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small business tax rates

Small Business Tax Rates: How Much Do You Pay?

Maybe it’s your first tax season as a small business owner. Maybe you’re considering jumping into the entrepreneurial world and want to know what you’ll eventually owe to the IRS. Either way, you’re curious about small business tax rates, and we’re here to tell you that … unfortunately, there’s a bit more to small business taxes than just figuring out your rate.

Yes, there are a set of specific small-business tax rates that largely boil down to your company’s business structure and, possibly, how much income your company brings in.

But there are also several other taxes you’ll have to deal with as a small business owner. And we’ll explain a few of those, too.

Small Business Income Tax Rates

In general, there are two sets of small business federal income tax rates that hinge on your corporate structure:

C corporations (21% flat rate)

The easiest structure from a tax perspective is the C corporation. That’s because, regardless of your company’s net income, you will be taxed a flat rate of 21%.

It wasn’t always this way. Prior to 2018, C corps had a tiered tax rate of between 15% and 35%. However, the Tax Cuts and Jobs Act (TCJA) changed the code to the current 21% flat rate.

The 2023 tax year also ushered in a corporate alternative minimum tax of 15% for corporations. But this only applies to very large companies with more than $1 billion in average adjusted financial statement income.

Note: If you pay dividends to shareholders, those shareholders will have to pay taxes on the dividends. Qualified dividends are taxed between 0% and 20% depending on the shareholder’s income. Non-qualified (ordinary) taxes are paid at the shareholder’s regular income tax rate.

Note: Limited liability companies (LLCs) can elect to be taxed like a C Corp by filing Form 8832 Entity Classification Election with the IRS.

Pass-through entities (0% to 37%)

Only a small percentage of companies are C corps. The rest are various pass-through entities that, instead of paying tax at the entity level, pass income along to shareholders, owners, members or partners, who then list this income on their individual tax returns and are taxed on it.

These pass-through entities include:

  • Limited liability companies (LLCs)
  • Partnerships
  • Sole proprietorships
  • S corporations

Because individuals are taxed on this income, it can be taxed at 0%, 10%, 12%, 22%, 24%, 32%, 35% or 37%. However, if they meet certain criteria, some pass-through owners can deduct up to 20% of net business income from their federal income taxes. (Note: This tax break will continue through the 2025 tax year and expire in 2026.)

Other Small Business Taxes You Might Have to Pay

Tax rules also dictate that small businesses might have some other obligations, including:

  • Sales tax: In most states, you’ll be responsible for collecting sales taxes from your customers and reporting/paying those taxes to the proper state and local authorities.
  • Excise tax: Similarly, states and local governments might also charge excise taxes, usually accounted for within the item’s price, rather than taken out separately like sales tax.
  • Property tax: If you own a physical location, you’ll need to pay property taxes to the appropriate authorities.
  • Payroll taxes: If you employ anyone, you must deal with payroll taxes, which include withholdings for federal income tax, federal and state unemployment, and Social Security and Medicare.
  • Self-employment taxes: If you’re self-employed, you have to pay a 15.3% FICA tax, though half of that is deductible on your Form 1040. (Businesses that employ people pay half this tax, while employees pay the other.)

And remember: If you are a small business owner, you’re likely going to have to pay your income and self-employment taxes on a quarterly basis, not annually.

Head Spinning? We Can Help You Figure Out Small Business Tax Rates (And Much More!)

Small business taxes aren’t the easiest thing in the world. In fact, unless your background includes time as a CFO or a tax professional, we strongly suggest not preparing your own small-business taxes.

Instead, cut down on the risk of error (or short-changing yourself) by leaving it to the pros!

McManamon & Co. offers expert tax services to small and midsize businesses, from basic filings to payroll taxes to compliance services and more. And we can build you a tax strategy that you can follow year-round to maximize your savings.

Call McManamon at 440.892.8900 or contact us online today to learn more about what we can do for you.

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