How to Calculate Business Taxes: What You Should Know

If you recently started a business (or got hired to help one), you might wonder how to calculate business taxes. 

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 and calculate your company’s taxes.

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

Before discussing how to calculate business taxes, let’s level-set with a simple definition: 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 taxing authorities.

Federal Income Tax

You’re probably familiar with federal income taxes. You submit your individual income tax return to the IRS each April (and hopefully get a refund!). 
Your business must also calculate taxable income and pay federal income taxes. You’ll need to make quarterly estimated tax payments throughout the year.

State and Local Taxes

Another crucial component to calculating business taxes? State and local taxes. 

States, cities, and counties impose taxes on small businesses. Small business owners should be aware of the following state and local taxes that could apply.  

• State, city, and county income taxes
• Net profit taxes
• Gross receipts taxes
• Franchise taxes

Self-Employment Tax

Business owners and independent contractors (i.e., individuals who do not receive a paycheck) are required to pay self-employment tax in addition to federal income tax. 

The reason? Self-employment tax covers Social Security and Medicare taxes. Employers traditionally deduct these taxes from employee paychecks; employers pay an equal amount in payroll taxes. 

However, if you’re not an employee, you’re responsible for paying the employee and employer portions of Social Security and Medicare tax. 

Payroll Tax

Does your business have employees? If so, the company is responsible for payroll tax. 

Payroll taxes support government funds for Social Security, Medicare, and unemployment programs. Your business should calculate payroll taxes and pay the IRS quarterly.  

Other Small Business Taxes 

Small businesses may be subject to various additional taxes, depending on each company’s facts. Be aware of the following business tax types:

• Sales and use tax
• Withholding tax
• Franchise tax
• Property tax
• Excise tax

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. 

Continue reading to find out how each business structure impacts the company taxes. 

Sole Proprietorships

Sole proprietorships are pass-through entities for business tax purposes. 

What does that mean for you? 

The sole proprietorship should report its federal taxable income on the business owner’s personal tax return, and the owner should pay tax on the business income. The federal tax rate depends on the owner’s income tax bracket. 

Partnerships

Like sole proprietorships, partnerships are considered pass-through entities. Partnerships typically have two or more owners.

The company should file federal and state partnership returns separately from its owners, but the partnership is not subject to federal income tax. Instead, the owners pay 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 recognized as entities separate from their owners. 

This means C corps must calculate taxable income, pay tax, and file tax returns separate from the 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 the owners pay tax on their 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 self-employment tax. 

Limited Liability Companies (LLCs)

LLCs are pass-through entities by default, but LLCs can elect to be taxed as partnerships or 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

Compute Your Taxable Income

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

First, gather your records to determine the year’s total receipts and business expenses. 

Add up your receipts, then subtract business expenses to calculate your net business income. 

Find Applicable Deductions and Credits

Next, subtract tax deductions from your net business income. Common deductions include depreciation expense, 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

Unsure whether your business can take advantage of deductions and credits? 

Here are some 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 Rate

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 tax rate depend on the business owner’s individual income tax bracket. 

To find your individual income tax bracket and applicable tax rate, use the IRS 2022 Form 1040 tax tables or refer to the Tax Foundation’s summary of the latest tax brackets and rates. Check the taxable income brackets applicable to your filing status.

Calculating State and Local Taxes

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. 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. 

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

Resources for Calculating State and Local Taxes

1-800Accountant offers business tax professionals and a multitude of online resources 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

Calculating 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 in addition to 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.) 

The IRS Schedule SE instructions or your tax professional can walk you through the self-employment tax computation. Don’t forget to report half of your self-employment tax as a reduction to your federal income tax liability. 

Calculating 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. 

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. 

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 tax professionals will help you maximize deductions and maintain compliance.