S Corp in Hawaii: Tax Rates, Setup, and Filing Rules

Key Takeaways

• Hawaii recognizes S corporations as pass-through entities, meaning shareholders report income on personal returns.
• Creating an S corp in Hawaii requires first forming a corporation or LLC and then filing IRS Form 2553.
• Hawaii does not impose corporate income tax on S corps but does tax individual shareholders based on personal income.
• Annual filings include federal Form 1120S and Hawaii Form N-35, with estimated payments possibly required.
• Hawaii S corps must adhere to state-specific registration, compliance, and business license rules.

Hawaii corporate income tax is the amount of money, in percentage, that the government of Hawaii requires of corporations doing business in Hawaii as income tax, which depends on how much taxable revenue the corporation generates.

Hawaii Income Ranges and Tax Percentages

Corporations in Hawaii are liable to the corporate income tax of Hawaii at marginal rates, between 4.4 percent and 6.4 percent. More specifically, it is broken down as follows:

• Income as much as $25,000 is taxed at a rate of 4.4 percent.
• Income greater than $25,000 and as much as $100,000 is taxed at the rate of 5.4 percent, minus $250.
• Income greater than $100,000 is taxed at a rate of 6.4 percent, minus $1,250.

Let's say, for example, that in the most recent tax year, your corporation in Hawaii generated a taxable revenue of $200,000 and gained no net capital. In that case, your corporation will be liable to pay Hawaii a corporate income tax to the tune of $10,050. The first $25,000 when taxed at 4.4 percent will equal $1,100. The next $75,000 when taxed at 5.4 percent, minus $250, will be $3,800. The remaining $100,000 when taxed at 6.4 percent, minus $1,250, will equal $5,150.

Creating an S Corporation in Hawaii

To create an S corporation, a traditional corporation must first be formed. Then, a special form must be filed with the IRS to apply for S status. An S corporation isn't liable to federal income tax separately. Instead, income that is taxable is passed through to each shareholder. Each shareholder then pays federal taxes on their own share of the company's revenue. That simply makes S corporations pass-through organizations.

Take note that the income of an S corporation's shareholders doesn't have to be distributed for the shareholders to be expected to pay taxes on that amount. Hawaii acknowledges the S status of S corporations. Therefore, S corporations in Hawaii aren't required to return corporate income taxes to the state. Instead, individual members of an S corporation are expected to pay taxes on their own share of the corporation's income.

Steps to Start an S Corp in Hawaii

To establish an S corp in Hawaii, follow these essential steps:

1. Choose a Business Name: Ensure it's unique and complies with Hawaii naming rules.
2. Appoint a Registered Agent: The agent must be located in Hawaii and authorized to receive legal documents.
3. File Articles of Incorporation: Submit this to the Hawaii Department of Commerce and Consumer Affairs (DCCA), Business Registration Division (BREG).
4. Obtain an EIN: Apply for a federal Employer Identification Number (EIN) through the IRS.
5. Elect S Corp Status: File IRS Form 2553 to elect S corp treatment. If you're an LLC, file Form 8832 first to be taxed as a corporation.
6. File Form N-201: This registers the entity for Hawaii general excise tax and other state-level taxes.
7. Comply With Annual Requirements: File annual reports with the DCCA and keep business licenses current.

S Corporation Tax Filing Requirements in Hawaii

While an S corp in Hawaii itself doesn't pay corporate income tax, it must still comply with key filing obligations:

• Federal Form 1120S: Must be filed annually with the IRS to report income and distributions.
• Hawaii Form N-35: Hawaii’s version of the S corporation tax return, which passes income through to shareholders.
• Schedule K-1 (Form N-35): Each shareholder receives a Schedule K-1 indicating their share of income.
• Estimated Tax Payments: Shareholders may be required to make estimated tax payments on income received via the S corp.
• General Excise Tax (GET): Regardless of S corp status, businesses must file and pay Hawaii’s GET, usually monthly, quarterly, or semiannually.

Advantages and Disadvantages of an S Corp in Hawaii

Advantages:

• Pass-Through Taxation: No corporate-level tax; profits are taxed only at the shareholder level.
• Avoids Double Taxation: Unlike C corporations, earnings are not taxed twice.
• Limited Liability Protection: Owners are generally not personally liable for business debts.
• Self-Employment Tax Savings: With a reasonable salary and dividends structure, shareholders may reduce self-employment tax.

