A Comprehensive Guide to Connecticut State Taxes: Understanding the Connecticut Corporate Tax Rate

Navigating Connecticut’s tax landscape is essential for anyone looking to start or run a business in the state. Connecticut boasts a vibrant business environment with strong sectors in education, technology, and healthcare, but it also presents challenges such as high operational costs and a complex tax structure. This guide delves into the intricacies of the Connecticut corporate tax rate and business tax requirements, providing a detailed overview of tax rates, sales and use tax, and the necessary steps for starting and maintaining a business. 

Connecticut Corporate Tax Rate: Key Takeaways

• Business Environment: Connecticut’s business climate is improving, with strengths in education, technology, and health, but high operational costs and structural issues remain significant challenges.
• Tax Structure: Connecticut imposes a 7.5% corporate tax rate and a 6.99% pass-through entity tax, with specific considerations for out-of-state and international business owners.
• Sales and Use Tax: The statewide sales tax rate is 6.35%, with higher rates for certain luxury items and taxable SaaS services, requiring compliance for remote and online sales.
• Starting and Closing a Business: Detailed steps are provided for registering, obtaining licenses, and dissolving a business in Connecticut, ensuring compliance with state regulations and tax requirements.

Is this a business-friendly state?

Connecticut’s business climate has seen some improvements in recent years, yet it still grapples with challenges that deter it from being deemed highly business-friendly. While its rankings have climbed marginally in certain areas, high costs, economic hurdles, and structural issues persist. Key points to note:

• Connecticut ranks 31st in CNBC’s 2023 Top States for Business, up from 39th in 2022, indicating modest progress.
• The Connecticut Business & Industry Association (CBIA) highlighted ongoing structural issues, particularly high taxes and costs, that have hindered economic recovery. Addressing the labor shortage is deemed critical for improving the business climate.
• Connecticut’s business friendliness was ranked 16th in 2023, down from 11th in 2022. Despite the decline, it remains one of the better-scored categories for the state.
• Despite improvements, continued efforts are essential to enhance competitiveness and foster a more business-friendly environment.

If I want to open a business in Connecticut what will I have to do?

To open a business in Connecticut, you will need to follow these key steps:

1. Choose a business structure (sole proprietorship, partnership, LLC, corporation) and name for your business.
2. Register your business with the Connecticut Secretary of State:
   1. For an LLC, file a Certificate of Organization.
   2. For a corporation, file a Certificate of Incorporation.
   3. For a sole proprietorship or general partnership using a fictitious name, file a Trade Name form.
3. Obtain a federal Employer Identification Number (EIN) from the IRS, which is required for all employers.
4. Register for Connecticut state taxes by obtaining a Connecticut Tax Registration Number and Sales Tax Permit from the Department of Revenue Services if you will have employees or sell taxable goods/services.
5. Determine what business licenses and permits you need for your specific industry/profession and location, and apply for them. Common examples include occupational licenses, zoning permits, and health department permits.
6. Register your business name for trademark protection by filing an Application for Reservation of Name if the name is available.
7. Obtain necessary business insurance policies like general liability, and workers’ compensation (if you have employees).
8. Create a detailed business plan and complete other startup requirements like getting a business bank account, and marketing materials.

The process can be complex, so consulting professionals like attorneys and accountants is recommended, especially for licensing, tax, and legal structure decisions specific to your business type and location within Connecticut.

Does Connecticut have an income tax?

Yes, Connecticut imposes an income tax on businesses, specifically corporations. Here’s a breakdown of the essential details:

Corporation Business Tax

• Connecticut imposes a corporation business tax on corporations conducting or eligible to conduct business within the state.
• The tax rate for the corporation business tax stands at a fixed 7.5% on the net income.
• Corporations are required to file an annual corporation business tax return and remit the greater of two options:
  • The tax calculated based on their net income (at the 7.5% rate)
  • The tax determined from their capital base (at a rate of 0.31%)
• This tax obligation primarily affects traditional C-corporations. S-corporations, partnerships, and LLCs are exempt from the corporation business tax.

