Running a small business can be a rewarding career. Many small business owners enjoy a great degree of independence and flexibility. However, small business owners are still beholden to taxes.
So, how much do small businesses pay in taxes? Unlike large corporations, small businesses don’t have a flat tax rate. The average tax rate for small businesses is around 20%, but this figure can fluctuate notably depending on your state, business structure, income, expenses, and deductions.
Let’s break down how each of these factors can impact small business tax calculations.
How much do small businesses owe in state taxes?
Small businesses are subject to federal and state taxes. Every state’s small business tax codes vary. Some states are more business-friendly than others.
For instance, Nevada, South Dakota, and Wyoming don’t have corporate or individual income taxes. Meanwhile, Alaska, New Hampshire, and Montana don’t have state-level sales taxes.
In order to calculate your state’s small business tax rate, you’ll need to brush up on its list of applicable taxes first.
What are the different business structures and their tax rates?
Whether you run a local real estate business or restaurant, your small business income tax rate will be based on your business structure.
Some small business owners pay business income taxes on their personal tax returns, while others file separate business tax returns based on their company’s net earnings.
Four common types of business structures are as follows:
- Sole proprietorships – A sole proprietorship is an unincorporated small business owned by one person. Owners of sole proprietorships include their business’ net income on their personal tax returns using Schedule C of Form 1040. As a result, sole proprietorships are considered pass-through entities—their taxes are “passed through” to their owners.
2. Partnerships – A partnership is an unincorporated small business owned by multiple people. Like sole proprietorships, partnerships are pass-through entities. Owners of partnerships report their share of net business income on their taxes using Form 1065.
3. Limited liability corporations (LLCs) – An LLC is a business structure that removes personal liability from the owner for their small business’ debts and liabilities. Due to its limited liability, an LLC resembles a corporation. However, LLCs are still taxed like sole proprietorships and partnerships (unless the business owner opts to have their LLC taxed as an S-corp or C-corp.)
4. Corporation - – Corporations are not pass-through entities. Instead, they’re taxed as separate entities. The flat tax rate in 2024 for corporations is 21%. Owners of corporations can report their business taxes using Form 1120.
What are the federal individual income tax rates for 2024?
Since sole proprietorships, partnerships, and LLCs are pass-through entities, you may wonder what the federal income tax rates are for 2024 as a small business. Income tax rates can range from 10% to 37%, depending on your tax bracket.
Here are the 2024 income tax rates for individuals and married couples filing jointly:
- 10%
- Individuals: $11,000 or less
- Married couples: $22,000 or less
- 12%
- Individuals: $11,000 to $44,725
- Married couples: $22,000 to $89,450
- 22%
- Individuals: $44,725 to $95,375
- Married couples: $89,450 to $190,750
- 24%
- Individuals: $95,375 to $182,100
- Married couples: $190,750 to $364,200
- 32%
- Individuals: $182,100 to $231,250
- Married couples: $364,200 to $462,500
- 35%
- Individuals: $231,250 to $578,125
- Married couples: $462,500 to $693,750
- 37%
- Individuals: Over $578,125
- Married couples: Over $693,750
You can calculate your income tax rate using Form 1040. Just add up all of your income sources and apply any relevant tax credits or deductions. The resulting number will give you your taxable net income, which can help you identify your and your small business’ federal income tax rate.
Detailed Employment Taxes
Understanding employment taxes is crucial for small business owners to ensure compliance and avoid penalties. This section provides practical steps on how to handle these taxes, covering both the employer and employee aspects.
FICA Taxes
The Federal Insurance Contributions Act (FICA) requires employers to withhold a percentage of an employee’s wages to fund Social Security and Medicare programs. As a small business owner, you are responsible for calculating and withholding these taxes.
- Social Security Tax: For the 2023 tax year, employees must pay Social Security taxes on income up to $160,200. The tax rate is 12.4%, with 6.2% paid by the employer and 6.2% by the employee.
- Medicare Tax: Medicare tax applies to all wages and is set at 2.9%, with 1.45% paid by the employer and 1.45% by the employee.
Self-Employment Tax
As a small business owner, you might also be subject to self-employment (SE) tax, which covers both the employer and employee portions of Social Security and Medicare taxes. The SE tax rate is 15.3%, with the Social Security portion applying to the first $160,200 of net earnings.
Calculating Employment Taxes
To calculate your employment taxes, follow these steps:
- Determine the total wages paid to each employee.
- Apply the Social Security tax rate to wages up to $160,200.
- Apply the Medicare tax rate to all wages.
- Withhold the employee portion from their wages and set aside the employer portion.
What is the qualified business income (QBI) deduction?
If your small business qualifies as a pass-through entity and your net income places you in a tax rate above 21%, you may wish you qualified for the corporate flat tax rate instead.
Luckily, Congress created the QBI to lessen the tax burden on these types of small businesses. The QBI allows small business owners of pass-through entities to deduct up to 20% of their qualified business income (though it has some limitations .)
Quarterly Estimated Taxes
Small business owners must make estimated tax payments quarterly to cover income tax and self-employment tax liabilities. This section explains how to calculate and manage these payments.
