Hawaii has a unique tax structure that businesses must understand before operating in the state. From franchise taxes on financial institutions to corporate and non-corporate income taxes, the state applies a blend of entity-level and pass-through rules. Compliance is reinforced with penalties, interest rates, and clear requirements for estimated tax payments.
This blog breaks down Hawaii’s tax system into its core components: franchise tax, corporate income tax, non-corporate income tax, and the rules surrounding estimated payments, interest, and penalties.
Franchise Tax
Hawaii imposes a franchise tax on banks and certain financial institutions under the Hawaii Revised Statutes (HRS). This tax is levied in lieu of both the state’s income tax and general excise tax for these entities. The franchise tax rate is 7.92%, measured against the institution’s entire net income from all sources in a given year.
The following entities are subject to the franchise tax:
- National banking associations located in Hawaii
- Banks organized under the laws of Hawaii
- Corporations engaged in banking in the state
- Foreign banks operating in Hawaii
- Federal savings and loan associations in Hawaii
- Building and loan associations
- Financial services loan companies
- Financial holding companies and savings and loan holding companies
- Mortgage loan originator companies
- Subsidiary corporations engaged in financial activities, majority-owned by financial institutions
- Trust companies
- Certain financial corporations and interbank brokers
- Small business investment companies
- Development companies approved by the federal Small Business Administration
By targeting financial institutions, Hawaii ensures that businesses operating in the state’s financial sector pay a fair share through a direct franchise tax rather than through the general excise or income tax system.
The franchise tax is reported using Form F1. For corporations operating on a calendar year, returns must be filed on or before April 20 following the close of the income year. The tax is also due on this date, though corporations may elect to pay it in four equal installments:
- April 20
- June 20
- September 20
- December 20
Penalties and interest apply for late compliance:
- Late Filing Penalty: 5% per month of the unpaid tax, up to a maximum of 25%.
- Failure to Pay After Timely Filing: 20% of the unpaid tax if it remains unpaid 60 days after the due date.
- Interest: 2/3 of 1% per month, or part of a month, applied to unpaid taxes and penalties starting the day after the due date.
These measures strongly encourage timely filing and payment, leaving little room for delay without financial consequences.
Corporate Income Tax
Corporations, including both C corporations and S corporations, that operate in Hawaii or earn income from sources within the state are subject to corporate income tax. Unlike the flat franchise tax, Hawaii applies a graduated corporate tax rate structure, ranging from 4.4% to 6.4%, depending on taxable income.
The filing requirements are straightforward:
- Returns are generally due on the 20th day of the fourth month after the close of the taxable year.
- Corporations must use Form N-30 (Hawaii Corporation Income Tax Return) to report income, deductions, and tax liability.
- Extensions are available, allowing up to an additional six months beyond the original due date.
This framework provides corporations with flexibility while ensuring the state collects taxes proportionate to the size and profitability of the entity.
Non – Corporate Income Tax
Non-corporate entities such as S corporations, partnership LLCs, and LLPs that operate in Hawaii or earn income from Hawaii sources are subject to taxation, though not at the entity level. Instead, their income or losses pass through to the individual owners or partners, who report it on their personal income tax returns.
Hawaii applies its individual income tax rates to these cases, which range from 1.4% to 11%, depending on the taxable income of the individuals.
The filing requirements are as follows:
- Returns are due on the 20th day of the fourth month after the close of the taxable year.
- S corporations must file Form N-35 (Hawaii S Corporation Income Tax Return).
- Partnerships and LLPs must file the Hawaii Partnership Return of Income, Form N-35.
- These entities may request a six-month extension to file, giving them additional time to prepare complete returns.
Estimated Payments & Interest and Penalty
Corporations expecting a tax liability of at least USD 500 for the year must submit Form N-201V to make estimated tax payments to the Hawaii Department of Taxation. Payments are made in four installments:
- April 20
- June 20
- September 20
- January 20 (of the following year)
These payments can be filed electronically through the state’s online portal, streamlining the process for taxpayers.
Penalties and interest mirror those imposed under the franchise tax system:
- Late Filing Penalty: 5% per month of unpaid tax, up to 25%.
- Failure to Pay After Filing Timely: 20% of unpaid tax if not settled within 60 days.
- Interest: 2/3 of 1% per month (or part of a month), starting from the day after the payment due date.
This consistency ensures that whether a corporation is subject to franchise tax, corporate income tax, or pass-through taxation, the compliance and penalty rules remain uniform across Hawaii’s tax system.
Hawaii’s taxation system is comprehensive yet clear in its application. Franchise tax focuses on financial institutions, while corporations and non-corporate entities are taxed based on income earned from the state. With graduated tax rates, structured deadlines, and strict penalties for non-compliance, the system emphasizes both fairness and accountability.
For businesses, the key to operating smoothly in Hawaii is understanding which taxes apply, filing the correct forms on time, and planning for estimated payments where necessary. With these elements in place, companies can remain compliant while focusing on growth and opportunities in the Hawaiian market.
