Small Business Tax Rate: What to Know
Small business taxes can be complicated, as there isn’t a single tax form or even a single tax rate that applies to all businesses. How you file your taxes and the small business tax rates you’ll pay on profits will depend on your business entity structure.
Businesses organized as corporations pay the corporate tax rate, which is 21%. Other business structures — including sole proprietorships, partnerships and S corporations — are considered pass-through entities; their incomes are taxed at the owner’s personal tax rate, which is between 10% to 37%. Limited liability companies (LLCs) may either pay taxes as a corporation or as a pass-through entity.
Small business tax rates by business type
Your business entity determines which form you’ll use to file your federal income tax return and how much you owe to the IRS. Below, we’ll break down tax rates for small businesses for the two major groups: corporations and pass-through entities.
Business income tax rate for corporations
C corporations have paid federal income taxes at a flat rate of 21% since 2018, as a result of the Tax Cuts and Jobs Act (TCJA). Prior to 2018, C-corps paid taxes on a tiered structure, with rates ranging from 15% to 35%.
As a result of the Inflation Reduction Act of 2022, the corporate alternative minimum tax (AMT), which is a 15% minimum tax for corporations, went into effect this year. However, since the corporate AMT applies only to corporations with average adjusted financial statement income over $1 billion, the Joint Committee on Taxation predicts that it will only impact around 150 companies each year.
Taxes on corporate dividends
Corporations pay their shareholders dividends, and shareholders then have to pay taxes on those dividends on their individual tax returns. This is referred to as “double taxation,” because the income is taxed twice — once at the corporate level and again when paid out as dividends.
The federal tax rate shareholders pay on those dividends depends on whether the dividends are ordinary or qualified. Ordinary dividends are taxed at the same rate as the shareholder’s other income, and rates range from 10% to 37%. Qualified dividends are taxed at lower capital gains tax rates, ranging from 0% to 20%.
Although corporations face double taxation, the flat corporate tax rate is lower than the personal income tax rate in several tax brackets.
Business income tax rate for S-corps and other pass-through entities
Pass-through entities include sole proprietorships, partnerships, S corporations and LLCs that have not elected to be taxed like a C-corp. The vast majority of businesses in the U.S. are pass-through entities.
The term “pass-through” refers to the fact that the business doesn’t pay federal income taxes directly. Instead, business income and losses pass through to the owners and members, who pay taxes on business profits via their individual income tax returns.
On individual tax returns, business income is taxed at the same rates as other ordinary income, such as wages from a job or interest earned from a savings account. For the 2023 tax year (tax returns filed in 2024), the federal income tax brackets are:
Personal Income Tax Rates for 2023 tax year
|For incomes of individuals
|For incomes of married couples filing jointly
|Less than or equal to $11,000
|Less than or equal to $22,000
|More than $11,000
|More than $22,000
|More than $44,725
|More than $89,450
|More than $95,375
|More than $190,750
|More than $182,100
|More than $364,200
|More than $231,250
|More than $462,500
|More than $578,125
|More than $693,750
At first glance, it might appear as though it would be beneficial to be taxed as a C corporation, since most corporations pay a top tax rate of 21% and individuals in the highest tax bracket pay a rate of 37% on their pass-through income. However, when Congress lowered the corporate tax rate, it also created a new qualified business income (QBI) deduction starting in tax year 2018.
For 2023 taxes, this 20% business tax deduction is available to all single pass-through business owners with taxable income at or below $182,100 (or $364,000 for married couples filing jointly). For taxpayers with income over those limits, the QBI deduction may be limited.
Tax rate for LLCs
Businesses structured as LLCs are unusual in that they have several options for how they’re taxed. The IRS may tax an LLC as a sole proprietorship or partnership, depending on how many people own the business. An LLC may also elect to be taxed as an S-corp.
In addition, LLC owners may choose for the business to be taxed as a C-corp, meaning profits are taxed at the corporate rate rather than the owner’s individual rates. This can be beneficial if the owners keep a substantial amount of profits in the business rather than paying them out as dividends, since retained earnings aren’t subject to double taxation the way dividends are. It can also allow LLC members to benefit from tax-advantaged fringe benefits and stock options.
