According to the IRS, there is no blanket category called “small business.” Instead, your business is taxed as either a sole proprietorship, partnership, LLC, S corp, or C corp.
Whatever your business structure, we’ll walk you through the tax rates so you can understand how your company is taxed (or you can just use our free estimated tax tool below).
How much are small business taxes?
Businesses pay different tax rates based on their structure, the amount of income they have, and the deductions and credits available to them. Here’s an overview of the tax rates for each type of entity.
If your business is structured as a C corporation, estimating the amount of tax you’ll owe on your business profits is pretty simple. Thanks to the Tax Cuts and Jobs Act of 2017, C corporations pay tax at a flat rate of 21%.
The TCJA also eliminated the alternative minimum tax (AMT) for corporations, so shareholders don’t have to worry about getting hit with a surprise AMT bill at the end of the year.
To illustrate, say Carter’s Cat Toy Consortium, a fictional C corp, has total taxable income of $75,000 after taking into account all revenues and business expenses. Carter could calculate his IRS income tax bill by simply multiplying $75,000 by the 21% corporate tax rate and know what he’ll owe: $15,750.
Pass-through entities: sole proprietors, partnerships, LLCs, and S corporations
If you’re not a C Corp, that means your business is a pass-through entity, such as a sole proprietorship, partnership, limited liability company or S corporation. Pass-through businesses don’t pay federal income taxes. Instead, the business owner pays personal income taxes on the income made from the business.
That means the question of “How much are small business taxes” depends on how much money you personally made this year. Which gets complicated because:
The owners pay tax on all of the income listed on their individual income tax returns, not just the business. If the business owner has wages from another job, income from a working spouse, investment income, etc., that influences the tax rate the owner will pay on business profits. Likewise, the business owner’s personal deductions and credits also impact the amount they’ll pay.
Income tax rates for individuals are progressive. This means the higher your taxable income, the higher your tax rate will be.
For 2019, seven tax brackets apply to individuals, depending on the filing status used on their tax return:
|Rate||Single, Taxable Income Over||Married Filing Jointly, Taxable Income Over||Head of Household, Taxable Income Over|
To illustrate, say Carolyn Conway, a fictional LLC member, had the following income in 2019:
$75,000 in net profits from Conway Consulting Co.
$10,000 in wages from a seasonal retail job
$5,000 in Interest from her savings account
Since Carolyn is single and has total taxable income of $90,000, looking at the table above, she can determine she falls into the 24% tax bracket. But that doesn’t mean all $90,000 of her taxable income is taxed at 24%. Only the amount over $84,200 is taxed at 24%.
Using the tax brackets above, Carolyn could estimate her income tax liability as follows:
$9,700 x 10% = $970
($39,475 - $9,700) x 12% = $3,573
($84,200 - $39,475) x 22% = $9,840
($90,000 - $84,000) x 24% = $1,440
Carolyn’s estimated tax bill for 2019 would be $15,823.
Other factors that impact small business income taxes
Several other factors that can affect the amount of taxes small businesses pay.
The calculations above don’t take into account any tax credits. Tax credits are dollar-for-dollar reductions in the amount of tax you owe. They’re often designed to influence taxpayers to take certain actions or make specific investments.
Examples of business tax credits include:
- Foreign tax credit
- Work opportunity credit
- Research and development credit
- Small-employer pension plan start-up cost credit
- Alternative motor vehicle credit
- Alternative fuel vehicle refueling property credit
If a sole proprietorship, partnership, LLC, or S corporation is eligible to claim a tax credit, the credit will pass through to the owner’s personal tax return.
Examples of federal tax credits available to individuals include:
- Earned income tax credit
- Child and dependent care credit
- American opportunity credit
- Adoption credit
Deductions are expenses that lower your taxable income. Check out our Big List of Small Business Tax Deductions for examples of expenses that can reduce your business’ taxable income.
Individuals can also claim a variety of deductions on their personal income tax returns. Some common ones include:
Itemized deductions. Including medical expenses, taxes, interest paid on a home mortgage, and donations to charity.
Standard deduction. A flat amount the IRS allows you to deduct instead of itemizing deductions. For 2019 tax returns, the standard deduction is:
$12,200 for single taxpayers and married couples filing separate returns
$24,400 for married taxpayers filing jointly
$18,350 for taxpayers that qualify for Head of Household filing status
Qualified business income deduction. The qualified business income (QBI) deduction gives some owners of pass-through businesses a tax deduction worth up to 20 percent of their business’s net income. There are a lot of rules around who can claim the QBI deduction and how to calculate it. For more details, check out The QBI Deduction: A Simple Guide.
Other small business taxes
Federal income taxes aren’t the only taxes small business owners must pay. Several other taxes must be paid to the IRS and state and local taxing authorities. Your small business may need to pay one or all of them, depending on your type of business, the products and services you provide, and whether you have employees.
State income taxes
Most states levy a state income tax on corporations and individuals that earn income in their state. Tax laws and rates vary by state. Check with your state’s taxing authority or a tax professional to ensure you know how much you have to pay and when. Only Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Washington, and Wyoming don’t have a state tax on income
Gross receipts tax or franchise tax
Some states, like Nevada and Texas, don’t have a state income tax, but they do assess a gross receipts tax on businesses. Others charge a franchise tax based on the value of the company. Check with your local tax authority or a tax professional to find out whether these taxes apply to your business.
If you have employees, you are responsible for paying payroll taxes on their wages. Payroll taxes include federal and state income tax withholding, Social Security and Medicare (FICA) taxes, and federal and state unemployment taxes.
Further reading: Payroll Taxes (What They Are, How to Calculate Them)
Many self-employed people don’t receive a paycheck or have Social Security and Medicare taxes withheld from their wages. Instead, they’re responsible for paying self-employment taxes —the self-employed version of FICA taxes.
Businesses in certain industries or that sell specific products and services may be responsible for paying excise taxes to the IRS. Examples include sales of gasoline, trucking companies, sports wagering, and indoor tanning services.
Many states and local governments levy a sales tax on transactions of goods and services. Business owners are responsible for calculating, collecting, and paying sales tax to their state or local taxing authority.
If your business owns real estate, you’ll have to pay property taxes to the city or county where the property is located. Some states or localities also require small business owners to pay taxes on personal property, such as furniture and equipment.
No matter your business structure, paying taxes is complicated due to different rate rates, rules, and obligations. For that reason, it’s a good idea to work with a tax professional who is familiar with the regulations in your state. They can help you figure out how much you’ll owe and make sure you’re making all necessary tax payments to the right taxing authorities.
Once you know how much you owe, it’s time to pay your taxes.
For a more comprehensive overview of small business taxes and how to file and pay them, check out Small Business Taxes (A Simple Guide).
Don't want to think about bookkeeping anymore?
Try a free trial with Bench. We'll take bookkeeping off your hands, pairing you with your own bookkeeper, and simple software to track your finances.