Why there is no single rate
A business pays several kinds of tax at once, and the rate depends on how the business is organized and where it operates.
Federal income tax uses brackets: higher slices of income are taxed at higher rates. States add their own income, franchise or gross receipts taxes, and some have none. Then come employment taxes and sales tax. Rates and brackets are updated by Congress and states, so check the IRS website and your state revenue department for the current numbers.
That is why two owners with the same profit can owe different amounts. Structure, deductions, state and the owner's other income all matter.
Pass-through businesses: sole proprietors, partnerships and LLCs
The business does not pay income tax itself. Profit passes through to the owners and is taxed on their personal returns at individual rates.
Sole proprietors, general partnerships and, by default, LLCs are pass-through entities. A sole proprietor reports profit on Schedule C of their personal return. Partners receive a share of profit on a Schedule K-1.
Owners also pay self-employment tax, which covers Social Security and Medicare on net earnings, since no employer is withholding. Because nothing is withheld, owners usually make quarterly estimated payments. Our guide to filing quarterly taxes explains the schedule. Some pass-through owners may also qualify for a deduction on qualified business income, subject to limits your accountant can explain.
If your profit changes sharply during the year, ask your accountant to recalculate your estimated payments so you neither overpay nor fall behind.
S corporations and C corporations
An S corporation passes profit through to owners but lets owners take part as wages and part as distributions. A C corporation pays its own corporate income tax.
S corporations avoid corporate-level income tax. Owner-employees must pay themselves reasonable wages subject to payroll tax, and remaining profit is taxed as income without self-employment tax. This can reduce taxes for profitable owners but adds payroll and compliance costs.
C corporations pay a flat federal corporate rate on profit, and shareholders pay tax again on dividends. That double layer is why most small businesses avoid the C structure unless they plan to raise outside investment. Your accountant can model both for your numbers. Read choosing a business structure for a comparison.
Employment and payroll taxes
If you have employees, you withhold their income and payroll taxes and pay an employer share plus unemployment taxes.
Employers withhold federal income tax and the employee's share of Social Security and Medicare, and then pay a matching employer share. Federal and state unemployment taxes are paid by the employer. Deposits are due on set schedules, and late deposits bring penalties.
Payroll taxes are among the most heavily penalized mistakes, since the money withheld belongs to the government. Use payroll software or a provider if you are not sure. See how to do payroll for the process.
Sales tax, state taxes and local taxes
Sales tax is collected from customers on taxable sales and passed to the state. States and cities add income, franchise, property or gross receipts taxes.
Sales tax is not your expense. You collect it and remit it. Rules differ widely: which goods and services are taxable, which customers are exempt, and where you have a duty to collect when you sell across state lines. Register with your state before you start collecting.
| Tax | Who it applies to | Basis |
|---|---|---|
| Federal income tax | Owners or C corporations | Taxable profit |
| Self-employment tax | Pass-through owners | Net earnings |
| Payroll taxes | Employers and employees | Wages |
| Sales tax | Sellers, paid by customers | Taxable sales |
| State and local taxes | Varies | Income, receipts, property |
Estimate what you will owe and set money aside
Ask your accountant for a percentage to set aside from each deposit. Keeping tax money in a separate account avoids a shock at filing time.
A simple routine: every time revenue arrives, move your agreed percentage into a tax savings account. Update the percentage when your profit changes. A quarterly check with your accountant prevents underpayment penalties and gives you time to adjust expenses or purchases.
Illustrative example: if your accountant recommends setting aside 25 percent, a $10,000 month puts $2,500 aside. The number depends on your structure, state and deductions, not on this example. Learn how deductions fit in with small business tax deductions.
Taxes and financing decisions
Taxes affect how much you keep and how much you can reinvest. Consider tax effects when borrowing, but never borrow only to chase a deduction.
Interest on business borrowing is generally deductible, and equipment purchases may qualify for depreciation or special elections. But a deduction returns only part of what you spend. The first question is whether the money will earn more than it costs.
If a tax bill or an investment creates a cash squeeze, ROI Funder offers working capital and term loans through its funder network to businesses with 6+ months of history and $20,000+ monthly revenue. Do not borrow to pay a tax bill you could cover by adjusting payment timing; ask your accountant about installment agreements first.
Frequently asked questions
What is the tax rate for a small business?
There is no single rate. It depends on structure, profit, state and tax type. Check current IRS and state figures or ask your accountant.
Do LLCs pay corporate tax?
By default, a single-member LLC is taxed like a sole proprietorship and a multi-member LLC like a partnership. An LLC can elect to be taxed as an S or C corporation.
What is self-employment tax?
It is the Social Security and Medicare tax that self-employed people pay on net earnings, covering both the employee and employer shares.
Do I have to make quarterly estimated tax payments?
Most owners with meaningful profit and no withholding do. Ask your accountant how much to pay and when.