However, deciding whether to have your LLC taxed like a C-corp is complicated. If you think you might benefit from electing corporate tax treatment, it’s best to discuss your options and potential tax-planning strategies with an accountant or attorney.
Additional small business taxes
Federal income taxes aren’t the only taxes small businesses must pay. Some others include:
Payroll taxes include Social Security and Medicare (collectively referred to as “FICA” taxes, as they were established by the Federal Insurance Contributions Act) and federal unemployment taxes. For businesses with employees, the FICA tax rate is 15.3% of the employee’s gross wages — 12.4% for Social Security and 2.9% for Medicare. Employers withhold half of that FICA rate from the employee’s wages and pay the remainder out of their own pocket.
Only the employer pays federal unemployment (FUTA) taxes, which aren’t withheld from the employee’s wages. The FUTA tax rate is 6% of the first $7,000 paid to each employee per year. However, employers may also qualify for a tax credit of up to 5.4%, which can bring their FUTA tax rate as low as 0.6%.
Many pass-through business owners don’t have employees, but they have to pay self-employment taxes, the self-employed version of FICA taxes. The self-employment tax rate is 15.3%.
Businesses pay excise taxes if they do any of the following:
- Sell or manufacture specific products, such as alcohol, tobacco and firearms
- Operate specific types of businesses, such as sports wagering companies
- Use various items or types of equipment, facilities or products, such as aircraft or heavy-duty trucks
- Receive payments for particular services, such as indoor tanning or telecommunications services
Although businesses pay excise taxes, the cost of these taxes is usually embedded in the price of products and services and passed through to consumers.
State and local taxes
Business owners are also subject to taxes in states where they do business.
State corporate income tax
Businesses may also pay income taxes at the state level. As of 2022, 44 states levy a corporate income tax, with rates ranging from 2.5% (North Carolina) to 11.5% (New Jersey).
Owners of pass-through businesses in states with a state income tax on individuals also pay taxes on their share of business profits on their state income tax returns. Individual income taxes are levied in 43 states, although New Hampshire only taxes dividend and interest income and Washington only taxes capital gains of high-income taxpayers. Top marginal tax rates range from 2.9% (North Dakota) to 11.5% (New Jersey).
Some small businesses are required to charge sales taxes. Forty-five states, the District of Columbia and many localities levy a sales tax. Each state and local taxing authority has its own rules, exemptions and tax rates.
Navigating those rules and exemptions can be confusing, so it’s a good idea to work with an accountant — especially if you sell products or services to out-of-state customers. You may need to register, collect and remit sales taxes in more than one state or local jurisdiction.
Businesses may also pay property taxes if they own land, buildings or vehicles, or maintain business inventories. Many state and local jurisdictions collect real estate and personal property taxes.
How to pay taxes as a small business owner
How you pay taxes as a small business owner depends on your business structure:
- C-corps and LLCs taxed like C-corps report business income and expenses on Form 1120.
- S-corps and LLCs that elect to be taxed like S-corps report business income and expenses on Form 1120-S, then issue a Schedule K-1 to each shareholder reporting their share of profits or losses.
- Partnerships and LLCs with more than one member report business income and expenses on Form 1065. The completed Form 1065 includes a Schedule K-1 for each shareholder, which they’ll need to report their share of profits or losses on their individual tax return.
- Sole proprietorships and LLCs with only one member report business income and expenses on Schedule C, a schedule that gets filed along with the owner’s individual tax return, Form 1040.
When to file your small business taxes
Corporations must make estimated tax payments on the 15th day of the fourth, sixth, ninth and 12th month of its fiscal year. Owners of pass-through businesses must make estimated tax payments, which are generally due around April 15, June 15, Sept. 15 and Jan. 15 of the following year. If any of those dates fall on a weekend or legal holiday, the due date moves to the following business day.
Some payroll, accounting or tax preparation software will estimate the business’s tax liability and send estimated tax payments to the IRS on their behalf. Just make sure to regularly set money aside for taxes, so it’s available when payments are due.