How much small businesses pay in taxes depends on a few factors like income, deductions, expenses, business structure, and more. From corporate and business taxes to tax rates and tax forms, here's how to figure out how much small businesses really pay in taxes.
Key Takeaways
- Small businesses pay taxes, but the amount depends on factors like business structure and business expenses.
- Some business owners pay taxes as part of their personal tax return, while others are taxed on their net earnings or share of business income.
- Small businesses also need to pay FICA and unemployment taxes and may need to pay self-employment taxes, too.
What Is a Corporate or Business Tax?
A corporate or business tax is charged on the profits of a company. The figure used as a basis for taxes varies, depending on the business type:
- Small business owners pay tax on Schedule C as part of their personal tax returns.
- Partners in partnerships and LLC owners are taxed on their share of business net income.
- Corporations are taxed on net earnings.
Note
Profit, net income, and net earnings mean essentially the same thing. Profit and loss is an accounting concept calculated as income minus expenses. Net income is income after taxes and deductions. Net earnings is a sum used to calculate income tax for corporations.
What Is the Small Business Tax Rate?
When you think of business taxes, you may be thinking about the federal business income tax rate. But the National Federation of Independent Business (NFIB) says most small businesses don't pay income tax at a business rate.
That's because about 75% of small businesses are not corporations. This large percentage of small businesses are considered "pass-through" entities, which means they pay tax at the personal tax rate of the owners.
Since small business (non-corporate) tax rates are tied to the total income of the business owners, we need to look at the current individual income tax rates.
For tax year 2022, the individual tax rates range from 10% to 37%, the latter of which applies to income over $539,900 ($647,850 for married couples filing jointly).
What Is the Corporate Tax Rate?
The only type of business that pays taxes on its own is a corporation.
The corporation's owners don't pay any tax strictly on the corporation's profits, but they are taxed on their income if they work as employees. They are also taxed on the dividend income they receive—the so-called "double taxation" issue.
The corporate tax rate is a flat tax rate of 21%.
How Do Small Business Owners Pay Taxes?
Most small businesses are owned by individuals.
Partnerships, LLCs, and sole proprietorships pay no business tax, but the income is passed through to the owners, who report it on their personal tax returns. Because of this, it can be difficult to separate the tax paid on business income from thetax owed by the individual for all forms of income.
To figure your income tax rate, you must calculate your taxes for Form 1040 or 1040-SR, by adding up all your sources of income, including your business's net income. You'll also have to include tax credits and deductions to compute a net taxable income.
When you have your total taxable income, you can use the IRS tax tables to figure out your tax, though tax prep software or an accountant may be better to ensure you maximize your credits and deductions.
Note
Look for tax prep software that offers a small business version with Schedule C included. The software will also likely have programs for figuring partnership, LLC, corporation, and S corporation taxes.
What Other Taxes Does a Business Pay?
In addition to income taxes, the largest tax bill that small businesses pay is payroll taxes. These taxes are for FICA taxes (Social Security and Medicare taxes). Your portion as an employer is 7.65% of the employee gross payroll.
Other payroll taxes, like unemployment taxes and workers' compensation taxes, increase the amount of tax you must pay as an employer.
Other taxes your business will be responsible to pay include:
- Capital gains taxes on business investments and on the sale of business assets (the capital gains tax rate is based on how long you owned the asset)
- Property tax on real property (land and buildings) owned by the business
- Tax on dividends from business investments
Don't Forget Self-Employment Taxes
Small business owners don't have income tax and Social Security and Medicare taxes withheld, so they must pay these taxes as self-employment tax. This means you'll have to pay the entire 15.3% tax rate—both your 7.65% employer portion and the 7.65% employee portion.
You can use the business version of tax preparation software programs to calculate this tax or use Schedule SE. Add the total taxable amount to your other taxable income on your personal tax return.
Quarterly Estimated Taxes
As a small business owner, you will probably need to pay quarterly estimated taxes to the IRS to avoid underpayment penalties. The payments are due April 15, June 15, and Sept. 15 of the current tax year, and Jan. 15 of the next tax year.
Income Taxes for LLC Businesses
If you are wondering why limited liability companies (LLCs) are not listed, remember that the LLC business type is not considered a tax entity by the IRS. An LLC with one owner is taxed as a sole proprietorship, with taxes calculated on Schedule C of the owner's personal tax return. Multiple-member LLC's are taxed as partnerships, but taxes are still passed through to the owners.
Note
Some LLCs elect to have their businesses taxed as corporations or S corporations. In these cases, the LLC operates the same as usual, but it pays taxes as a corporation or S corporation.
State Taxes for Businesses
As a business, you may have to also pay business taxes in your state. This will depend on the state and your business structure. You'll mainly need to worry about income taxes and employment taxes in your state, though there may be other state and local taxes, too. For example, Washington state has a Business and Occupation Tax that is a gross receipts tax, but it does not have an income tax.
Qualified Business Income Tax Deduction
The Qualified Business Income (QBI) deduction is a tax deduction worth 20% of the owner's net income from the business. This is in addition to the normal deductible business expenses.
It isn't available for owners of corporations or S corporations, and there are specific limits and detailed calculations involved. Your business tax software program or your tax professional can calculate this deduction for you.
Frequently Asked Questions (FAQs)
How much is the small business tax rate?
There is no specific tax rate for small businesses. The rate you pay as a small business owner depends on the business structure. Many small businesses will pay taxes at the individual tax rate which ranges from 10% to 37% depending on the income. A corporation may pay a flat corporate tax rate of 21%.
How do tax deductions work for small businesses?
There are many tax deductions for small businesses, many tied to business expenses. A few popular business tax deductions include business travel costs, the qualified business tax deduction, business supplies, retirement contributions, and advertising or marketing expenses.
