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You’ve carefully planned your 2024 business budget and you added a cushion in case unexpected costs pop up during the year. You can’t predict everything, but don’t let a surprise tax bill derail your business spending.
This article will explain how to determine your small business tax liability in 2024. You’ll learn how to find your income tax rate and whether other taxes could affect your business. You’ll also learn how to reduce your tax bill with business deductions and credits.
You can stay within budget by knowing how much small businesses pay in taxes in 2024.
So, How Much Do Small Businesses Pay in Taxes?
Small businesses generally pay income taxes of 20-30% of net earnings. Your tax rate depends on your business structure and the nature of your operations.
Some small businesses do not pay federal income tax. For example, pass-through entities distribute business profits to their owners. Pass-through owners pay individual income taxes based on their personal tax bracket.
Most small businesses pay state and local income taxes and other non-income taxes. Your business location and size affect your total tax burden.
Continue reading to learn how your business structure impacts your tax rate and other taxes on your small business.
Your Business Structure Determines Your Tax Rules
Your federal income tax rate depends on your business's legal entity structure.
The IRS does not specify a “small business” tax rate. Instead, the IRS categorizes businesses by entity type. To determine your tax rules, identify your business structure for tax purposes. The below section explains how tax rules apply to the following types of businesses:
Other uncommon business structures, such as estates and trusts, are outside the scope of this article.
Always consult your attorney and accountant to determine your business structure for tax purposes. Professional CPAs can advise you on the most advantageous entity type for your business.
C Corporations
C corporations represent standalone business entities. C corps file federal income tax returns to report business income and calculate their income tax liability. The 21% corporate tax rate applies to C corp taxable income.
Single-member LLCs with a C corporation tax election also file corporate tax returns.
C corp owners must file individual income tax returns to report corporate dividends received and wages earned.
Pass-Through Entities
Pass-through entities distribute business income and deductions to their owners. The pass-through entity owners pay federal income tax on their business income.
For example, consider a small law firm organized as a pass-through entity. The law firm’s partners generate business revenue by providing legal services to clients. The firm’s business tax return will report its business receipts and the amount of income distributed to the lawyers. Each partner will receive a statement detailing their share of business income and deductions for the tax year. The partners must report their pass-through income on their personal income tax returns to calculate their federal tax liability.
Sole proprietorships, partnerships, S corporations, and limited liability companies represent pass-through entities. The business owner’s personal tax rate applies to their share of taxable income.
Sole Proprietorships
Sole proprietorships generally represent businesses owned by a single individual or married couple.
Your business defaults to sole proprietorship treatment if you’re the sole business owner. Many freelancers and independent contractors operate sole proprietorships.
Federal tax laws do not recognize sole proprietorships or single-member LLCs as separate legal entities. If you establish a single-member LLC in your state, your business will maintain sole proprietorship treatment for your federal tax return.
Sole proprietors must report their business income and expenses on their personal tax returns.
Partnerships
Federal tax laws recognize a partnership as a distinct legal entity, meaning the business must file a standalone tax return. Partnership returns report business income, ownership information, and partner distributions.
Multi-member LLCs default to partnership tax treatment and must file partnership returns.
Two or more business owners can organize a partnership. Partners should establish a partnership agreement, which is a legal document outlining terms such as each member’s contribution and ownership percentages. Partnerships pass income and deductions to partners according to the partnership agreement. Each partner must report their share of business income on their personal income tax return.
We recommend consulting business tax professionals for help with complex partnership rules.
S Corporations
Similar to partnerships, S corporations represent standalone legal entities that pass income through to the business owners. S corporations must file S corp returns to report business income and shareholder distributions. Each shareholder must report their share of business income on their personal tax return.
An existing corporation can establish an S corporation by filing the S corp election form. Check with professional CPAs before filing to ensure your business meets the S corp requirements.
Limited Liability Companies (LLCs)
Limited liability companies default to pass-through entity treatment for federal tax purposes. The LLC’s tax return depends on the number of owners and whether any entity tax elections apply.
If you own a single-member LLC, you must report your business income on your individual income tax return. Single-member LLC owners are sole proprietors for federal income tax purposes.
Multi-member LLCs must report business income on a partnership tax return.
Exceptions apply to entities electing C corp or S corp tax treatment. We recommend consulting tax professionals if your LLC has a valid tax election.
Personal Tax Rates for Tax Year 2023
Pass-through entity owners must report their share of business income on their personal tax returns. Your pass-through entity’s small business tax rate is zero, but your individual income tax rate applies to your share of earnings.
For example, if you operate a multi-member LLC, your business must file a partnership tax return to report its activities and ownership information. The partnership will not owe income tax. Instead, you’ll receive a Schedule K-1 detailing your share of business income and deductions. You must report the income on your individual income tax return and apply your federal tax rate.
