Connecticut Small Business Tax Guide for 2025

From income and sales tax to specialized entity taxes, Connecticut's tax system is complex. Small business owners must not only understand these obligations to ensure ongoing financial health and compliance but must also learn how to navigate ongoing tax challenges and legislative changes. Important changes to be aware of include the state's reduced pass-through entity tax credit, the economic nexus threshold for remote sellers, and the advent of AI-driven compliance tools to aid in ever-changing compliance requirements.

Compliance with Connecticut laws is essential for your small business's financial health and sustainability. Tax compliance is critical as it helps your business reduce financial risk, enhance your business's reputation, and avoid costly penalties, such as errors in unemployment insurance contributions. Maintaining complete and up-to-date documentation is essential for compliance and helps fend off heightened IRS enforcement initiatives.

Whether you're an experienced Connecticut-based entrepreneur or just launched your startup, use this comprehensive guide to break down everything you need to know about business taxes in the state.

Figuring Out Connecticut's Business Tax Maze

Connecticut imposes several types of taxes on small businesses, including income, corporate, pass-through entity, sales, withholding, and unemployment insurance taxes, with obligations varying based on your business structure and activities.

Personal Income Tax for Business Owners

If you operate as a sole proprietor, partnership member, or LLC member (members own the business) in Connecticut, your business income passes through to your personal tax return. Connecticut has a progressive income tax structure with rates ranging from 2% to 6.99% based on your taxable income.

If you own or co-own a Connecticut-based business featuring a pass-through entity structure, consider these key points:

• You'll report business income on your personal Connecticut income tax return (Form CT-1040)

• If you expect to owe $1,000+ in taxes, you must make quarterly estimated tax payments

• Connecticut follows the "90% prior-year liability rule" for estimated payments to help avoid underpayment penalties

How C Corps Are Taxed in Connecticut

C corporations and LLCs that elect to be taxed as C corporations in Connecticut face the Corporation Business Tax, which is calculated on either net income or capital base, whichever yields the higher tax amount.

If this tax applies to your business, keep these facts in mind:

• The standard net income tax rate is 7.5%

• A minimum tax of $250 applies regardless of income

• Governor Lamont's 2025 budget proposes extending the 10% corporate tax surcharge through 2028

• The capital base tax is being phased out, with acceleration to 2026 proposed

These proposed changes may create strategic opportunities for C corporations to reallocate resources, but complicate long-term planning and may also influence whether you select a pass-through or corporate structure. For growing businesses, periodically reassessing your business structure becomes increasingly important as your revenue changes.

These developments may subject businesses to a surtax, making the income calculation methods you use a strategic concern, such as net income and capital base calculations.  

How Pass-Through Entities Are Taxed in Connecticut

Connecticut imposes a mandatory Pass-Through Entity (PTE) tax on partnerships, S corporations, and LLCs that are taxed as partnerships or S corporations.

This unique dual-layer system works as follows:

• The entity pays a 6.99% tax on Connecticut-source income

• Owners receive a credit against their personal income taxes for their share of the PTE tax paid

Important change: Connecticut reduced the PE tax credit from 93.01% to 87.5%, effectively raising the tax burden for small businesses. This particularly impacts LLCs and S corporations reinvesting profits. Legislative proposals like HB 5549 have aimed to restore the original credit percentage.

Pass-through entities must file Form CT-1065/CT-1120SI and make estimated payments if their expected tax liability exceeds $1,000.

Sales and Use Tax in Connecticut: The Basics

Connecticut imposes a 6.35% sales tax on retail sales of most goods and certain services. Business owners must understand when they're required to collect this tax.

Additional sales tax rates apply to specific transactions:

• Meals and certain beverages: 7.35%

• Short-term motor vehicle rentals: 9.35%

• Digital goods and hotel occupancy: rates vary

Use tax applies to taxable goods and services purchased tax-free (such as from out-of-state sellers not collecting Connecticut tax) that are subsequently used in Connecticut. Businesses must meticulously track inventory and equipment acquisitions to report use tax properly.

