How to Calculate Business Taxes: A Guide to Tax Liability in 2025

Many first-time owners choose to personally address their business tax responsibilities early on as a cost-cutting measure. This approach produces the best results when you understand how to calculate your business tax liability while avoiding mistakes and penalties. If you're handling taxes for your small business, use this article to learn the steps you should take to address your business tax liability.

First, you’ll need to understand which taxes your small business should pay. Business taxes include federal and state income taxes, self-employment, and payroll taxes. 

Next, review your entity structure to determine your small business tax rate. Then, you'll calculate any federal, state, local, self-employment, and payroll taxes your business may be responsible for paying.

Accurate business tax calculations are vital to your business's success. Keep reading to find out how to calculate your business taxes and stay in compliance.

Understanding the Different Types of Business Taxes

While business tax is often used interchangeably with federal income tax, the term business tax collectively refers to the taxes that may apply to your business. 

Awareness of these taxes is critical to keeping your business in good standing with the IRS and other tax authorities.

Federal income tax

You’re probably familiar with the federal income tax process as a worker. You submit your individual income tax return to the IRS each April by tax day and hopefully get a refund. 

Your business must also calculate taxable income and pay federal income taxes. You’ll also need to make quarterly estimated tax payments throughout the year. 

Quarterly estimated tax payment due dates for the 2025 calendar year include the following: 

• April 15, 2025

• June 16, 2025

• September 15, 2025

• January 15, 2026

Use IRS Form 1040-ES, Estimated Taxes for Individuals, to calculate and pay your quarterly estimated taxes. The form includes payment vouchers and instructions for filing online. 

State and local taxes

Understanding your state and local tax responsibilities is another crucial component to calculating your business taxes. 

States, cities, and counties may impose taxes on your small business. You should know the following state and local taxes as you work to address and minimize your tax liability.    

• State, city, and county income taxes

• Net profit taxes

• Gross receipts taxes

• Franchise taxes

You may also be responsible for paying payroll and self-employment taxes at the state or local level. If you have questions about your state and local tax responsibilities, contact local officials or your state Department of the Treasury or consult a CPA or other tax professional. 

Self-employment tax

In addition to federal income tax, business owners, freelancers, and independent contractors pay the self-employment tax of 15.3%, regardless of their income tax bracket. Self-employment tax represents 12.4% of Social Security and 2.9% of Medicare taxes. 

Why do small business owners pay the self-employment tax? Consider a traditional W-2 employee who receives a bi-weekly paycheck: The employer withholds Social Security (6.2%) and Medicare (1.45%) taxes from the employee each pay cycle. The employer pays an equal portion. The employee and employer split the 15.3% of Social Security and Medicare taxes on the employee’s wages.

In contrast, self-employed individuals must pay both the employer’s and the employee’s share of Medicare and Social Security taxes. Fortunately, many people subject to this tax can take business expense deductions, which helps reduce taxable self-employment income.

Use IRS Form 1040 Schedule SE, Self-Employment Tax, to calculate the tax you owe on your self-employment income. 

If you calculated $400 or more in net profit on Schedule C, you should complete Schedule SE. Report your self-employment tax on Form 1040.

Payroll tax

If you currently have employees or your business intends to begin hiring, it's important to understand your payroll responsibilities. Payroll taxes support government funds for Social Security, Medicare, and unemployment programs. Your business should calculate payroll taxes and pay the IRS quarterly. 

Employers must submit multiple tax forms to comply with federal and state employment tax rules. Payroll reporting includes the following: 

• IRS Form 940, Employer’s Annual Federal Unemployment Tax (FUTA) Return: File Form 940 annually to report your FUTA liability and payments.

• IRS Form 941, Employer’s Quarterly Federal Tax Return: File Form 941 quarterly to report your FICA liability and payments.

• IRS Form W-2, Wage and Tax Statement: File Form W-2 for each employee to report wages, tax withholdings, and deductions.

While less common, if your FICA liability is below a threshold set by the IRS, you must file: 

• IRS Form 944, Employer’s Annual Federal Tax Return: If your annual FICA liability is $1,000 or less, file Form 944 annually to report your FICA liability and payments.

Refer to our payroll compliance checklist to help ensure you comply with applicable employment laws and regulations. 