Federal Income Tax Brackets for Individuals
The IRS publishes individual income tax brackets annually. The following table displays tax rates by filing status for the 2023 tax year.
| 2023 Federal Income Tax Rates by Filing Status | |||
| Tax Rate | Single | Head of Household | Married Filing Jointly |
| 10% | $0 - $11,000 | $0 - $15,700 | $0 - $22,000 |
| 12% | $11,001 - $44,725 | $15,701 - $59,850 | $22,001 - $89,450 |
| 22% | $44,726 - $95,375 | $59,851 - $95,350 | $89,451 - $190,750 |
| 24% | $95,376 - $182,100 | $95,351 - $182,100 | $190,751 - $364,200 |
| 32% | $182,101 - $231,250 | $182,101 - $231,250 | $364,201 - $462,500 |
| 35% | $231,251 - $578,125 | $231,251 - $578,100 | $462,501 - $693,750 |
| 37% | $578,126+ | $578,101+ | $693,751+ |
The tax year 2024 brackets include inflation increases. You can find the 2024 income tax brackets on the IRS website. Use the latest rates to calculate your 2024 quarterly estimated tax payments.
Individual income tax filers pay their applicable tax rate on ordinary income, including wages, rent, and interest.
For example, consider a single taxpayer who earned $70,000 of self-employment income in 2023. Assuming no deductions, the taxpayer uses the 22% federal tax bracket to calculate their federal income tax.
Depending on your business structure and operations, you may need to pay additional taxes on your federal income tax return. Common examples include self-employment tax and capital gains tax.
Self-Employment Tax
Self-employed individuals, such as independent contractors, must pay self-employment tax on their business income.
What Is Self-Employment Tax?
Self-employment tax funds the Social Security and Medicare taxes.
Employees pay Social Security and Medicare taxes with every paycheck. Employers pay an equal share of the payroll taxes. Employers and employees split the 12.4% Social Security and 2.9% Medicare tax burden.
Unlike employees subject to income tax withholding on each paycheck, self-employed individuals do not remit Social Security or Medicare taxes on non-employee wages. Self-employment tax covers the employee and employer portion of the payroll taxes.
Independent contractors must pay a 12.4% Social Security tax on up to $160,200 and a 2.9% Medicare tax on all self-employment wages earned in 2023.
Taxpayers should add their self-employment tax liability to their federal income tax liability to determine how much they owe.
Calculating Self-Employment Tax
Use IRS Form 1040, Schedule SE, to calculate your self-employment tax liability.
The 2023 Schedule SE requires taxpayers to multiply self-employment earnings by 92.35%. The result represents wages subject to self-employment tax. Additionally, taxpayers can deduct half of their self-employment tax liability.
Capital Gains Tax
Federal tax laws grant favorable treatment of long-term capital gains, meaning taxpayers generally pay lower taxes on capital gains than on ordinary income. You can generate a capital gain by selling a capital asset for more than its value. Capital assets include investment properties and shares of stock.
Your capital gains tax rate depends on your federal taxable income.
| 2023 Capital Gains Tax Rates by Filing Status | |||
| Tax Rate | Single | Head of Household | Married Filing Jointly |
| 0% | $0 - $44,625 | $0 - $59,750 | $0 - $89,250 |
| 15% | $44,626 - $492,300 | $59,751 - $523,050 | $89,251 - $553,850 |
| 20% | $492,301+ | $523,051+ | $553,851+ |
Note that individual taxpayers enjoy lower capital gains tax rates, but C corporations must pay the 21% corporate tax rate on capital gains.
Your State Affects Your Small Business Tax Rate
Your federal income tax liability represents one component of your total tax bill. Many state and local jurisdictions impose income taxes, each with varying rates and rules.
Like your federal tax liability, your state income tax bill depends on your business structure. States often follow the federal income tax treatment of each business type. For example, consider an S corporation filing a federal S corp return. Most state laws treat the business as a pass-through entity and require the company to file a state S corporation return.
However, some states disregard S corporation elections. S corporations enjoy pass-through entity treatment for federal income tax purposes, but several states require S corporations to file C corp returns and pay corporate taxes.
We recommend partnering with tax professionals for help with your state filing requirements.
States with Low or No Income Tax
Taxpayer-Friendly States for Corporations
Several states impose low or no corporate income taxes. You could enjoy a lower corporate tax bill if you own a C corp in the following states. This list excludes several states imposing a gross receipts tax, which can generate a high tax liability.
States with No Corporate Income Tax or Gross Receipts Tax
States with Low Corporate Income Tax
Taxpayer-Friendly States for Pass-Through Entities and Individuals
Sole proprietors and pass-through entity owners must pay individual income tax on their share of business income. You could enjoy a lower state income tax bill if you’re a business owner in one of the following locations.
States with No Individual Income Tax
States with Low Individual Income Tax
The following list reflects each state’s flat rate or highest tax bracket in each state.
States with the Highest Income Taxes
The following section includes states with the highest income taxes for businesses and individuals. If you own a business in one of these locations, consider partnering with tax advisory professionals who can help you implement tax planning strategies.