Remote sellers are required to collect Connecticut sales tax if they exceed $100,000 in annual in-state sales or 200 transactions. Marketplace facilitators are responsible for collecting and remitting sales tax on behalf of marketplace sellers.

Connecticut's Withholding Tax Requirements

Employers must withhold Connecticut income tax from employee wages based on the state's graduated income tax brackets. These withholding taxes must be remitted to the Connecticut Department of Revenue Services (DRS) according to a schedule based on the amount withheld (weekly, monthly, or quarterly).

Employers must file quarterly reconciliation returns (Form CT-941) and an annual reconciliation (Form CT-W3). Withholding calculations require precision, as errors can trigger penalties.

1-800Accountant offers full-service payroll where payroll taxes are handled on your behalf, ensuring compliance with Connecticut's withholding requirements.

Unemployment Tax Requirements for Connecticut's Employers

Connecticut employers must pay state unemployment insurance taxes to the Connecticut Department of Labor. Tax rates vary from 1.1% to 8.9% based on the employer's experience rating—businesses with frequent layoffs typically have higher rates.

Errors in unemployment insurance contributions can trigger penalties, making it essential to calculate and submit these taxes accurately and on time.

How Your Business Type Changes Your Connecticut Tax Bill

Your business structure significantly impacts your tax obligations in Connecticut. 

Sole Proprietorships:

• Report business income on Schedule C and Connecticut Form CT-1040

• Income taxed at personal rates (2% to 6.99%)

Partnerships/LLCs (taxed as partnerships):

• File Form CT-1065/CT-1120SI for the Pass-Through Entity Tax

• Partners/members report their share of income on personal returns

• PTE tax credit (currently 87.5%) applies

S corporations/LLCs (taxed as S corps):

• File Form CT-1065/CT-1120SI for the Pass-Through Entity Tax

• Shareholders report income and claim PTE tax credit on personal returns

• PE tax credit reduction particularly impacts businesses reinvesting profits

C corporations/LLCs (taxed as C corps):

• Pay Corporation Business Tax on Form CT-1120 (7.5% rate plus potential surcharge)

• Dividends to shareholders are taxed again at the individual level

Working with the tax professionals at 1-800Accountant, experienced in Connecticut taxation, is invaluable for navigating these complex requirements, especially with the PE Tax's impact on different business structures.

Smart Ways to Handle Your Sales and Use Tax

For many small businesses, sales tax represents one of the most complex compliance areas.

Sales Tax 101: When Do You Collect It and On What?

You must collect Connecticut sales tax when:

• You sell, lease, or rent tangible personal property

• You provide taxable services

• You ship products to Connecticut customers (if you have nexus)

The general sales tax rate is 6.35%. Failing to collect and remit sales tax when required makes your business liable for the uncollected amount, plus potential penalties and interest. The Connecticut DRS can assess penalties for failure to file returns, failure to pay tax, and negligence or fraud.

Understanding 'Nexus' in Connecticut

"Nexus" determines whether your business has sufficient connection to Connecticut to trigger tax collection obligations. Types of nexus include:

Physical presence nexus:

• Having an office, warehouse, store, or employees in Connecticut

• Storing inventory in a Connecticut fulfillment center

Economic nexus:

• For remote sellers: $100,000+ in gross receipts from Connecticut sales and 200 or more retail sales into the state in the preceding 12 months

Marketplace facilitator requirements:

• Platforms like Amazon and Etsy must collect and remit tax on sales made through their platforms by marketplace sellers

Fulfillment by Amazon (FBA) and Nexus Implications

If you use Amazon FBA and your inventory is stored in Connecticut, you have a physical presence nexus and must register for a Connecticut Sales and Use Tax Permit.

