Federal vs State Tax Responsibilities
US taxes operate at multiple levels. Understand your federal obligations and how state selection affects your tax burden as an international founder.
Key Takeaways
- Overview
- Federal tax obligations
- State tax types
- State selection impact
- Nexus and multi-state obligations
Overview
The US has a multi-layered tax system with federal, state, and sometimes local taxes. Understanding which apply to your business helps you plan properly and avoid surprises. Understanding these obligations is essential when opening U.S. financial accounts or working with payment processors.
Federal tax obligations
- Income tax on US-source business income
- Self-employment tax (if applicable)
- Employment taxes for US employees
- Estimated tax payments (quarterly)
- Annual tax return filings
- Maintaining proper tax compliance supports continued access to U.S. banking and payment services
State tax types
| Tax Type | Description | Who Pays |
|---|---|---|
| Income tax | Tax on business profits | Entities with state income |
| Franchise tax | Tax for privilege of doing business | Varies by state |
| Sales tax | Tax on retail sales | Businesses with nexus |
| Payroll tax | Tax on wages paid | Employers with state employees |
State selection impact
Your formation state affects your ongoing tax burden. Some states have no income tax; others have significant franchise taxes. Consider the full picture, not just formation costs.
| State | Income Tax | Franchise Tax | Notes |
|---|---|---|---|
| Wyoming | None | None | Lowest tax burden overall |
| Delaware | None for non-residents | The flat annual tax is $300 for tax years through 2025 (last paid June 1, 2026) and $400 from tax year 2026 (first due June 1, 2027). | Delaware LLCs do not file an annual report. Corporations have separate rules. |
| Texas | None | Margin tax | May apply above the no-tax-due threshold ($2.65M for 2026–2027) |
| California | 8.84% | $800 minimum | High burden for all entities |
Nexus and multi-state obligations
If you have 'nexus' (significant connection) in a state beyond your formation state, you may have tax obligations there too. Nexus can be created by employees, property, or significant sales.
Common mistakes to avoid
- Choosing a state without understanding ongoing tax costs
- Ignoring franchise taxes (can add up significantly)
- Not understanding nexus triggers in other states
- Assuming formation state is the only state that matters
- Missing quarterly estimated tax payments
Tax planning should happen before formation, not after. Understand the full tax picture for your business model before choosing a state.
Need tax planning help?
Our tax and accounting services help you understand and manage your obligations.
Ready to start your US company?
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Related guides
Continue learning with recommended next steps in Taxes.