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Occupational License/Privilege Tax - EVERYTHING You MUST Know!!

So one of my subscribers on my YouTube Channel commented on one of my videos asking for a video on this topic, and while I normally don’t take requests from my comments section, I never really heard of this, so I wanted to take a deeper dive on this concept.  


So in this article, We are talking about:

  • EVERYTHING You MUST Know about Occupational License/Privilege Tax

  • Where and when this Tax will apply to you

  • Everything in between!


Disclaimer: The content of this article does not contain and is never intended to be legal, business, financial, tax, or health advice of any kind, This video is for entertainment purposes only. It is advised that you conduct your own research and consult with qualified professionals before applying anything you find online. 


I also want to be clear that everything we are going to go over in this video is very market dependent, and what applies to me and my market may not apply to you!


Thank you to gig tax for Verifying this information and making this video possible!


Derby_City_Dasher: There is another tax you should cover. occupational license  tax or occupational privilege tax apparently there at least 15 States that allow such taxes. 


So I did some digging on this and it turns out there are a bunch of states that have their own laws on this and what is crazy is the lack of uniformity on this.


What is Privilege Tax?


The privilege tax definition can vary depending on your state and industry. For example, some businesses may have to pay privilege tax to conduct and operate in certain states. However, in other areas, like Arizona, privilege tax works similarly to sales tax. 


Types of Privilege Tax


Privilege tax can vary depending on what state you do business in.


Professional privilege tax: Alabama, Connecticut, Delaware, Montana, North Carolina, and Tennessee levy a professional privilege tax on certain licensed professionals. This tax is in addition to license fees.


Some examples of professions who may need to pay the privilege tax include:


  • Attorneys

  • Physicians

  • Agents

  • Lobbyists


Keep in mind that the above is not an all inclusive list and can change.


Occupational privilege tax: Colorado has an occupational privilege tax that is essentially a head tax. Most workers within the jurisdiction must pay the tax, and the tax may be imposed on certain businesses operating in jurisdictions. 


This only applies to certain cities in Colorado such as Aurora, Denver, Glendale, Greenwood, Village, and Sheridan.


For the employees, the tax is based on the city where work or services are performed, not the business location or where the employee lives. 


That’s right,  businesses and employees may be required to pay Colorado OPT, depending on jurisdiction. Each qualifying employee and business must pay the tax if they’re in one of the participating jurisdictions. 


Corporate Income and Privilege tax: All states except South Dakota and Wyoming have a combination of corporate income and privilege taxes.


General Business License: Alabama, Alaska, Delaware, Hawaii, Maine, Maryland, Nevada, and Tennessee require a general business license.


Gross Receipts Tax: Los Angeles, San Francisco, Philadelphia, and Portland have gross receipts taxes.


Transaction Privilege Tax: Arizona has a transaction privilege tax (TPT) license. This tax works kind of like a sales tax for sellers. TPT applies to certain purchases, and the seller is responsible for paying it instead of the customer. 


Most businesses in Arizona need to pay transaction privilege tax. Again, only vendors are responsible for paying it, not the customers. 


Sales to certain customers, such as government agencies or members of a recognized tribe, may be exempt from Arizona TPT. 


General Excise Tax: Hawaii has a general excise tax (GET) license.


New Mexico Business Tax Identification Number: New Mexico requires businesses that make taxable sales of tangible personal property to register for a gross receipts tax (GRT).


Occupational License Tax: Kentucky has an occupational license tax.


Franchise Tax: Alabama, Arkansas, California, Delaware, Georgia, Illinois, Louisiana, Mississippi, New York, North Carolina, Oklahoma, Tennessee, and Texas have a tax that certain business owners have to pay to conduct business and operate in a state. 


However, California’s franchise/privilege tax only applies in certain situations.


Each of them have their own rules and regulations so make sure you research what is required and consult with a qualified tax professional, because you may or may not need this as a gig worker, but you may need to know this as you develop an exit strategy. 


Who Needs to Pay it


Certain entities, like nonprofits, are exempt from franchise taxes. However, many businesses, including corporations and limited liability companies (LLC), have to pay it if the state imposes it.


Derby_City_Dasher: They are not State taxes or even really County taxes, but counties do have such a tax, metro revenue commissions and towns in counties can impose their own taxes on you if you worked there or they think you worked there. 


Well some are, some aren’t and it is no surprise to me that a government can pull some shady things. Which again, that is where you will have to do some research on what your market demands. 


That said, in a lot of cases these taxes can be imposed on them if the industry they are involved in requires it. 


What is the Rate for this Tax?


Derby_City_Dasher: Could be anywhere between 2.2% to 3%. Which is significantly higher than any local tax I ever paid as a W2 employee. 


Well depending on where you are and what you do, that can end up on employees as well. What makes it more painful for employees though is the fact that employees cannot write off their expenses before paying like a gig worker can, or really any business. 


Either way, I would do some research on this in your area, as well as look into the most current and accurate information based on where you are or expanding into so you can maximize your income earning opportunities. 


Derby_City_Dasher: Also this tax is completely divorced from the federal income tax reporting system which makes it even more complicated. Bad news I think these type of taxes will spread as States continue to reduce or eliminate State income taxes. 


I don’t know about the federal levels here but I will say this, some places are even fighting to have these taxes removed from their state. Tennessee is already an income tax free state and is looking to have the Professional Privilege Tax removed.


I think this is more about politics than simply the taxes though. 


Also, I would like to remind everyone that this is not a political channel, I am not making this video for the purposes of politics, my goal is to provide information and insight based on a tax perspective and business perspective. 


Please don’t cancel me. 


Derby_City_Dasher: The good news is LLC's are exempt at least where I'm from so I might have to look into the cost of setting one up and consider it an option.


Regardless of that being true or not, I would recommend consulting a qualified tax professional to assist you in making sure you are IRS compliant on a State and Federal level. Especially for topics like this because of how specific the situation would be to each individual. 


That said, it is vital that you work with the right professional so you don’t get overcharged for having as many 1099s as you do as a gig worker or any tax documents as someone in business for themselves, which is where GigTax is here to help!


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If you would like to add some other perspective on the Occupational Privilege Tax in various markets, feel free to email me: drivenwyld@gmail.com and who knows? Maybe your email or perspective and be featured in a post as well!


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