Rhode Island Just Taxed Million-Dollar Earners — Here's What Owners Owe

Rhode Island Business Owners Making Seven Figures Just Got a New Tax Bill

Governor Dan McKee has signed a state budget that creates a new tax bracket for Rhode Island residents earning more than $1 million a year — and because most small businesses in the state are structured as pass-through entities, that new bracket reaches directly into the personal tax returns of business owners, not just the wealthy investors and executives the "millionaire tax" label suggests.

What the new law actually does

The law raises Rhode Island's top personal income tax rate from 5.99% to 8.99%, but not all at once. The increase phases in gradually: an additional 1% surtax on income over $1 million starts in tax year 2027, rising by roughly 1 percentage point a year until it reaches the full 3% surtax — and the 8.99% top rate — by 2029. The state projects the surtax will eventually generate about $142 million a year in additional revenue once fully phased in.

Rhode Island joins a growing list of states adding surtaxes on very high earners, following similar moves in Massachusetts, New York, and, closer to home for comparison, Maine's own millionaire surtax enacted earlier this year. But Rhode Island's version stands out for reaching a lower bar — $1 million in total income, not $1 million in business profit alone — and for phasing in over three tax years rather than taking effect immediately.

Why this is a small business story, not just a "tax the rich" story

Most small businesses in the U.S. are not C corporations. They're LLCs, S corporations, partnerships, and sole proprietorships — pass-through entities where business profit isn't taxed at the corporate level at all. Instead, it flows through to the owner's personal tax return and gets taxed as personal income. That means a Rhode Island restaurant group, medical practice, law firm, or contracting business that clears $1 million in profit in a strong year doesn't get treated differently than a hedge fund manager under this law. The owner pays the same new surtax rate on the income above that threshold.

Rhode Island has roughly 100,000 small businesses, and the vast majority are structured this way. For an owner whose business has a breakout year — a large contract, a strong holiday season, the sale of a piece of equipment or property — crossing the $1 million line even once can trigger the surtax for that tax year, even if the business doesn't clear that bar every year.

The opposition, and the risk business groups are watching

The Greater Providence Chamber of Commerce and other business groups opposed the surtax while it moved through the legislature, warning that even a limited exodus of high-earning residents and business owners to lower-tax states like Florida, New Hampshire, or Massachusetts' neighbor states could weigh on an economy business groups already describe as fragile. Rhode Island has a smaller and more mobile population of high earners than a state like New York, which makes the "will people just leave" question more consequential for state revenue projections than it might be elsewhere.

Supporters of the bill counter that the phase-in schedule — starting at a modest 1% add-on in 2027 rather than jumping straight to the full 3% — is designed to limit any sudden shock and give affected taxpayers time to adjust their planning before the rate reaches its ceiling in 2029.

What business owners should do now

Because the surtax doesn't start until tax year 2027, owners have roughly a year and a half of runway before it first applies. That's enough time to work through a few concrete steps with a tax professional:

• Model out whether your business's typical profit, plus any other personal income, is likely to cross $1 million in a given year — and whether that's a one-time event or a recurring pattern
• Revisit your entity structure. The choice between an LLC and an S corp affects how income is characterized and, in some cases, what planning options are available as top marginal rates rise
• Review your profit and loss statement from the past two to three years to see how close you've come to the $1 million threshold, and whether timing income or expenses across tax years could smooth out a spike
• Talk to a Rhode Island-based CPA about residency and apportionment rules if you have business activity or a second residence in another state

A planning tool that already exists — with a new wrinkle

Rhode Island already offers pass-through entities a workaround for a different tax problem: the federal cap on how much state and local tax individuals can deduct on their federal return. Under Rhode Island's existing pass-through entity tax (PTET) election, an LLC, S corporation, or partnership can elect to pay Rhode Island income tax at the entity level, at a flat 5.99% rate, rather than passing that liability entirely to the owner's personal return. Because the entity-level tax isn't subject to the federal SALT deduction cap, it can preserve a larger federal deduction than paying the same tax personally.

What's not yet clear is exactly how the new millionaire surtax interacts with a PTET election, since the surtax is structured as a personal income tax add-on rather than a change to the flat entity-level PTET rate. Business owners near the $1 million threshold should ask their accountant directly whether making or continuing a PTET election changes how much of their distributive share of business income ends up exposed to the new surtax — the answer may depend on how Rhode Island's Division of Taxation ultimately issues guidance on the interaction between the two provisions.

How it compares to Maine's millionaire tax

Rhode Island's new surtax arrives in the same year Maine's own millionaire tax took effect, and the two laws invite comparison. Maine's surtax applies a flat additional rate immediately, while Rhode Island phases its surtax in over three years. Rhode Island's top rate, once fully phased in at 8.99%, will sit close to Maine's top combined rate as well, putting both New England states firmly in the higher-tax bracket for successful pass-through business owners, alongside neighbors like Massachusetts and New York.

For a business owner operating near the New England state lines, that growing cluster of high-earner surtaxes is becoming a real factor in decisions about where to locate a headquarters, register a second entity, or even where an owner personally maintains residency — decisions that used to hinge mostly on customers and labor markets, not marginal tax brackets.

What happens if you cross the line only once

Not every business that eventually pays this surtax is a consistently high-earning company. A landscaping company that sells off a piece of commercial property, a family-owned manufacturer that lands one unusually large contract, or a retailer that has a blowout single year could all cross the $1 million mark without it reflecting their typical annual income. Because the surtax applies to income in the year it's earned, a one-time spike can trigger it even for a business that spends most years well under the threshold. That makes it especially important for owners with lumpy, unpredictable revenue — as opposed to steady, high-six-figure earners — to model out a range of scenarios rather than assuming this law simply doesn't apply to them.

The bottom line

If your Rhode Island business — or your total household income including that business — is anywhere near $1 million a year, this law is worth planning around now, even though the first surtax dollar isn't due until returns filed for tax year 2027. The phase-in gives you time. Ignoring it until 2029, when the rate hits its full 8.99%, does not.

Photo by Kelly Sikkema on Unsplash