How Much Can a Small Business Make Before Paying Taxes?

Running your small business while navigating the often complex world of taxes can feel like you're stuck in a maze. As you make your way through it, you'll have many questions about your business tax situation. Among the most common: 

How much can my business earn before I have to pay taxes?

The answer isn't as straightforward as you might hope – it depends on multiple factors, including your business structure, income type, and specific tax regulations. Before you dive into the details of this excellent blog, here's a high-level snapshot of key tax thresholds that you should be familiar with: 

• Self-Employment Tax Threshold: $400 in net earnings

• 2025 Standard Deduction: $15,000 (single), $30,000 (married)

• Qualified Business Income (QBI) Deduction: Up to 20% of qualified business income

• Corporate Tax Rate: Flat 21% for C corporations

What Are Business Taxes?

Business taxes aren't a one-size-fits-all proposition. They encompass various types of levies that businesses may need to pay, including: 

• Commercial Activity Taxes (CAT)

• State Income Taxes

• Sales and Use Taxes

• Federal Income Taxes

• Self-Employment Taxes

Each type of tax has its own set of rules and thresholds. For instance, some taxes, like CAT, are based on gross receipts, while others focus on net income. Other taxes, such as sales and use, apply to the sale or use of specific goods and services.

The business structure you form as also impacts overall tax liability and thresholds, with state income tax applicability varying depending on the structure you choose. 

How Do Corporations Calculate Taxable Income?

Corporations use this general formula to determine their taxable income: 

Gross Income - Allowable Deductions = Taxable Income

If your business is taxed as a corporation, consider the following deductions, including salaries, rent, utilities, and cost of goods sold. C corporations are taxed on profits at the corporate level, a flat 21% federal rate, and owners are taxed at a personal level on corporate dividends. This is called double taxation, which S corporations avoid. 

Entity selection matters, especially if you intend to take advantage of S corporations' pass-through taxation feature, where profits are passed to each owner, called a member, to be handled on their personal income tax returns. This allows S corporation owners to sidestep double taxation.

How Do Unincorporated Businesses Calculate Taxable Income?

Calculating state income tax for unincorporated small businesses involves considering specific state-level deductions and thresholds.

For pass-through entities operating in some state tax systems, taxable income may be subject to a flat tax on income exceeding certain deduction thresholds, such as a Small Business Income Deduction (SBID). Ohio's version of this deduction, sometimes called the Business Income Deduction (BID), allows owners to deduct a portion of that income from their individual state tax return. 

S corporations aren't the only business entity featuring pass-through taxation. Businesses operating as independent contractors/sole proprietors, partnerships, and limited liability companies (LLCs) also support this feature, which allows owners to be taxed at personal income rates ranging from 10% to 37% in 2025. How much your business earns before you pay taxes depends on individual rates, personal deductions, and the standard deduction. 

How Does Net Income Impact Taxes?

Generally, income taxes are distinct from gross receipts taxes and are typically based on a measure of net profit or income, revenue minus business expenses. For federal purposes, self-employment tax applies to net earnings exceeding $400. This is a key threshold that triggers when some tax is due, even if income tax isn't. In this scenario, net income is the crucial figure. 

For state income tax purposes, taxable income can be the income remaining after specific deductions are claimed, such as SBID.

What Is Self-Employment Tax?

Whether you operate your own business or work as a W-2 employee, you will contribute to the federal Social Security and Medicare programs. Employees contribute 7.65% of their income to these programs while employers match that contribution. 

Business owners with net earnings of $400 or more must pay the self-employment tax, which is 15.3%. This percentage equals the employee/employer contributions to Social Security and Medicare. Savvy self-employed individuals can claim a deduction that recovers half of what they contributed in self-employment tax.  

LLC, S Corp, or C Corp: How Does Picking One Change Your Tax Picture?

