Login and Pay: Once enrolled, log in to your account. Select “File/Pay Taxes” from the menu and choose the specific tax type you need to pay (e.g., corporate income tax, sales tax). The system will guide you through the filing procedure (if needed) and let you make the online payment afterward.
3. Payment Options: Within the Business Online Services Account, you can choose from several ways of paying online:

• ACH Credit: Make a direct transfer of funds from your bank account to Virginia Tax’s bank account. Review the Electronic Payment Guide on the Virginia tax website for details and fees for ACH transfers.
• eForms: These are electronic, fillable forms that you can use to submit your tax return and payment information directly through the website. No login is required, but you’ll need to provide your tax account number and other pertinent information.

Method 2: Using Web Upload

If you have a lot of tax filings and want to address them all in one go, this is the method to go with. You’ll need an account for this, too, so make sure to enroll if you haven’t already.

1. File Preparation: Prepare your tax return information in an approved file format (details available on the Virginia tax website).
2. Upload and Payment: Log in to your account and go to the “Web Upload” section. Upload your prepared tax return file and make the online payment using the available options (similar to those mentioned in Method 1).

Virginia Business Tax Return

The Virginia business tax return is a form you file with the Virginia Department of Taxation to report your business income, deductions, and credits for a specific tax period (typically a calendar year or fiscal year). Based on this information, the state calculates any tax you owe or determines if you’re due a refund. The way you file a business tax return in Virginia is dependent on your business structure (like most things in this department) and tax obligations.

Taking the business structures from earlier, if you have a sole proprietorship or a partnership, you won’t be filing separate business tax returns. Your business income “passes through” to your personal income tax returns, which you file using Virginia individual income tax forms. C corporations, on the other hand, will file a Virginia Corporation Income Tax Return (Form 500) to report their taxable corporate income and calculate the 6% corporate income tax owed.

The same goes for S corporations that haven’t elected the Virginia PTET (Pass-Through Entity Tax) but with a different form: the federal S corporation return (Form 1120S) and an informational Virginia Corporation Income Tax Return (Form 500). S corporations that have elected the PTET will file a Virginia S Corporation Pass-Through Entity Tax Return (Form 500-PTET).

What’s Included in a Business Tax Return?

The specific content of your Virginia business tax return, as we just saw, changes along with the form you file. Generally, though, it includes the following:

Business Information: Your business name, Federal Employer Identification Number (FEIN), Virginia tax account number (if applicable), and business address.

Income: Details of your business income from sales, services, investments, and other sources.

Deductions: Allowable expenses incurred in operating your business, such as rent, salaries, utilities, and supplies.

Credits: Tax credits you may qualify for, which reduce your tax liability.

Tax Calculation: The form will guide you through calculating your taxable income and the amount of tax owed based on the applicable tax rate.

Payment Information: Can be included with the return or submitted separately.

How to File a Virginia Business Tax Return

In line with the online method of filing your taxes, you can file a business tax return in Virginia both online and through paper. For a paper filing, you can download and mail the appropriate form (mentioned earlier) along with the required attachments (if any).

If you want to go the digital route, which we recommend since it’s so much easier, you’ll need a Business Online Services Account. This allows you to file and pay taxes digitally for most business tax types. If you don’t want to create an account, you can go for an eForm. Virginia has electronic versions of certain tax forms (e.g., eForm 500EZ) that you can submit online without needing an account.

Filing Business Taxes Is a Complicated Business

Virginia’s business tax is quite the mix of policies for small businesses, corporations, and individual people. Understanding your specific business structure, looking at tax elections like the PTET, and staging on your toes with local changes in sales tax rates are more important than ever for businesses in the state.

After reading this article, you should have all the information you need to figure out which taxes apply to your firm, how much they are, and how to file them easily from your desk. With that, all that’s left to do is put together the documents, submit them, and finally put an end to the ordeal.