Business Tax Rates: How Much Do Small Businesses Pay in Taxes?
Filing taxes as a small business owner can be complex, with numerous factors to consider. From tax law revisions to the overwhelming number of forms, understanding your small business tax rate and how to file can be difficult.
Your business entity type and preferred filing status will also affect your tax rate. For example, LLCs that opt for the IRS to tax them as corporations are subject to corporate tax rates. Other businesses like sole proprietorships and limited partnerships may be subject to self-employment taxes. Understanding your entity type and requirements is the first step toward filing your taxes accurately and efficiently.
Tax laws are constantly changing, and it can be challenging to keep up with the latest revisions. A professional tax advisor or CPA can accurately file your business taxes on time. Our experienced tax specialists also know all the deductions and credits that can lower your tax bill.
We’ll cover small business tax rates, filing requirements, and various strategies that can help to reduce your taxes.
Table of contents
- How Are Small Businesses Taxed?
- Small Business Tax Rates
- Updates to Small Business Tax Rates
- What Taxes Do Businesses Pay?
- How Much Do Small Businesses Pay in Taxes by State?
How Are Small Businesses Taxed?
Depending on your business structure and income, you may be subject to one or more types of taxes.
- Corporate tax
- Self-employment tax
- Sales tax
- Payroll tax
We’ll cover everything you need to know about tax rates for the most popular business entity types—corporations, partnerships, sole proprietorships, and LLCs.
The IRS considers most U.S. businesses (around 95%) pass-through entities, also known as flow-through entities. Pass-through entities include:
- Sole proprietorships – Businesses with a single owner
- Partnerships – Businesses with two or more owners
- Limited liability companies (LLCs) – LLC owners can protect their personal assets from their business, but get the tax benefits of a pass-through entity. LLCs can also request the IRS tax them as corporations.
- S corporations (S corps) – Corporations that have a special tax designation, so the IRS taxes them as pass-through entities.
The biggest advantage of pass-through entities is that they avoid double taxation. The term refers to when the IRS taxes the same income twice—once at the corporation level and again on an individual shareholder’s personal income tax.
A corporation (C corporation) stands alone from its shareholders. The IRS taxes corporations as separate legal entities, which opens them up to double taxation. C corporations must report profits and earnings to the IRS. The IRS then taxes them at the corporate income tax rate. Shareholders still must file their personal income tax returns and report the corporate dividends and capital gains they get as part of their taxable income.
Let’s say a corporation earns $1,000,000 in profit and then passes on $200,000 in dividends to its shareholders. The business would have to pay corporate income taxes on the full amount of $1,000,000. Individual shareholders would also be subject to taxation on their share of the $200,000 dividend earnings.
The federal corporate income tax rate currently sits at 21%. A corporation with $100,000 in taxable income would owe $21,000 in taxes. With that said, that’s not necessarily the amount you need to pay. You can apply various small business tax deductions and credits to help reduce your tax liability.
While corporations have advantages, double taxation can be a major drawback. Most small businesses operate as pass-through entities instead.
Small Business Tax Rates
Unlike C corporations, the IRS taxes income for pass-through entities at the individual level. Owners file and pay taxes on all income—including business earnings—on their personal income tax returns. However, there are specific forms you need to include depending on your business structure. For example, partnerships will file Form 1065. S corporations will file Form 1120-S.
If you operate a pass-through entity, your small business tax rate will depend on your income tax bracket. The higher your taxable income, the higher your tax rate. Federal income tax rates range from 10% to as high as 37%.
It is important to note that pass-through entities may be subject to other taxes, outside of income. For example, you may need to pay self-employment tax.
|Tax rate||Single individual income||Married (filing jointly) income|
|10%||$10,275 or less||$20,550 or less|
Updates to Small Business Tax Rates
The IRS updates small business tax rates yearly to account for inflation or other economic changes. Therefore, you should look out for the latest rules and regulations or consult a tax professional. Legislation also impacts your tax bill.
