Indiana has 34th highest taxes on small businesses

2013-09-17T09:30:00Z 2013-09-17T09:33:04Z Indiana has 34th highest taxes on small businessesJoseph S. Pete joseph.pete@nwi.com, (219) 933-3316 nwitimes.com
September 17, 2013 9:30 am  • 

Small business owners face lower tax bills in Indiana and Illinois than they would in more than half of all other states, according a recent study.

The non-partisan Tax Foundation looked at the top marginal tax rates for non-corporate businesses that are either owned by individuals or small group of shareholders.

Researchers ranked all 50 states and found Illinois has the 28th highest taxes on small businesses, and Indiana has the 34th highest.

Sole proprietors of Illinois businesses can pay as much as 46.8 percent of their income in taxes, while the sole owners of Indiana businesses can pay as much as 46.6 percent, the study found. Small businesses that are set up as S-Corporations, or firms with fewer than 100 shareholders where the profits are taxed on the owners' individual tax returns, pay up to 43.8 percent in taxes in Illinois and as much as 43.6 percent in Indiana.

Top tax rates in both Indiana and Illinois are lower than the national averages of 47.5 percent for sole proprietorships and 44.5 percent for S-corporations, which are similar to partnerships.

Over the past three decades, the number of non-corporate businesses has tripled to more than 30 million, while the number of corporations declined to 1.6 million, according to the Tax Foundation. Income for non-corporate businesses has posted a five-fold increase during that time.

Currently, about 23 million businesses in United States are sole proprietorships, while about 7.3 million are S-corporations. They are often called pass-throughs, because they do not pay a corporate tax rate and any profit or loss is passed through directly to the owner.

"The majority of businesses today are pass-throughs, and most pass-through income is earned by taxpayers with income greater than $200,000 a year," said Kyle Pomerleau, an economist for the Tax Foundation.

The top federal tax rate on that income is 39.6 percent, but additional city and state income and self-employment taxes can contribute to a higher top marginal rate. Small business owners in California, for instance, can pay up to 51.8 percent of their income in taxes.

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