Sole proprietorship & partnerships (and default LLCs)

Consider how forming as a sole proprietorship or partnership impacts your taxes: 

• Income is reported on the owner's personal tax return

• Subject to individual income tax rates (10%-37% for 2025 tax brackets)

• Self-employment tax applies to net earnings over $400

• The 2025 standard deduction helps shield some income from taxes

S corporation

Consider how forming as an S corporation impacts your business taxes:

• Pass-through entity (IRS Form 1120-S) where profits/losses are passed to shareholders

• Owners working in the business must take a reasonable salary

• Remaining profits distributed as dividends may not be subject to self-employment tax

C corporation

Consider how forming as a C corporation impacts your business taxes:

• Separate legal and tax entity (IRS Form 1120)

• Flat 21% federal corporate income tax on taxable income

• No standard deduction at the corporate level

• Potential double taxation when profits are distributed as dividends

LLC (limited liability company)

Consider how forming as an LLC impacts your taxes:

• Offers flexible tax treatment

• By default, taxed like sole proprietorships

• Can elect to be taxed as an S corp or C corp for potential tax advantages

Entity structure differences impact how much can be made before paying taxes. When you trust 1-800Accountant with your financial work, your designated team evaluates your current entity structure. They will recommend or make proactive changes that can cut your business's first-year tax burden by up to half. Beyond a minimal tax burden, entity structure optimization helps businesses avoid double taxation and maximize eligibility for deductions, such as Section 199A.

How Business Structure Can Help Save on Taxes

There will be scenarios where changing business structures benefits your operations. For example, if you've been operating as a sole proprietor and are searching for a solution to reduce self-employment tax obligations, consider forming as an S corporation and then splitting income into a salary and distributions. 

Certain entities qualify for specific deductions. Pass-through entities can take advantage of the Section 199A deduction, which allows business owners to deduct up to 20% of QBI.

If you're considering altering your business structure, 1-800Accountant's affordable, full-service entity formation solution has your back, starting at $0 + state fees. Our formation experts provide personalized guidance to ensure the optimal selection, promoting tax efficiency from the outset. They also advise restructuring considerations for existing businesses to ensure maximum tax savings.

How Much Can You Make Before You Owe Taxes? Key Numbers to Know

When do C corporations start owing taxes?

C corporations are generally required to file a tax return annually with a flat 21% federal tax rate on any taxable income, with no standard deduction at the corporate level. 

While any amount of net profit typically triggers a tax liability for a corporation, they may also have to pay state-specific minimum taxes and franchise taxes that must be paid even if the corporation hasn't made any profit. 

When do unincorporated businesses have to pay taxes?

Ohio's CAT feature gross receipts exclusion thresholds–$3 million in annual gross receipts, below which businesses may not be required to pay. For federal purposes with pass-through entities, the self-employment tax applies to net earnings exceeding $400. For income tax, the threshold is higher, as income passes to an owner's personal return and is offset by the 2025 standard deduction ($15,000 single, $30,000 married) plus other deductions. 

For example, a sole proprietor earning $50,000 with $20,000 expenses has $30,000 net profit, with the self-employment tax applying to the $30,000 net profit. For income tax, after the standard deduction, only $15,000 (single) or $0 (married) would be subject to income tax.

Remember that minimum tax obligations for certain state taxes may be eliminated for businesses with revenues under specified thresholds. State income tax for pass-through entities may become applicable on income that exceeds a defined deduction threshold, such as the SBID.

Self-employment tax threshold

One of the first tax hurdles most small business owners encounter is the self-employment tax. If you earn $400 or more in net earnings from self-employment, you'll be subject to a 15.3% self-employment tax. This covers Social Security and Medicare taxes for individuals working for themselves.

General revenue threshold rules for small business tax filings

Filing or tax payment obligations for some business taxes, such as a state-level gross receipts tax, may be determined by revenue thresholds–an exclusion increased to $3 million for Ohio's CAT.

However, there are taxes with thresholds that have changed from year to year, such as the reporting threshold associated with IRS Form 1099-K, which reports third-party payment platforms. The 1099-K reporting threshold was $5,000 in 2024, $2,500 this year, and $600 for 2026 and beyond. 

Lower thresholds create reporting burdens and increased visibility with the IRS. 

What If Your Business Has Zero Taxable Income?