Trailing Nexus Rules

If your business previously had nexus in Connecticut but ceased the nexus-creating activity, you must still collect and remit sales tax for the remainder of the calendar quarter plus the next three succeeding calendar quarters.

Businesses classified as "non-collecting sellers"-- remote retailers who do not collect sales tax on transactions have additional reporting requirements, including notice to buyers that they may owe use tax in the state, and the submission of an annual purchase summary and informational report to DRS.   

How Connecticut Sales Tax Is Sourced

Connecticut uses destination-based sourcing for sales tax, meaning tax is applied based on where the purchaser receives the product or service (the ship-to address). Unlike some states, Connecticut does not currently have local (city or county) sales taxes in addition to the state rate.

Sales Tax Exemptions, Tax-Free Customers and Sales Tax Holidays

Tax-exempt goods include:

• Most groceries (excluding candy, soft drinks, and prepared meals)

• Prescription and non-prescription drugs

• Newspapers and certain subscription magazines

• Solar equipment (under Green Energy Incentives)

Tax-exempt customers:

• U.S. government

• State of Connecticut

• Qualifying charitable and non-profit organizations with valid exemption permits

Sales tax holidays:

• Connecticut typically holds an annual Sales Tax Free Week in August

• During this week, most clothing and footwear items under $100 are exempt from sales tax

Sales Tax on Shipping and Handling

Shipping and handling charges are generally taxable in Connecticut if the items being shipped are taxable. If shipping charges represent the actual cost of transportation via common carrier and are separately stated on the invoice, they may be non-taxable.

Getting Your Connecticut Business Officially Set Up

Before conducting business in Connecticut, you'll need to complete several registration steps.

Checklist for Connecticut Business Registration

1. Register your business name and legal structure with the Connecticut Secretary of the State

2. Obtain a Federal Employer Identification Number (EIN) from the IRS

3. Register with the Connecticut DRS for applicable state taxes using the myCTDRS online portal

4. Obtain necessary state or local licenses and permits specific to your industry

Getting a Sales Tax Permit in Connecticut

Businesses planning to sell taxable goods or services must obtain a Sales and Use Tax Permit (Form REG-1) before making any sales in Connecticut. Registration is completed online through the myCTDRS portal.

The permit must be displayed conspicuously at your business location. While there's no fee to obtain the permit, compliance with all collection, remittance, and filing obligations is required.

Buying an Existing Business? Tax Steps for New Owners

When purchasing an existing business in Connecticut:

• Obtain a new Sales and Use Tax Permit in your name, as permits aren't transferable

• Request a Tax Clearance Certificate (Form AU-963) from the seller to verify tax compliance

• Be aware of potential successor liability for the seller's unpaid taxes

• Ensure the seller files their final return and cancels their permit within 15 days of the sale

How to File and Pay Your Connecticut Business Taxes

Most Connecticut business taxes must be filed and paid electronically through the DRS online portal, myCTDRS.

The Usual Way to File and Pay Your Business Taxes

The myCTDRS portal allows businesses to access tax accounts, file returns, make payments via electronic funds transfer (EFT), and view correspondence.

1-800Accountant's services feature an online filing portal that simplifies interactions with state systems like myCTDRS, ensuring accurate, hassle-free, and timely submissions.

Handling Your Personal Income Tax as a Business Owner

Sole proprietors and pass-through entity members report business income on:

• Form CT-1040 (for residents)

• Form CT-1040NR/PY (for nonresidents/part-year residents)

Quarterly estimated tax payments using Form CT-1040ES are required if you expect to owe $1,000+ in Connecticut income tax after credits. Your business can avoid underpayment penalties by aligning with Connecticut’s 90% prior-year liability rule.

Returns are typically due by April 15 for calendar year filers.

Getting the Pass-Through Entity (PTE) Tax Filed and Paid

Pass-through entities must file Form CT-1065/CT-1120SI annually, due by the 15th day of the third month following the end of the entity's taxable year, which is March 15 for calendar year filers.

