How Much Does a Small Business Pay in Taxes?

On average, small businesses pay 19.8 percent in taxes but there are factors that could affect your tax rate. A business that has a single owner pays an average of 13.3 percent tax rate and those with multiple owners pay an average of 23.6 percent. C corporations pay 21% in federal corporate income taxes. Additionally, they also pay state corporate taxes ranging from 0-11.5%. 

Small businesses don’t pay the income tax corporate rate. In fact, 75% of these businesses are referred to as “unincorporated pass-through entities” which allows them to pay the owner’s personal tax rate. And since owners can also include in their personal taxes the income from their small business, the rate that they will pay as a business owner will be lower.

If, for example, you make between $40,526 to $86,375 in one tax year, your tax will be $4,664 plus 22% of any amount above $40,525. A small business owner on average makes $64,474 in a tax year so their base fee would be $4,664 plus 22% of the $23,949 which amounts to $5,268.78. That means their tax is $9,932.78.

But you will also have to pay for state taxes and this will depend on which state you’re from. In New York, with an income of $64,474 your tax would be $3,262.18. In total, you’ll be paying $13,194.96 if you live in New York and have an annual small business income of $64,474. Fortunately, there are deductions you can claim to lower this amount.

That said, you need to be aware of tax rules that may impact you depending on your business structure. Over 70 percent of businesses in the U.S. are sole proprietorships which means they are not set up as a business with the state so the business income will be included in their personal taxes. Partnerships are different. These businesses have multiple owners and the owners need to report their income on their individual personal taxes. For corporations, the business itself pays taxes and income cannot be reported on their personal taxes. Currently, the tax rate is 21% for corporations, which is markedly lower than the previous 37%.  The tax rate for a Limited Liability Company (LLC) would vary depending on whether it is a sole proprietorship, partnership or corporation.

The following are the different taxes that small businesses owners need to deal with:

  • Income tax. This includes state and federal taxes where applicable.
  • Self-employment tax. This covers Medicare, social security and others. 
  • Payroll taxes. If a small business has employees it needs to pay 7.25 percent of an employee’s gross salary. 
  • Capital gains taxes. This pertains to investments or asset sale. Assets held for over 1 year are taxed 0, 15 or 20 per cent depending on its bracket. Assets held for under 1 year are considered part of the business’ income and income bracketing applies.
  • Property tax. Taxes for property such as land or building owned by the small business range from 0.18 percent to 1.89 percent.
  • Dividend tax. Investments that have dividends earned by the small business are considered income and will therefore be taxed.

According to the IRS, all businesses need to submit an annual income tax return. The exception is partnerships, as they are required to submit an information return instead.  Business owners earning less than $400 do not have to pay any self-employment tax. The IRS will likely not be interested in auditing your small business until you become profitable. But you still need to file your taxes to avoid legal issues in the future. If you need assistance, an online tax preparer like HR Block can help you do your taxes. 

Category: Tax Tips

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