Businesses with gross receipts below certain exclusion thresholds, like Ohio's CAT, may not owe that particular tax. In addition, eliminating minimum tax requirements for businesses under certain revenue levels for specific taxes also results in not owing those taxes.  

Generally, for federal income tax, zero taxable income for a pass-through business owner requires deductions that equal or exceed revenue. For example, a sole proprietor with $30,000 net profit, if married and taking the $30,000 standard deduction for 2025, would have $0 taxable income for income tax purposes. However, the 15.3% self-employment tax would still apply to the $30,000 net profit.

What Happens If Your Business Loses Money (NOL)?

A net operating loss (NOL) happens when a business's tax deductions exceed its taxable income. While it can be an unenviable position, an NOL indicates that the business made less than its deductible expenses, so no income tax is due for that year.

NOLs can generally be carried forward to future tax years to offset taxable income, subject to current IRS rules and limitations, such as the 80% taxable income limitation for NOLs arising in tax years after 2017.

While NOLs can be carried forward, since the conclusion of 2020, carryback provisions haven't been allowed for most businesses. 

What If Your Income Is Less Than the Standard Deduction?

For state income tax purposes, income below certain specific deduction thresholds may result in a lower tax liability or no tax on that portion of income.

This primarily applies to income from pass-through entities reported on owners' personal returns. The 2025 federal standard deductions directly shield this amount of adjusted gross income, which includes business profit, from federal income tax.

If a business owner's total taxable income after all deductions is applied is less than the standard deduction, they likely wouldn't owe federal income tax.

Do You Still Have to File Taxes If You Don't Owe Anything?

Many businesses are still required to file a tax return even if they don't owe anything to authorities. A diversity of scenarios exists where a business would still be responsible for filing even if it doesn't owe, including:

• An S corporation must file Form 1120-S annually to report income and losses to shareholders, even if no corporate-level tax is due. 

• A partnership files Form 1065. 

• A business with an NOL typically files to establish the loss for carryforward purposes. 

Failure to file can result in penalties and increased IRS scrutiny even without tax liability.

Tax Incentives: How to Reduce Tax Bill

Business deductions to claim

Tax deductions can significantly reduce your taxable income for the year. Some key deductions include business travel expenses, marketing and advertising costs, cell phone and communication expenses, charitable donations, and interest on business loans.

For pass-through owners, the 2025 federal standard deduction, $15,000 single; $30,000 married, shields a significant amount of their business income from taxation. You may leverage tax deductions more effectively by optimizing your business structure.

Tax credits you might be eligible for

Tax credits are even more valuable as they directly reduce your tax bill, including the Small Business Health Care Tax Credit, the Work Opportunity Tax Credit, and energy-efficient investment credits (up to 30% for solar or EV charging stations).

Many states offer tax credits, each with specific eligibility criteria and application processes. Check your state's tax authority website for information on available credits, including job creation credits, investment credits, and R&D credits. 

Qualified Business Income (QBI) deduction

The QBI deduction allows pass-through business owners to exclude up to 20% of qualified business income from federal taxes. For 2025, this applies to joint filers with income up to $383,900, completely phases out at $483,900 for joint filers or $241,950 for single filers, with different rules applying for specified service businesses. 

Interest paid on business loans

Many business owners will apply for loans for a multitude of reasons. If the loan is a legitimate debt for which your business is responsible, the IRS allows you to deduct the interest paid on that loan. 

Interest associated with loans to buy equipment for your business or for working capital typically qualifies. However, interest on loans used for business and personal reasons must be allocated.

Donations to charity

Donations to charity can typically be deducted. However, it can't be just any charity. For a donation to be deductible, it must be made to an IRS-qualified 501(c)(3) public charity or private foundation. Unsure if the charity you support qualifies? Use the IRS Tax Exempt Organization Search to confirm your preferred charity qualifies. 

Rules differ for corporations and pass-through entities. C corporations can deduct contributions on Form 1120, limited to a percentage of taxable income. For pass-through entities, including sole proprietorships, partnerships, and S corporations, contributions are generally passed through to owners to be deducted on their personal returns. Use Schedule A (Form 1040), Itemized Deductions, to itemize this deduction. 

