A professional tax, also known as an occupation tax or a professional privilege tax, is a tax that a professional must pay to receive the right to practice a professional service. Many state and local governments collect professional taxes, and a professional who has clients in more than one state may owe professional taxes in several states.
A professional tax is different from other taxes workers must pay. According to the Penn State local tax website, the reason for these differences is that, originally, holders of a professional practice license in England could sell the license to another person, granting that person the right to practice a profession in a city or town. This tax operates like a real estate tax rather than an income tax.
Business Tax Comparison
A professional tax is similar to a business tax, but it is not exactly the same. All businesses in an area pay a business tax, including businesses such as supermarkets that do not offer professional services. A large business may pay a higher business tax than a small business, but a professional tax is a flat tax that depends only on an individual's profession. A physician who makes $200,000 a year and a physician who makes $400,000 a year pay the same amount of professional tax each year. The state of Tennessee, for example, assesses the same amount of professional tax on a worker in any profession on its list.
Workers in scientific, medical, legal and financial fields often pay the professional tax. A local government lists specific professionals--such as lawyers, mortgage brokers, dentists and optometrists--who are subject to the professional tax. A worker who does not pay the professional tax risks losing a license to offer a service. Each location creates its own list, so a professional may have to pay a professional tax when working in one city but not in another city.
When a professional pays an occupational tax, a city, county or state may issue a special tax stamp, or a certificate, to the professional. The professional must display this tax stamp or certificate at the workplace to show local inspectors that tax payments are current.
A business may pay a professional tax for an employee, although it is the employee's obligation to ensure that the government receives this tax. When a business pays a professional tax, it pays the same rate for each employee who works for the business, without regard to the number of hours each employee works. Hiring several professionals to work part time can incur a higher professional tax liability than hiring several full-time professionals.
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