Can a Small Business Get a Tax Refund?

Overpaying tax dollars to the federal or state government can typically get you a personal tax refund. But can small businesses also get tax refunds?

Refunds for businesses aren’t as common as refunds for individuals. That’s because, depending on the type of business, your company might not pay federal or state income taxes directly. Still, your small businesses can get a tax refund in some situations.

Here is what you need to know about small business tax refunds, plus tips on how to reduce your business tax bill.

How different types of businesses pay taxes

Since 90% of businesses in the U.S. are pass-through entities, which include sole proprietorships, partnerships, limited liability companies (LLCs) and S corporations, they don’t pay federal income taxes to the IRS. Instead, their profits “pass through” to the owners’ personal tax return, and the business owner or owners pay taxes rather than the business.

If you own a pass-through business, you may be required to pay federal and state income taxes throughout the year, either by having it withheld from your paychecks or making quarterly estimated payments. If your withholding or estimated payments are greater than your final tax bill, you can receive a personal tax refund or apply the refund to next year’s estimated taxes.

C corporations are the only type of business entity that pays corporate income taxes directly to the federal government. If you expect your C corp to owe $500 or more in taxes, you must make quarterly estimated payments. As a result, a C corp can get a business tax refund if you paid too much to the federal government.

Here’s a brief overview of how to do small business taxes based on your business entity:

• Sole proprietorship: If you run your business by yourself, you’re considered a sole proprietor and don’t need to file separate business tax returns. Instead, you report your business’s income and expenses on Form Schedule C filed with your personal tax return.
• Partnership: If your business is structured as a partnership, you need to file Form 1065 to report business revenues and expenses but you don’t pay taxes for the business directly to the IRS. Instead, each partner receives a Schedule K-1 reporting their share of the company’s profits, and they use that information to complete their personal tax return and pay any tax due.
• Limited liability company (LLC): As an LLC, you can file tax returns in several different ways. LLCs with only one member (known as single-member LLCs) use Form Schedule C to report their business income and expenses to the IRS, just like sole proprietorships. LLCs with more than one member (known as multi-member LLCs) use Form 1065 to report business income and deductions to the IRS, just like a partnership. LLCs may choose to be taxed as a pass-through entity or a corporation.
• S corporation: Like partnerships, S corporation shareholders receive a Schedule K-1, which they use to complete their personal tax return and pay taxes on their share of the business’s profits. S corps file federal income taxes using Form 1120-S.
• Corporation: C corporations are the only type of business structure that must pay federal income taxes directly to the IRS. You need to use Form 1120 when filing taxes for your small business that is structured as a C corp.

Understanding the small business tax rate

Different business tax rates apply based on your company’s structure.

• C corps pay federal income taxes at a flat rate of 21%.
• Pass-through businesses pay taxes on all the income included in their personal tax returns — including business profits, wages from a job, investment income, and Social Security benefits. Personal tax rates are progressive, meaning the higher your taxable income, the higher your tax rate. In 2024, there are seven tax brackets ranging from 10% to 37%.

Which business entity could provide the best tax advantages?

With corporations paying a flat rate of 21% and pass-through business owners potentially subject to a 37% rate on business profits, incorporating might seem like the better choice. However, there are several factors to consider when choosing a business entity.

• Pass-through deduction. The pass-through deduction allows some owners of pass-through businesses to claim a deduction worth up to 20% of their qualified business income. This essentially allows businesses to pay a top tax rate of 29.6% on business profits.
• Double taxation. C corps are subject to double taxation, meaning the business pays taxes on profits, and then shareholders are taxed again on those profits when they’re received in the form of dividends.
• Self-employment tax. Sole proprietors, partners, and LLC members must pay self-employment taxes on business profits on top of their regular income tax. Self-employment taxes are the self-employed version of Social Security and Medicare taxes, commonly known as “FICA tax.” Business owners with an S corp, or an LLC filing as an S corp, only pay FICA tax on their wages — all remaining profits are only subject to income tax. Corporate shareholders don’t pay self-employment taxes. Instead, they receive a salary from the company and have FICA taxes withheld from their paycheck.

Picking the ideal structure for your company depends on how much you expect to earn and whether the potential tax breaks outweigh the extra administration work. For example, you can reduce your tax bill by structuring your business as an LLC and electing S corp status. However, you may have to pay annual LLC fees with this method — which can go as high as $800 per year in some states. It’s best to discuss your options with a tax advisor to see which option could help save the most on your next small business tax return.

Types of business taxes

Federal income taxes tend to get the most attention from small business owners, but they’re far from the only taxes that small business owners must pay. Some other types of business taxes include:

Income taxes

Besides federal income taxes, many states levy income taxes on individuals and businesses. Currently, 41 states tax wages, salaries and self-employment income. Only New Hampshire exclusively taxes dividend and interest income. Alaska, Florida, Nevada, South Dakota, Tennessee, Texas and Wyoming don’t levy an income tax.

However, Nevada, Ohio, Texas and Washington impose a gross receipts tax instead of a corporate income tax. Delaware, Oregon and Tennessee have a gross receipts tax in addition to corporate income taxes. Gross receipts refer to the amount your business received from all sources during a particular tax year, before subtracting any business costs or operational expenses.

Payroll taxes

Businesses with W-2 employees must report and deposit federal and state payroll taxes. This includes federal and state income tax withholding, FICA taxes and federal and state unemployment taxes. You can either get an accountant or bookkeeper to help with this, or invest in a payroll service to manage it yourself.

Self-employment taxes

Self-employment taxes are the Social Security and Medicare taxes paid by self-employed business owners. Sole proprietors, partners in a partnership, and LLC members must pay self-employment taxes on self-employment earnings of $400 or more. If you have an LLC that files as an S corp, you can have the appropriate FICA tax deducted from your paychecks.

Sales or excise taxes

Many states and localities levy a sales tax on transactions of goods and services. The federal government also levies excise taxes on certain goods and services, including fuel, airline tickets, heavy trucks and tractors, indoor tanning salons and tobacco. Business owners need to calculate, collect and remit sales and excise taxes to their federal, state or local taxing authority.

Reducing your taxable income

While getting a tax refund may sound enticing, it’s typically more beneficial to reduce your small business income tax liability by implementing various tax planning strategies. For example, you can learn more about what types of business expenses count as qualified business deductions.

The IRS generally considers an expense to be deductible if it’s “ordinary and necessary.” An ordinary expense is common and accepted in your line of work. A necessary expense is helpful and appropriate under the circumstances.

While ordinary and necessary expenses for your small business depend on your industry and unique business needs, some common examples include:

• Advertising and marketing
• Bank fees
• Business insurance
• Dues and subscriptions
• Employee fringe benefits
• Interest expense
• Legal and professional fees
• Business-related meals
• Rent
• Repairs and maintenance
• Salaries and wages
• Taxes and licenses
• Travel
• Utilities

You can find more examples of deductible business expenses and rules for claiming them in IRS Publication 535. It’s also worth investing in small business tax software to stay on track with your income and expenses so you’re ready to go when tax season rolls around.