Disadvantages:

• Strict Ownership Rules: Limited to 100 shareholders, all must be U.S. citizens or residents.
• Additional IRS Filings: Must file Form 2553 to elect S status and maintain compliance.
• GET Still Applies: Hawaii imposes a general excise tax on business activities, regardless of pass-through status.
• Complex Payroll Requirements: Shareholder-employees must receive a reasonable salary, which requires payroll setup.

Due Dates for Hawaii Tax Returns

The tax returns of Hawaii are due by day 20 in the 4th month after the tax year closes. For businesses that file according to the traditional calendar year, returns are due by April 20. Businesses that can't file on that date can acquire an automatic extension of state tax. In Hawaii, an extension grants a filer six extra months to file their return, which means their new due date becomes October 20 (this is assuming the filer is going by the regular calendar year).

Form N-301

A corporation, REMIC, trust, or partnership must use Form N-301 to apply for an automatic extension of time to file a tax return in Hawaii. The filing can be done by traditional mail or by an online application via Hawaii's Electronic Services website, www.ehawaii.gov/efile.

If an entity desires to request a business extension, Form N-301 must be filed and submitted. This is required whether or not the entity has a due state tax balance. For the record, a tax extension doesn't provide extra time to pay the due tax balance.

In order to get a business extension, Hawaii demands 100 percent compliance with timely tax payment. So, the entity applying for the extension needs to ensure payment of all Hawaii's taxes by their original due dates, which is April 20 by default. This is to avoid extra charges as a penalty for delayed tax payments.

The applying entity can do the tax payments digitally via Hawaii's E-Service website by the above-provided link. Optionally, the entity can send a payment with Form N-301 by traditional mail.

Net Income Tax Rates of Hawaii

What are the personal net income tax rates in Hawaii? They're the following ranges and their corresponding percentages:

• From zero to 2.400 pays 1.4 percent
• From 2,400 to 4,800 pays 3.2 percent
• From 4,800 to 9,600 pays 5.5 percent
• From 9,600 to 14,400 pays 6.4 percent
• From 14,400 to 19,200 pays 6.8 percent
• From 19,200 to 24,000 pays 7.2 percent
• From 24,000 to 36,000 pays 7.6 percent
• From 36,000 to 48,000 pays 7.9 percent
• From 48,000 to 150,000 pays 8.25 percent
• From 150,000 to 175,000 pays 9 percent
• From 175,000 to 200,000 pays 10 percent
• From 200,000 and above pays 11 percent

Common Compliance Mistakes for S Corps in Hawaii

S corps in Hawaii should avoid these common compliance pitfalls:

• Failing to File Form 2553 Timely: Missing the deadline can cause a default to C corp tax treatment.
• Ignoring State Filing Obligations: Not filing Hawaii Form N-35 or GET returns can result in penalties.
• Improper Owner Compensation: Not paying shareholder-employees a reasonable salary can trigger IRS scrutiny.
• Lack of Recordkeeping: Hawaii requires accurate records for distributions, payroll, and expenses.
• Neglecting Annual Reports: Forgetting to file annual reports with Hawaii BREG can lead to administrative dissolution.

Frequently Asked Questions

1. Does Hawaii tax S corporations directly?
   No. Hawaii honors federal S corp status and does not impose corporate income tax on the entity itself. However, shareholders must report and pay tax on their share of income.
2. What forms must an S corp in Hawaii file?
   An S corp must file IRS Form 1120S, Hawaii Form N-35, and possibly Schedule K-1 for each shareholder. It may also need to file general excise tax returns.
3. Is a business license required for S corps in Hawaii?
   Yes. Most businesses, including S corporations, must register for a general excise tax license using Hawaii Form BB-1.
4. Can a single-member LLC elect to be taxed as an S corp in Hawaii?
   Yes. The LLC must first elect to be taxed as a corporation (Form 8832), then file Form 2553 to elect S corp status.
5. What is the general excise tax (GET) rate in Hawaii?
   The base GET rate is 4%, with an additional 0.5% surcharge in some counties. S corps are required to pay GET on gross business income.

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