Pass-Through Entity Tax

• For pass-through entities such as S-corporations, partnerships, and LLCs, a 6.99% pass-through entity tax is enforced on their business income.
• The income from these entities flows through to the personal income tax returns of the owners, where it is subject to taxation at the state’s personal income tax rates ranging from 3% to 6.99%.

Does Connecticut have a franchise tax?

No, Connecticut does not have a franchise tax on LLCs or other business entities. 

• Connecticut refrains from imposing a franchise tax or fee on LLCs as a requirement for conducting business within the state, offering a favorable environment for LLC operations.
• By default, LLCs in Connecticut are taxed as pass-through entities, ensuring that the LLC itself does not bear the burden of income tax. Instead, LLC members report and fulfill tax obligations on their respective shares of the LLC’s income through their personal tax returns.
• However, LLCs have the option to elect corporate taxation status for federal tax purposes by submitting Form 2553 to the IRS. Should an LLC opt for this election, it becomes subject to corporate taxation in Connecticut as well, obligating it to the state’s 7.5% corporation business tax on its net income.
• LLCs with employees operating in Connecticut must comply with employer tax requirements, encompassing tasks such as withholding employee income taxes and remitting unemployment insurance taxes to the state treasury.
• Additionally, LLCs are subject to Connecticut’s 6.35% sales and use tax on taxable goods and services sold within the state, constituting an essential consideration for their financial planning and compliance efforts.

Does having a mailing address in Connecticut trigger corporate income tax and/or registration requirements?

According to Connecticut tax law, taxpayers are required to file taxes if they engage in certain activities within the state. These activities include:

1. Maintaining an office.

2. Performing or soliciting orders for services.

3. Having an employee, regardless of their location, engaged in managerial or research activities.

If the state determines that the mailing address is associated with any of these activities, the taxpayer will be obligated to fulfill tax filing requirements.

If I have my business in Connecticut but live in a different state will I pay tax?

If your business is headquartered in Connecticut but your residence lies in another state, you’ll likely find yourself navigating tax obligations in both locations. However, the specifics of these obligations hinge on the structure of your business and the sources of your income. Here’s what you need to know:

Income Taxes:

• For pass-through entities like LLCs or S-corps operating in Connecticut, the business income that flows to you will typically be subject to personal income tax in your state of residence. Additionally, you’ll be responsible for the 6.99% Connecticut Pass-Through Entity Tax on your portion of the business income.
• If your Connecticut-based business is structured as a C-corporation, it will be subject to the 7.5% Connecticut corporate income tax. As an owner, you’ll then pay personal income tax in your state of residence on any salary or dividends you receive from the corporation.

Other Taxes:

• If your business employs individuals in Connecticut, you’ll need to withhold Connecticut income taxes from their wages and fulfill your obligations for Connecticut unemployment insurance taxes as their employer.
• Sales generated by your Connecticut-based business will require the collection and remittance of Connecticut sales tax, which stands at 6.35%, on taxable goods or services.
• Depending on the nature of your business activities in Connecticut, you may also encounter industry-specific taxes or fees that need to be addressed.

If all my activities are outside the US and I live in a different country, but have a company in Connecticut do I have to pay tax there?

Businesses registered in Connecticut are required to file a tax return annually. It is mandatory for all companies to comply with this filing requirement.

A company has “the right to carry on business in this state” if it meets certain conditions. For a company incorporated or organized under Connecticut laws, this right is granted when the Secretary of the State endorses its certificate of incorporation. This right continues until a certificate of dissolution is filed in accordance with Sections 33-376(d), 33-377(b), 33-383(d), or 33-387(d).

Does having an employee in Connecticut trigger corporate income tax?

In Connecticut, the income nexus threshold is set at $500,000. This means that foreign corporations are required to file Connecticut business tax returns only if their income from Connecticut exceeds $500,000. Additionally, employing a staff member in the state unequivocally creates a tax filing obligation.

Does having an independent contractor in Connecticut trigger corporate income tax?

No, employing an independent contractor in Connecticut does not automatically mandate a business to fulfill Connecticut’s corporate income tax obligations. 

Contracting with an independent contractor for services rendered in Connecticut does not suffice to trigger corporate income tax responsibilities for the contracting entity. Rather, the corporation must establish a tangible physical presence (e.g., office facilities) and engage in substantive business activities within the state, extending beyond the utilization of contractors located therein.