Business cell phone bill

To claim a deduction for your business cell phone bill, you must ensure it is used exclusively for business purposes or determine how much of your cellphone usage is work-related versus personal. Business calls, texts, emails, applications, and data used to run your company all count as business use. 

Tracking your business usage with a log or digital tool is essential to determining the amount you can deduct. If you use your phone 50% of the time for business, you can claim half of your phone expenses. However, a dedicated business line simplifies the steps you'll need to take. 

Business travel deductions

Transportation, including airfare and car mileage, lodging, and meals, which are often subject to a 50% limitation, are common travel expenses that are eligible to be deducted. Most expenses qualify if they're ordinary and necessary aspects of doing business, including travel costs. The costs incurred are eligible if they occurred while away from home for a night or more. 

It's essential to maintain supporting documentation for every deduction you intend to claim, and travel deductions are no different. To qualify, the IRS requires detailed documentation that supports the business purpose of each expense.

Keeping track of supporting travel documentation can be a hassle without the bookkeeping experts at 1-800Accountant maintaining your business records. 

Ads and marketing spend

Most reasonable advertising and marketing expenses incurred to promote your business activities and attract new clients are deductible. 

Eligible advertising and marketing activities include costs of online ads (social media, search engines, etc.), website design and maintenance for marketing purposes, printed materials (brochures, business cards), and local event sponsorships. 

Find more deductions with professional help from experts

Professional tax advisory services from 1-800Accountant identify often-overlooked deductions, including home office expenses, ensuring compliance with QBI deduction wage/capital limits, and leveraging energy-efficient investment credits. 

For example, a retail business has $200,000 in annual net income. By leveraging deductions recommended by their designated tax advisor, they could reduce taxable income by $40,000, lowering tax by $12,000. This scenario assumes a 30% effective tax rate.

Strategize for Your Taxes

Plan for estimated taxes

Many businesses need to pay estimated taxes throughout the year, including if you're a sole proprietor, partner, or S corp owner receiving profit distributions.

1-800Accountant offers quarterly estimated tax services done for you to avoid underpayment penalties and interest. For a glimpse into the process, take a freelance client who earns $120,000 annually. 1-800Accountant calculates taxable income after expenses and the standard deduction, applies the self-employment tax and income tax, and divides the total into quarterly payments. 

Plan for business growth

Strategic tax planning is crucial in supporting long-term business growth and managing obligations. Proactive tax planning can help you:

• Avoid underpayment penalties

• Manage tax thresholds effectively

• Align tax strategies with business growth

Your approach to tax planning should evolve as your business matures. Consider entity structure changes to maximize retirement plan contributions and strategically time asset purchases as your business grows. 

Balancing tax shifts with your core business responsibilities can be difficult without expert tax advisory services from 1-800Accountant. Enjoy unlimited, year-round access to a dedicated advisor to ensure proactive tax planning, strategic advice, adapting to legislative changes, and aligning tax strategies with evolving business goals for long-term financial health.

Making sure your tax plan fits your business goals

Whether you're a sole proprietor or just founded a C corporation, it's critical to align your tax strategies with business goals to optimize your business's financial health. For example:

• If a primary goal is to maximize owner income, the strategy might focus on deductible expenses and S corporation distributions. 

• If reinvestment for growth is key, C corporation status or deferral strategies might be the best route.

Tax advisory can help navigate federal and state concerns, such as gross receipts tax rules implemented in California and New York.

Professional help from experts to be compliant and maximize savings

Professional, full-service business tax preparation and advice from 1-800Accountant can guide your business in developing pro-growth tax strategies, meet filing requirements with error-free output, and maximize annual tax savings.

Our affordable, tax-deductible financial services will be integral to managing tax duties and fostering growth for your business.