Tax Cuts and Jobs Act (TCJA)
For example, the Tax Cuts and Jobs Act (TCJA) made major changes to the U.S. tax code, deductions, credits, and business tax rates. One of the biggest changes is that it lowered the corporate income tax rate from 35% to 21%. It also introduced a 20% deduction for qualified business income (QBI) from pass-through entities. However, some of those changes will phase out in the next few years.
A total of 23 individual and business tax TCJA provisions are set to expire on December 31, 2025. A tax professional can help you understand these changes and their impact on your business.
Inflation Reduction Act (IRA)
The Inflation Reduction Act (IRA) also influences how much you could pay in taxes. For one, it increased incentives for electric vehicles and other energy-efficient upgrades.
It also proposed a minimum tax rate of 15% for corporations that have made over $1 billion over three taxable years. This change has little to no impact on small business taxes. Unless you are a large, publicly traded corporation—think Walmart, Amazon, and Apple—it won’t have an impact on your business taxes.
What Taxes Do Businesses Pay?
Other than income tax, your small business may be subject to payroll taxes, self-employment taxes, and more. In addition to federal taxes, you may also have state and local taxes. Here is an overview of the taxes that businesses must be aware of:
Payroll or Employment Taxes
If your business has employees, then you’ll need to consider payroll tax. Payroll taxes are the taxes employers pay on employee salaries and wages. They include federal, state, and local taxes and Federal Insurance Contributions Act (FICA) taxes. You’ve likely seen FICA taxes appear as Social Security and Medicare on a paycheck.
The current FICA tax rate is 7.65% for the employer and 7.65% for the employee, or 15.3% total. As the employer, you’re responsible for withholding the appropriate payroll taxes from your employee’s salary and paying them to the IRS.
You’ll also withhold income tax from employees’ wages. To know how much tax to withhold, you’ll need to collect a W-4 Form from employees before they start work. This IRS form has details like an employee’s address, social security number, and tax filing status.
In addition to withholding and FICA taxes, there are other types of payroll taxes, including FUTA and SUTA. For example, Federal Unemployment Tax Act (FUTA) is an employer-paid tax that funds state unemployment benefits. Likewise, employers pay State Unemployment Tax Act (SUTA) taxes to fund state unemployment benefits.
Quarterly Taxes (Estimated Taxes)
Most sole proprietorships, partnerships, and S corps owners pay estimated taxes to the government on a quarterly basis. Instead of paying taxes all at once, it’s broken into four payments. You must pay estimated taxes if the amount you expect to owe is greater than $1,000.
Quarterly taxes usually fall into two categories—self-employment taxes (Social Security and Medicare) and income taxes. Even though you pay quarterly taxes, you’ll still need to file an annual tax return.
There are a few ways that you can calculate your estimated taxes. First, you’ll need to estimate your gross income and how much of that is taxable. Then, factor in possible tax savings from deductions and credits. You can also estimate your yearly taxable income and look at the tax rate for your income bracket.
Another method you can use is to look at your tax return for the past year. You can use last year’s figures to estimate your tax liability for this year. However, this method only works if you don’t expect your income to change much year over year.
The due dates are usually April 15, June 15, September 15, and January 15 of each year. However, some of the dates change if they fall on a weekend or holiday.
Here are the due dates for 2022 and 2023.
|2022 tax year||2023 tax year|
|April 18, 2022||April 18, 2023|
|June 15, 2022||June 15, 2023|
|September 15, 2022||September 15, 2023|
|January 17, 2023||January 16, 2024|
If you underpay your estimated taxes or don’t pay them by the due dates, you may be subject to penalties.
Xendoo’s business tax services will help you figure out what you owe if you’re unsure of how to calculate your estimated taxes.
You’ll factor self-employment taxes into your quarterly or estimated tax payments. As the name suggests, self-employment taxes are taxes that self-employed individuals must pay. This includes those who own an unincorporated business or another type of pass-through entity.