While it is true that businesses engaging independent contractors valued at $5,000 or more are obliged to report them as “new hires” to the Connecticut Department of Labor for unemployment purposes, this requirement remains distinct from corporate income tax obligations. Corporate income tax liabilities are contingent upon the corporation’s independent business activities and physical presence in Connecticut, not solely its utilization of contractors.

Does having a founder living in Connecticut trigger corporate income tax?

No, merely having a founder or owner residing in Connecticut does not automatically mandate the business to fulfill Connecticut’s corporate income tax requirements.

If you hold board meetings in Connecticut will it trigger corporate income tax?

No, simply hosting board of directors or shareholder meetings in Connecticut does not automatically mandate a corporation to file and fulfill Connecticut’s corporate income tax obligations. 

Connecticut’s Department of Revenue Services clarified that the act of “convening meetings of the board of directors or shareholders or engaging in other activities related to internal corporate affairs” in isolation does not impose a corporation to the Connecticut corporation business tax.

Does Connecticut collect sales tax?

Yes, Connecticut does collect a statewide sales tax on the sale of most goods and some services. 

• The statewide sales tax rate stands at 6.35%, with no supplementary local sales taxes levied by municipalities or counties.

• This 6.35% rate is applicable to the retail sale, lease, or rental of most tangible personal property and specific taxable services.

• Certain items attract higher tax rates in Connecticut, such as 7.75% on motor vehicles exceeding $50,000, jewelry surpassing $5,000, and clothing/footwear valued over $1,000.

• Exemptions from sales tax include groceries, clothing under $1,000, and select other items.

• Annually, Connecticut hosts a week-long “Sales Tax Holiday” in August, during which clothing and footwear under $100 are exempt from tax.

• Businesses engaged in the sale of taxable goods or services, with economic nexus in the state (exceeding $100,000 in sales and 200+ transactions), are required to procure a Connecticut Sales and Use Tax Permit from the Department of Revenue Services (DRS).

Does Connecticut tax SaaS income?

Yes, Connecticut does tax SaaS (Software as a Service) income.

• SaaS products and services are indeed subject to taxation in Connecticut.
• When SaaS is utilized for personal or consumer purposes, it is taxed at the standard state sales tax rate of 6.35%.
• Conversely, SaaS employed for business or commercial use enjoys a reduced tax rate of 1% since it falls under the “computer and data processing services” category.

It’s noteworthy that Connecticut’s decision to tax SaaS stems from legislative measures enacted in 2019, aimed at extending taxation to encompass digital goods and services.

Does Connecticut tax online marketplaces?

Yes. Connecticut has enacted legislation mandating that larger online retailers impose sales taxes on purchases starting December 1, 2018. This law applies to companies generating $250,000 or more in annual revenue in Connecticut, with at least 200 individual transactions within the state per year. Designated as “marketplace facilitators,” these companies are tasked with collecting the 6.35% sales tax on behalf of the sellers on their platforms and remitting payments to the state.

It is anticipated that this legislation will generate approximately $35 million in additional revenue for Connecticut. Marketplace facilitators must register with the state’s Department of Revenue Services and obtain a Connecticut Sales and Use Tax Permit. Additionally, out-of-state marketplace sellers may be required to register with the state DRS based on their annual sales volume in Connecticut.

Does Connecticut tax remote software sales?

Yes, Connecticut indeed imposes taxes on remote software sales, encompassing Software-as-a-Service (SaaS) among others.

1. SaaS and similar remotely accessed software fall under the taxable category of “computer and data processing services” in Connecticut.
2. For individuals or consumers utilizing SaaS for personal use, it is subject to the full 6.35% state sales tax rate.
3. Conversely, for businesses or commercial entities leveraging SaaS for operational purposes, a reduced tax rate of 1% applies, recognizing it as a “computer and data processing service.”
4. The taxation of SaaS and digital goods was established through legislation enacted in 2019, introducing the reduced 1% rate specifically for business use of electronically delivered prewritten software.
5. Notably, Connecticut presumes that software, including SaaS, is taxable if the consumer/subscriber’s billing address is within the state.