Filing Taxes: Special Tips for New Businesses and Those Using a DBA

Tax tips for your first year

It's essential to understand evolving tax laws and 2025 adjustments to brackets and deductions from day one. If you've just founded your business or have been in operation for a couple of months, consider these important tax tips as you establish yourself: 

• Obtain an Employer Identification Number (EIN) from the IRS

• Choose an accounting method (cash vs. accrual)

• Select a tax year (calendar vs. fiscal)

• Register for state and local taxes (sales tax, payroll taxes)

Common pitfalls new business owners face include overlooking estimated tax requirements, misclassifying workers, and failing to maintain adequate records from day one. 

Using a 'Doing Business As' (DBA) name

A DBA, or “doing business as,” is an alternate title or assumed name different from the legal name of your business entity. You must file the appropriate paperwork to use a trade name like this to ensure you’re not misleading customers. 

If you organized your business officially with your state secretary of state, then your company’s legal name is the full title used for that process. To use any other names than these, you must proceed with a DBA filing.

For example, a sole proprietor "John Doe" operating as "Best Plumbing Services" (a DBA) still files taxes under John Doe's Social Security Number on Schedule C of IRS Form 1040, and their income thresholds for tax are based on their individual filing status and total income.

Industry-Specific Taxes: Real Estate, E-commerce, or Construction?

Different industries face unique tax challenges. Real estate professionals will grapple with special depreciation rules, potential capital gains deferral, and passive activity loss limitations.

E-commerce business owners must understand complex sales tax nexus rules, taxation of digital goods, and reporting thresholds (e.g., $600 Form 1099-K reporting). Construction businesses can build on their success with specialized accounting methods, equipment depreciation credits, and energy-efficient construction incentives.

Smart tax moves for your specific industry

There are smart tax moves associated with specific industries. These include:

• Technology companies that might focus on maximizing the R&D tax credit

• Restaurants that explore the FICA tax tip credit

For service businesses impacted by QBI phase-outs, they should consider optimizing expenses and retirement contributions. Non-service businesses should focus on meeting wage or capital investment thresholds to maximize their QBI deduction.

How Do You Know if Your Business Can Get a Refund?

Common reasons your business may receive a refund include overpayment of estimated taxes throughout the year, claiming refundable tax credits, and amended tax returns that correct errors or claim previously missed deductions and credits, resulting in lower tax liability than originally paid. 

While a refund for an estimated tax overpayment isn't the end of the world, the more accurate your estimates, the better. 

What If You Don't File Your Business Tax Returns on Time (or At All)?

Failing to meet tax obligations can result in serious consequences. You may receive failure to file penalties, failure to pay penalties, accuracy-related penalties, potential IRS audits, tax liens on business assets, and in extreme cases, potential criminal charges.

It's critically important to understand and meet all tax obligations to avoid IRS issues and ensure your operations aren't interrupted. Embrace reporting income accurately and maintaining meticulous records to support the deductions you'll claim, which helps to avoid headaches and costly tax issues.  

Key Takeaways: How Much Can Your Business Earn Tax-Free?

The amount a small business can make before paying taxes varies widely based on business structure, income type, applicable deductions, and personal filing status. 

While self-employment tax kicks in at just $400 of net earnings, federal income tax liability typically begins after applying business deductions and standard deductions.

Why Navigating Taxable Income Limits Is Crucial for Your Business

Knowing these specific income thresholds is vital not just for maintaining compliance but for strategic financial planning. It empowers business owners like you to make informed decisions regarding pricing, expense management, investments, and selecting the optimal business structure.

Proactively managing income and deductions around these thresholds can maximize the profit your business retains before significant tax liabilities arise, directly impacting cash flow and growth potential, which is vital in the early phases of your business. 

Let 1-800Accountant Illuminate Your Path to Tax Efficiency

Navigating tax thresholds and obligations can be complex. 1-800Accountant, America's leading virtual accounting firm, offers affordable, tax-deductible personalized tax planning services to help you:

• Understand your specific tax trigger points

• Maximize deductions and credits

• Optimize your business structure

• Develop a strategic tax approach

Ready to gain clarity on your business's tax situation? Schedule a free consultation with 1-800Accountant today to discover how expert support from tax professionals and CPAs can provide peace of mind while helping you keep more of your hard-earned money.