Small business owners can't afford to spend too much time dealing with taxes, because they have to primarily deal with running their businesses. If you don't plan for the small business taxes you'll have to pay, though, it can jeopardize the future of your business.
Below, we'll look at the tax rates various businesses have to pay. Although there are many different variations on small business tax rates, the one thing they have in common is that with some planning, you can work on paying as little of them as possible.
What is the small business federal tax rate?
The amount of taxes small businesses have to pay to the federal government depends on several factors. Your level of income plays a key role, but the choice you make about how to set up your business can also make a big difference in the size of the check you have to write to the IRS.
Below, we'll look at some of the tax rates that apply to small businesses.
C corporations: 21%
If your business is a standard C corporation, or elects to get taxed as though it were one, then you'll have a flat rate of 21% on your net income. Taxes get imposed on your sales reduced by allowable deductible expenses. There are no longer small business tax brackets for C corporations.
This small business income tax rate applies only at the entity level, though. If you pay yourself a salary, it'll typically get deducted as a legitimate business expense, but you'll end up having to pay individual income tax on the income you draw as salary at your own personal tax rate.
Pass-through entities: 0% to 37%
Many small businesses are set up as some type of pass-through entity. These business types include sole proprietorships, partnerships, limited liability companies, and S corporations. The one thing these entities share in common is that they typically don't have to pay any tax at the entity level.
In exchange, though, they have to pass through their taxable income to their shareholders, partners, or owners, who then in turn have to include that income on their own individual tax returns.
In general, the larger your income, the higher the tax rate will be on pass-through income. For instance, if you have only a modest amount of business income that's not enough to use up your entire standard deduction, then you might end up paying no federal tax on your business income.
Conversely, if you have a lot of income — either from your business or from other sources — then you could end up paying tax rates as high as the top marginal tax bracket of 37%.
Additional small business taxes
In addition to federal income tax, there are several other types of taxes small businesses can be required to pay. Even the best tax software won't necessarily cover all of these. These taxes vary from place to place, but it’s equally important to pay them in order to avoid running into trouble.
If your business sells things or offers services in a state that taxes such transactions, you might have to collect sales tax and send it to the state. Most businesses can successfully make their customers bear the brunt of the sales tax, but in some cases, the business itself ends up having to cover the tax liability.
Small businesses are often subject to state and local property taxes. In some cases, only real estate that the business owns is subject to tax. In other locations, some of the tangible property the business owns is also taxed, such as business equipment and supplies.
In either case, it's important to file the appropriate documentation to ensure you meet the requirements of your state and local tax authorities.
If you have employees, you're responsible for collecting Social Security, Medicare, and unemployment taxes on their wages. Fail to withhold them from your employees' paychecks, and you'll be left footing the bill.
It's important to make sure that sending these withheld taxes to the IRS is on your small business tax preparation checklist. If you don't send the withheld taxes to the IRS, you can be subject to serious penalties and other sanctions.
If you're set up as a pass-through entity other than an S corporation, then you'll typically have to pay self-employment tax on the earnings from your business. The current rate on these personal business taxes is 15.3% up to the maximum Social Security wage base of $137,700, and then 2.9% above that amount.
Again, the owners are responsible for paying this tax, not the business itself, but taxpayers will find that the numbers they report as business income play an important role in determining the self-employment tax.
Small business tax rate frequently asked questions
Below are some questions many small business owners may have about their taxes.
Can I have a retirement plan for my small business?
There are several options for retirement plans for small businesses, and they vary according to the level of complexity of the business and whether the business has employees other than the owner and the owner's spouse.
By setting up retirement plans, you can create tax deductions worth tens of thousands of dollars in tax savings and prepare for your financial future at the same time.
Should I lease or buy equipment?
Many small business owners focus a lot on the tax aspects of how they chose to get vital equipment. Leasing requires less upfront money, but the tax incentives for purchasing equipment outright recently have made it possible to get accelerated deductions in a way that can make buying more tax efficient. In the end, non-tax factors play a major role in answering this question.
Can I deduct expenses for a home office?
In general, if there's an area of your home that you use exclusively to run a home business, then you might be able to take a home office deduction for it.
However, the specifics of the home office deduction can get complicated, so it makes sense to check with your accountant or tax advisor to decide whether claiming the tax break really makes sense.
Be smart about your small business taxes
Small business taxes don't have to take up a huge amount of time, but it's important for you to take them seriously. With tax authorities ready to come after you if you neglect paying what you owe, getting a handle on your taxes is important in order to keep yourself as focused as possible on growing your small business.