If I want to close my business in Connecticut, what will I have to do?

Closing your business in Connecticut involves several important steps to ensure a smooth and legally compliant process:

1. File a Certificate of Dissolution: This formal document terminates the business and must be submitted to the Connecticut Secretary of State. You can conveniently file online, by mail, or in person.

2. Close Business Tax Accounts: Clear all outstanding taxes and fines owed to state departments, including:

• Notify Tax Agencies: Inform the Connecticut Department of Revenue Services about the business closure to facilitate the proper closure of tax accounts.

• Notify CT Paid Leave Authority: If your business had employees, notify the CT Paid Leave Authority of the dissolution to fulfill any remaining obligations.

3. File Final Annual Report: If your business is obligated to file annual reports, ensure you submit a final report to avoid penalties and fees.

4. Distribute Assets: Disburse any remaining assets to the members according to the operating agreement or applicable legal guidelines.

5. Notify Creditors and Settle Debts: Inform all creditors of the business closure and settle any outstanding debts before proceeding with dissolution.

6. Cancel Licenses and Permits: Cancel all licenses and permits associated with the business to avoid any potential liabilities or legal complications.

7. File Final Federal Tax Returns: Complete and file the final federal tax returns for the business to fulfill any remaining tax obligations at the federal level.

8. Cancel Employer Identification Number (EIN): Once all tax obligations are settled, cancel the business’s Employer Identification Number (EIN) to officially close its tax accounts.

By diligently following these steps, you can ensure a proper and legally sound closure of your business in Connecticut, minimizing potential complications and liabilities.

When is my tax return due for Connecticut?

Corporation Business Tax:

• Filing and Payment Deadline: Corporations must file their 2023 Form CT-1120 by May 15, 2024.
• Extension Deadline: An extension is granted until November 15, 2024, for filing the 2023 return, though the payment remains due by May 15, 2024.

Pass-Through Entity Tax:

• Filing and Payment Deadline: Pass-through entities are required to submit their 2023 Form CT-1065/CT-1120SI by March 15, 2024.
• Extension Deadline: An extension is permitted until September 16, 2024, for filing the 2023 return, while the payment remains due by March 15, 2024.

Other Key Deadlines:

• April 15, 2024, is the deadline for filing 2023 fiduciary income tax (Form CT-1041).
• Quarterly income tax withholding (Form CT-941) has deadlines on January 31, 2024, and April 30, 2024.
• May 15, 2024, marks the deadline for filing 2023 unrelated business income tax (Form CT-990T).

What happens if I file my tax return in Connecticut late?

Late filing of your business tax return in Connecticut can lead to penalties and interest charges, as outlined below:

• For the Corporation Business Tax (Form CT-1120), a late filing incurs a penalty of $50 or 10% of the tax due, whichever is greater.
• Interest accrues at a rate of 1% per month or fraction of a month on any unpaid portion of the corporation tax beyond the original due date.
• Generally, you have a window of 3 years from the original or extended due date to file an amended Connecticut corporation tax return without incurring penalties. Subsequently, penalties may be applied.
• If you need to report federal changes from an amended IRS return, it’s crucial to file an amended Connecticut return within 90 days of the IRS final determination to avoid penalties.
• Late filing and payment for pass-through entities (Form CT-1065/CT-1120SI) also result in interest and penalty charges, although specific rates are not provided in available sources.

Can Cleer Tax help me with filing taxes in Connecticut?

Certainly! At Cleer Tax, our dedicated team is committed to addressing the distinct requirements of your business. 

We provide comprehensive tax advisory services tailored to your specific needs, covering every aspect of compliance and optimization – including helping you reduce tax liability wherever possible. Our goal is to ensure that you capitalize on every available opportunity, leaving no stone unturned when maximizing your tax benefits and minimizing any potential liabilities. 

Cleer provides Corporate Income Tax Packages encompassing federal and state income tax filings for a hassle-free experience. We also offer all-inclusive bookkeeping packages, which include your monthly statements plus your federal and state tax returns. If you need help getting up to date on your books, we also offer support for companies that have fallen behind on their bookkeeping with our bookkeeping catch-up package.

If you need any help reducing your tax liability, schedule a consultation, or feel free to contact us.