Other small business taxes

Your small business may be subject to additional taxes, depending on your industry and activities, including the following business tax types:

• Sales and use tax (for the sale of goods or services) 

• Franchise tax (paid for the right to operate in some states)

• Property tax (a percentage paid based on the assessed value of your business property, such as offices)

• Excise tax (a tax applied on goods at times of purchase, such as fuel or tobacco)

If you’re unsure whether these taxes apply to you, check with a tax professional. 1-800Accountant can help you maintain compliance with your small business taxes.

How Business Structure Impacts Taxes

Before calculating your business taxes, consider your company’s structure. The business entity type affects the nature and amount of taxes due.

If you're a single owner and have not elected to form as a specific business entity, you will be taxed as a sole proprietorship by default. If there are two or more business owners under the same scenario, your business will be taxed as a partnership by default.

Continue reading to find out how each structure may impact your business taxes.

Sole proprietorships

Sole proprietorships are pass-through entities for business tax purposes. Pass-through taxation means the business distributes profits and losses to their owner or owners, who then pay personal income tax on their share of business activity. For example, look at a rideshare driver operating as a sole proprietor who made $1,000. In this scenario, the driver would be responsible for paying $153 to fulfill their self-employment tax duties. This rideshare driver and other sole proprietors responsible for paying the self-employment tax can claim 50% of this contribution.

What does that mean for you? 

Your sole proprietorship should report its federal taxable income on your personal tax return, and you should pay tax on the business income. The federal tax rate depends on your income tax bracket.

Partnerships

Like sole proprietorships, partnerships are considered pass-through entities with two or more owners. However, partnerships have additional responsibilities that impact the tax process that sole proprietors aren't subject to. For example, partnerships must file an informational return annually via IRS Form 1065, U.S. Return of Partnership Income and Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., to report the partnership's income, gains, losses, deductions, credits, and individual partner's share of each.

The partnership will not pay federal income tax. Instead, each owner, following their individual Schedule K-1, pays tax on their share of business income, and their individual income tax rates apply to their pass-through income.

C corporations (C corps)

C corps are taxed separately from their owners, uniquely impacting the tax process compared to other business entities covered in this article. This separation creates complexity that most businesses will avoid.

For example, C corps, representing some of the largest businesses in America, lack pass-through taxation and must adhere to double taxation at the corporate and individual levels to fulfill their tax responsibilities. This means your C corp business must calculate taxable income, pay tax, and file tax returns separate from your and other business owners’ returns. 

The federal income tax rate is 21% for all C corporations. State and local taxes vary by jurisdiction.

S corporations (S corps)

Think of an S corp as a hybrid structure: S corporations are pass-through entities, which means you and other owners pay tax on their respective share of business income. However, like C corps, S corps file separate business tax returns. 

Further, S corps can pay salaries to their owners, which helps business owners avoid paying the 15.3% self-employment tax. While operating your business as an S corp has numerous advantages and tax benefits, action is required to maintain that structure.  

For example, S corps must follow specific eligibility rules to maintain their status. Requirements include: 

• S corps cannot have more than 100 shareholders or more than one class of stock.

• Shareholders (owners) cannot be corporations, partnerships, or nonresident aliens. 

• S corps must generate less than 25% of their gross receipts from passive investment income. 

• S corps must maintain records of each shareholder’s basis.

Limited liability companies (LLCs)

LLCs are pass-through entities by default, but they can elect to be taxed as different entities, including partnerships and C corporations. The business tax impacts depend on the company’s tax elections, if any. 

If your business made a partnership or C corporation election, the company should file business tax returns separate from the owners’ returns. 

Otherwise, the LLC’s activity should be reported on the business owner’s personal tax return. Like the sole proprietorship treatment, the federal tax rate depends on the owner’s income tax bracket.

Calculating Federal Income Tax

The hours it takes to calculate your federal income taxes partially depend on the preparation and protocols you embrace throughout the year. For instance, current and detailed recordkeeping supports your preparation and filing process during tax time. Instead of scrambling for the records needed to compute your taxable income and reduce it via deductions and credits, it's important to be organized. Embracing industry standard protocols will save time, reduce headaches, and make for a smoother tax day.  