Estimated PTE tax payments are required for eligible entities and must also furnish Schedule CT K-1 to each member showing their share of the tax paid.

C Corp Taxes: How to File and Pay

C corporations file Form CT-1120 annually, due by the 15th day of the month following the due date of the corresponding federal income tax return. Corporations expecting tax liability over $1,000 must make quarterly estimated tax payments.

Filing and payments are generally submitted electronically via myCTDRS.

How to File and Send in Your Sales and Use Tax

Sales and use tax returns (Form OS-114) must be filed electronically using myCTDRS. Your filing frequency—monthly, quarterly, or annually—depends on your anticipated sales tax liability:

• Annual: Yearly liability of $1,000 or less

• Quarterly: Yearly liability between $1,001 and $4,000

• Monthly: Yearly liability over $4,000

Businesses must file by their assigned frequency, even if no tax is due. Failing to file a "zero return" can incur a $50 late filing penalty.

If your business is closing, ensure you meet your obligations before moving on to your next venture to avoid penalties.  

• Your business must file a final sales tax return and remit all taxes collected within 15 days of ceasing business operations in the state.

• You must check the "Yes" box for question 5 on Form OS-114, indicating it is a final return.

• Cancel the Sales and Use Tax Permit by contacting DRS.

Employee Withholding Tax: How to File and Pay

Employers must file Form CT-941 quarterly to report wages paid and income tax withheld. Payment frequency (weekly, monthly, or quarterly) depends on the amount withheld. Form CT-W3, an annual reconciliation, must also be filed with copies of each W-2.

Unemployment Tax: How to File and Pay

Unemployment insurance taxes are managed through the Connecticut Department of Labor's Tax and Wage Reporting System. Employers must file quarterly tax and wage reports (Form UC-2/UC-5A) and pay contributions based on their assigned experience rating.

Don't Miss These Connecticut Tax Deadlines

Meeting tax deadlines is crucial to avoid penalties and interest.

When Are Connecticut Taxes Due?

Key deadlines include:

• Individual income tax returns: April 15

• PTE tax and S corporation returns: March 15 (calendar year filers)

• Corporation Business Tax returns: May 15 (calendar year filers)

Sales Tax: Due Dates

• Monthly filers: Last day of the following month

• Quarterly filers: April 30, July 31, October 31, January 31

• Annual filers: January 31 of the following year

Missed a Deadline? Here's What to Expect

If you miss a deadline, it's in your business's best interest to submit your materials and payment as soon as you can to avoid additional interest that will accrue.

Missing tax deadlines can result in:

• Failure to file penalty: $50 or 10% of tax due (whichever is greater)

• Interest: 1% per month on unpaid tax

• Late payment penalties: 10% of unpaid tax (up to 15% for sales tax under certain conditions)

The Inflation Reduction Act's $46 billion IRS funding boost has intensified scrutiny of small business filings, increasing audit risks. 1-800Accountant offers comprehensive audit defense services to help businesses navigate audits if they occur.

Getting the Most Out of Connecticut Tax Breaks

Connecticut offers various tax incentives to encourage business investment, job creation, and innovation, further enhancing the state. 

Ways Your Connecticut Small Business Can Save on Taxes

Available tax credits include:

• Research and Development (R&D) tax credits for qualifying expenditures

• Job creation tax credits for businesses creating new full-time positions

• Pass-Through Entity Tax Credit optimization strategies to mitigate the 87.5% credit cap

Many small businesses overlook R&D credits due to complexity, missing significant savings opportunities.

Connecticut-based business owners should embrace PE Tax Credit Optimization strategies to mitigate the 87.5% credit cap imposed by the state. Stacking credit, such as combining PE credits with property tax deductions up to $350 under the governor's 2025 proposal, is also possible.