Self-employment taxes consist of two separate parts: Social Security and Medicare. Currently, the combined tax rate is 15.3%. This situation differs from employers who only have to pay half of their employees’ Social Security and Medicare taxes. You won’t be subject to these payroll taxes if you don’t have any employees.
When filing your taxes, you can deduct your self-employment tax payments as an adjustment to income on your tax return. This deduction ensures that you aren’t double-taxed on the same money. Other tax credits may be available to small business owners to offset some or all of the cost of paying self-employment taxes.
To avoid paying self-employment taxes, consult a tax professional to discuss incorporating your business. You can take advantage of certain IRS regulations for corporations that may reduce your overall self-employment liability.
While sales tax laws differ by state, retailers generally collect sales tax when they sell tangible goods to customers within their state.
The location of the sale, not the business location, will determine how much you pay in sales tax. For example, if your business is in one state but sells to someone in another state, you’ll pay the respective state’s sales tax. Certain states have reciprocal agreements that allow businesses to only collect sales tax from customers within their own state. It’s best to check with an accountant or tax professional to comply with the applicable laws.
In most cases, you’ll need to register with the applicable state government before collecting and remitting its sales tax. This process usually requires you to list the items you plan to sell and provide account information. You must also keep accurate records of all transactions made within the state. Failure to comply with the applicable laws could result in penalties, interest payments, and other fees.
Xendoo’s bookkeepers and CPAs are familiar with tracking and remitting sales tax for all types of businesses, including ecommerce. If you’re interested in sales tax services, we can do a consultation for your business.
Capital Gains Tax
The IRS collects capital gains taxes on the profits you earn from selling an asset such as stocks, real estate, or other investments.
Capital gains fall into two categories—short-term and long-term. Short-term gains are from assets that you’ve owned for less than one year before selling. Long-term gains are from assets that you’ve owned for more than one year.
Your capital gains tax rate depends on which category it falls under. The IRS taxes short-term capital gains as income. Tax rates for long-term capital gains are different and usually lower than income tax rates.
Here are 2022 long-term capital gains tax rates.
|Tax filing status||0% rate||15% rate||20% rate|
|Single||Under $41,675 taxable income||$41,675 – $459,750||Over $459,750|
|Married, filing separately||Under $41,675||$41,675 – $258,600||Over $258,600|
|Head of Household||Under $55,800||$55,800 – $488,500||Over $488,500|
|Married, filing jointly||Under $83,350||$83,350 to $517,200||Over $517,200|
Keep in mind that capital gains tax rates can vary from this for particular types like collectibles. The time that you own a capital gain can also impact how much you owe in taxes.
How Much Do Small Businesses Pay in Taxes by State?
In addition to federal income taxes, you’ll likely have state and local taxes. The federal corporate income tax rate is currently 21%, but most states have individual tax rates and rules.
Currently, 44 states and Washington D.C. impose taxes on corporate income. Top rates range from 2.5% in North Carolina to 11.5% in New Jersey.
There are also states that don’t have personal income taxes. If you are in one of the below states, you don’t have to file and pay state income taxes on earnings.
- South Dakota
- Tennessee (on wages)
- Washington (state)
Even though some states don’t have an income tax, they may have other taxes. For example, some states have a gross receipts tax that taxes sales instead of profits. Companies must pay taxes on their total amount of sales, even if they don’t make any profit. Look up your state’s requirements or verify with a tax accountant to comply with the applicable laws.
Small Business Tax Professionals
As a small business owner, filing taxes can be confusing. It can be difficult to understand that tax code and all its complexities. But, with an experienced tax specialist, you shouldn’t have to.
Xendoo is an all-in-one service. We have expert bookkeepers, accountants (CPAs), and tax specialists in-house. Our experts work together on your accounts and know all the tax code changes to file your tax returns accurately. They can also choose the best tax deductions and credits that will save you and your business money.
Our bookkeeping plans come with flat monthly fees, so you know exactly what you’re paying each month. If you want to get personalized advice from our tax CPAs, you can add on tax services for as little as $100 per month. We’ll file your taxes too. Schedule a free consultation to see how we can help your business.