Compute your taxable income

Your business must estimate taxable income and make quarterly estimated tax payments. After year-end, you’ll follow the same process to prepare the federal tax return.

Your first step should be to gather your records to determine the year’s total receipts and business expenses. Good recordkeeping practices will make tax preparation much smoother and more manageable. 

Once you've gathered all your receipts, add them up, then subtract business expenses to calculate your net business income for the year. 

Find applicable deductions and credits

Next, you should subtract eligible tax deductions from your net business income. Common deductions include depreciation expenses, mileage, and charitable contributions. 

Additionally, your business may be eligible for certain business tax credits. While deductions lower the business’s taxable income, tax credits reduce the business’s tax liability.

Commonly Overlooked Tax Deductions and Credits

If you're unsure whether your business can take advantage of deductions and credits, use these examples of business deductions and tax credits you could be overlooking: 

Tax Deductions

• Qualified business income (QBI) deduction

• Home office deduction

• Self-employed health insurance deduction

Tax Credits

• Self-employment tax credit

• Work Opportunity Tax Credit

• Employee Retention Tax Credit

Want to maximize your deductions and lower your tax bill? We recommend partnering with a business tax professional. 

Determine your tax bracket and tax rates

C corporations (and LLCs taxed as C corps) are subject to a 21% federal income tax rate. 

For all other business types, the tax bracket and rate depend on the business owner’s individual income tax bracket.

Calculate self-employment tax

If you’re a business owner or independent contractor who doesn’t receive a paycheck, your income may be subject to self-employment tax and federal income tax. 

How do you know how much you’ll owe? 

The self-employment tax rate is generally 15.3% of your share of business income. Your share of business income is 100% if you own a sole proprietorship or a single-member LLC. 

If you had at least $400 net profit on Schedule C, you should complete Schedule SE. Report your self-employment tax on Form 1040. Use IRS Form 1040 Schedule SE to calculate the tax you owe on your self-employment income and report half of your self-employment tax as a reduction to your federal income tax liability.

Calculate payroll tax

If you issue paychecks to workers, your business is responsible for paying the employer’s share of Social Security, Medicare, and federal and state unemployment taxes. If you're running payroll manually, it's important to understand what you'll do before and after paying your W-2 workers.

When it comes to running payroll, you should understand how to calculate gross wages, pre-tax deductions, and withholdings, among other steps you'll take before issuing payments. The process is not finished once your employees receive their checks. Instead, you'll make payroll tax deposits and report these payments to the IRS. 

Employers are required to remit Social Security tax (12.4%) and Medicare tax (2.9%) to the IRS, but the burden is split between employers and employees. Your business pays 6.2% and 1.45%, respectively, of employee wages. You should deduct an equal amount from every paycheck.

Additionally, your business pays a 6% federal unemployment tax, but only on the first $7,000 of each employee’s wages. State unemployment tax rates vary, so we recommend consulting payroll tax professionals.

Report payroll tax by using the forms detailed in the Payroll tax section above. You can save time each pay period by using 1-800Accountant's full-service payroll solution. 

Calculating State and Local Taxes

1-800Accountant offers business tax professionals and many online resources, including a robust support section, to help you. You can also refer to various other resources to ensure the accuracy of your state and local tax calculations: 

• Tax form instructions

• State and local government websites

• Tax department representatives

How to determine what your business owes

Your state tax liability depends on your business entity type and location(s). 

First, determine the applicability of state, city, and county taxes; the rules for each entity type may vary. Common local taxes you may be responsible for include state income taxes, property taxes, and sales tax. Remember to consider sales taxes and other non-income taxes. 

Next, find the correct tax forms. Refer to your business records and use the tax form instructions to compute your state and local tax liability. Avoid errors by double-checking state and local tax rates. 

You may need to apportion your business income if your business operates in multiple states. Don’t worry – we can help with complex state tax calculations.

Let the Experts Calculate Your Business Taxes

Accurate business tax calculations are crucial to smooth business operations. 

Now you know how to calculate business taxes and the issues to be aware of. As you can see, calculating business taxes can be complex, leaving opportunities for mistakes.

Ensure accuracy and avoid errors by partnering with 1-800Accountant. Our professionals provide tax advisory and other functions to help you maximize deductions and maintain compliance.