Industry-Specific Tax Breaks to Look For

Connecticut offers specialized incentives for certain industries it wants to attract, including:

• Manufacturing: Machinery & Equipment Expenditure Credit

• Apprenticeship Tax Credits: Up to $7,500 per trainee in manufacturing sectors

• Green Energy Incentives: Sales tax exemptions for solar equipment purchases

Professional tax discovery audits can identify overlooked savings, often recovering 5-10% of annual tax liabilities.

Smart Moves for Staying on Top of Your Taxes

Maintaining tax compliance while minimizing liability requires proactive planning.

Top Tips for Tax Planning

1. Understand all obligations for state, local, and federal tax

2. Utilize available deductions and credits to minimize tax liability

3. Regularly review your business structure to ensure it remains tax-efficient as your business evolves

4. Consider strategic moves like converting LLCs to S corporations for self-employment tax considerations 

5. Stay informed about tax law changes through multi-year tax projections aligned with Connecticut's biennial budget cycle

Keeping Accurate Records

Maintain detailed financial records throughout the year, including income and expense documentation, sales tax collected, and supporting documentation (invoices, receipts, bank statements). 

Consider services that offer:

• Real-time bookkeeping that syncs with accounting software

• Document digitization for storing receipts and invoices in encrypted client portals

• Mileage tracking apps for substantiating vehicle expenses

When to Call in a Tax Pro (and Why It's Worth It)

Professional tax assistance is particularly valuable for:

• Navigating complex structures like Connecticut's dual-layer PTE tax system

• Optimizing tax credits and deductions

• Providing audit representation and defense

• Creating scenario models to project the impacts of varying credit levels

1-800Accountant matches Connecticut-based business owners with CPAs experienced in their industry and state-specific tax issues, providing expert guidance tailored to your business needs.

Where to Learn More About Your Business Taxes

Workshops and Webinars for Small Businesses

The Connecticut DRS offers free tax workshops, webinars, and informational sessions covering business registration, sales and use tax, withholding tax, and navigating the myCTDRS portal.

The Small Business Administration and local Chambers of Commerce also provide valuable educational resources.

Tax Help in Spanish for Your Business

The Connecticut DRS provides key publications, forms, and taxpayer assistance in Spanish. Spanish-speaking taxpayers can request assistance when contacting the DRS call center or visiting taxpayer service locations.

Steering Clear of Tax Trouble and Common Mistakes

Penalties and Interest: What Happens If You Mess Up on Taxes?

Tax mistakes can be costly:

• Failure to file: $50 or 10% of the tax due (whichever is greater)

• Failure to pay: 10% penalty (up to 15% for sales tax under certain conditions)

• Interest: 1% per month until paid

• More severe penalties for negligence or fraud

How to Fix Common Tax Mistakes

Common filing errors include mathematical mistakes, using the incorrect form, missing a deadline, worker misclassification, and sales tax calculation errors. 

Regular financial reviews and reconciliation of W-2s and 1099s can prevent costly mistakes. When errors are discovered, prompt filing of amended returns is essential.

Tax Rule Changes: Stay Updated

Stay informed about Connecticut tax changes by:

• Subscribing to DRS newsletters

• Regularly checking DRS and DECD websites

• Attending informational webinars

• Working with tax professionals who track legislative developments

Your Partner in Navigating Connecticut Small Business Taxes

Understanding Connecticut's complex business tax landscape is crucial for financial health and compliance. From income and corporate taxes to the unique Pass-Through Entity tax, sales tax obligations, and payroll responsibilities, managing these requirements demands both diligence and expertise.

1-800Accountant, America's leading virtual accounting firm for small businesses, simplifies this complexity with:

• Connecticut-specific tax expertise from knowledgeable CPAs and tax professionals

• Assistance with business registration and permit acquisition

• Comprehensive payroll management solutions

• Sales and use tax compliance guidance

• Strategic tax planning and credit optimization

• Meticulous bookkeeping and audit support

Take control of your Connecticut small business taxes and focus on what you do best—running and growing your business. Discover how 1-800Accountant's tailored services can provide the support and peace of mind you need.