Calculating Estimated Taxes
To calculate your estimated tax payments:
- Estimate Your Taxable Income: Use your previous year's income as a base and adjust for expected changes.
- Calculate Tax Liability: Apply the current year's tax rates to your estimated taxable income to determine your overall tax liability.
- Divide into Quarterly Payments: Divide your total estimated tax liability by four to determine your quarterly payments.
Making Payments
Use IRS Form 1040-ES to calculate and submit your estimated tax payments. Payments are due on the following dates:
- April 15
- June 15
- September 15
- January 15
Timely payment of your estimated taxes can help you avoid penalties and interest.
What other taxes do small businesses have to pay?
Income taxes aren’t the only type you’ll owe at the end of the year. Some other potential taxes for small businesses include:
- Payroll tax – If your small business has employees, you’ll have to pay the following payroll taxes:
- Federal Insurance Contributions Act (FICA) taxes - Employers are responsible for calculating and withholding FICA taxes from their employee’s paychecks. FICA taxes help fund Social Security and Medicare programs. FICA taxes are typically split in half between employers and employees—both parties contribute 7.65% for a total of 15.3%. FICA taxes must be paid to the IRS monthly or bi-weekly. They’re reported quarterly using Form 941.
- Federal Unemployment (FUTA) taxes - Employers must also pay FUTA taxes. The FUTA tax rate is 6% for the first $7,000 paid to each employee. Luckily, you may qualify for a tax credit of up to 5.4%, which can reduce your FUTA taxes significantly. Annual FUTA taxes are reported using Form 940.
- Self-employment tax – Some small business owners are both employers and employees of their companies. These taxpayers must pay the employer and employee portions of the FICA taxes, resulting in a 15.3% tax rate.
- Capital gains tax - Capital gains taxes are incurred when a small business owner sells business assets for a profit. The capital tax gains rate ranges from 0% to 20%, depending on your income and whether the investment was short-term or long-term.
- Property tax – If your business owns any buildings or land, you’ll owe property taxes on it. Business property taxes are based on the local property tax rate.
- Dividend tax - Dividends are distributions of a corporation’s earnings that it pays out to its shareholders. Shareholders must pay taxes on their dividends on their individual tax returns. If your small business pays dividends, you can report them using Form 1099-DIV. Dividends can be taxed in two ways :
- Ordinary dividends are taxed at the same rate as an individual’s income.
- Qualified dividends are taxed at a capital gains tax rate, which can range from 0% to 20%.
- Excise tax – Excise tax only applies to small businesses that sell or manufacture certain products, operate in specific industries or rely on special types of equipment. You can determine if your small business owes excise taxes here.
How does tax deduction work for small businesses?
Writing off qualified business expenses as tax deductions can help you reduce your taxable net income. The list of qualified business deductions is updated regularly by the IRS.
Currently, some popular small business deductions include:
- Startup expenses – The IRS recognizes that starting a small business can be expensive. As a result, you can deduct certain startup expenses, such as pre-launch business marketing, travel, and training expenses.
- Work-related travel expenses – Do you book flights, hotels, or rental cars for your small business? If so, you may be able to deduct some of these expenses. You can also deduct costs relating to the business use of your car.
- Business meals – Small businesses can deduct 50% of their qualifying business meal expenses.
- Business insurance – If you have insurance for your small business, you can deduct its cost on your tax return. You can also deduct any renter’s insurance if you have a home office.
- Home office expenses – Speaking of home offices, if you have one that qualifies with the IRS, you may be able to deduct five dollars per square foot up to 300 square feet.
- Office supplies – Whether your office is located at home or somewhere else, you can deduct the costs of your office supplies, such as computers, software, scanners, printers, and more.
- Promotional expenses - Any money you spend on advertising and promoting your business, from website redesigns to business cards, can be deducted. For example, you can deduct the costs of listing and advertising your business on Nextdoor, a localized platform that connects small businesses with their neighbors.
- Health insurance premiums – If you’re self-employed, you can deduct your health insurance premiums and certain medical expenses.
- Retirement contributions – You can also deduct any money you contribute to your retirement accounts.
When do business owners pay small business taxes?
After you’ve learned how to file small business taxes, you should learn when to pay so as not to incur penalties. The IRS (Internal Revenue Service) prefers to receive regular payments from small business owners, rather than an annual lump sum. As a result, most small business owners are required to pay quarterly estimated taxes.
The due dates for these payments are as follows:
- April 15th
- June 15th
- September 15th
- January 15th
Generally, it's a good idea to set aside roughly 30% of your small business’ post-deduction income to put toward these quarterly estimated payments.
Nextdoor: Connect with your community today
Since there’s no flat tax rate for small businesses, calculating taxes for your small business can be complex. a little complicated. Luckily, you can always seek out the assistance of a certified public accountant (CPA) on Nextdoor.
If you need help attracting more business in your neighborhood, Nextdoor can help your small business too. Not only can our neighbor-first platform help you grow your business through local advertising, but Nextdoor can connect you with the clients and customers that matter most: your community.
Discover how an online presence on Nextdoor can supercharge your small business success today.