States with High Corporate Income Tax Rates
States with High Individual Income Tax Rates
The following list reflects each state’s flat rate or highest tax bracket in each state.
What Other Types of Taxes Should Your Small Business Pay?
Your federal and state income tax liability depends on your business structure, but several non-income taxes could apply to your small business, regardless of your business type.
For example, all employers must remit payroll taxes on employee wages. Other taxes include sales, property, and excise taxes. As we’ll discuss, some taxes vary by state.
Payroll Taxes
Your small business must pay taxes on employee wages. Payroll taxes include the following:
Sales Taxes
States impose sales tax on numerous types of transactions. Historically, businesses paid sales tax for selling physical goods, but many states now tax the sale of digital products and certain services.
Sales tax rates vary by state, city, and county. Additionally, most jurisdictions apply different tax rates to each product category. For example, groceries may be subject to a different sales tax rate than clothing.
Note that federal laws do not impose sales tax, but state and local taxing authorities assess sales tax in many jurisdictions. States, cities, counties, and other localities may each impose sales taxes.
Property Taxes
Like sales taxes, property taxes depend on your business location. State and local tax authorities levy tax on real estate and personal property, including buildings, land, vehicles, and machinery.
Property tax represents a percentage of your property value. For example, your local assessor may determine the market value of all taxable property in your county every three years. Your property tax bill represents a percentage of your property’s market value.
Property tax rates vary by state and county. Some locations tax all property, while others exempt personal property.
States with High Sales or Property Taxes
Sales and property taxes often disregard business entity type and impact small businesses equally. Additionally, sales and property tax systems can be complex. Most state laws allow cities and counties to impose local taxes in addition to the statewide tax.
Be aware of the following locations with high sales or property taxes.
States with high sales taxes:
States with high business property taxes:
Excise Taxes
Excise tax represents a tax on specified items such as gas, tobacco, and alcohol. The taxes often apply to activities with negative health or environmental consequences. Federal, state, and local governments impose excise taxes to fund government programs.
Review the IRS excise tax overview to determine whether your business activities create an excise tax liability. Check your state and local laws for location-specific requirements.
Other State and Local Taxes
Many state and local jurisdictions impose other non-income taxes such as gross receipts, franchise, or net worth taxes.
Gross receipts taxes apply to total sales revenues rather than business net income, which considers expenses. Businesses generally pay a percentage of the total in-state sales, with few or no deductions.
Franchise and net worth taxes often apply to business equity or asset value. Your tax bill may represent a percentage of your outstanding corporate stock or the net value of in-state business property.
How to Reduce Your Business Income Taxes
You can lower your business tax bill by taking advantage of business tax deductions and credits. Consider the following strategies to reduce your federal income taxes.
Business Tax Deductions
Business tax deductions lower your business's taxable income and can help you save money on taxes. Whether you’re a sole proprietor or C corp owner, you can deduct many of your operating costs. We recommend implementing a bookkeeping solution so you can accurately determine your business expenses.
Common business tax deductions include the following:
Individual Tax Deductions
Small business owners can benefit from individual income tax deductions. Your federal income tax return allows you to take the standard deduction or itemize your tax deductions.
Standard Deduction
The standard deduction is available to all individual taxpayers. The IRS adjusts the deduction annually for inflation.
The following list includes the 2023 standard deduction amounts for each filing status.
Itemized Deductions
Itemizing deductions often benefits homeowners whose mortgage interest and property tax deductions exceed the standard deduction. If you itemize your deductions, you cannot take the standard deduction.
The following list includes common itemized deductions for individuals.
Your tax advisor can help you review your personal expenses to maximize your deductions.
Qualified Business Income Deduction
Sole proprietors and owners of partnerships or S corporations can take the qualified business income deduction. Individual taxpayers can deduct 20% of qualified business income (QBI), regardless of whether they take standard or itemized deductions.
Your 2023 taxable income before the QBI deduction must be less than $182,100 ($364,200 for married couples filing jointly). Your QBI deduction could be limited if you have a higher income.
Tax Credits
Tax credits reduce your tax liability dollar-for-dollar, meaning each dollar of tax credit reduces your tax liability by one dollar.
Refundable credits grant taxpayers a refund if the credit reduces their tax liability below zero. Nonrefundable credits can reduce your liability to zero but cannot generate a tax refund.
The following list includes common tax credits for businesses and individuals.
Business Tax Credits
Individual Income Tax Credits
Tax Planning
Tax professionals can help you identify strategies to reduce your small business taxes. Consult tax advisors to learn about planning options for your business.
Common planning strategies include the following:
How To Pay Taxes as a Small Business Owner
Your small business filing requirement depends on your structure. Your business entity type determines your tax form and its due date.
When to File Your Small Business Taxes
The below list includes standard due dates for business tax returns, individual income tax forms, and quarterly estimated tax payments. If a deadline falls on a holiday or weekend, the due date shifts to the next business day.
Fiscal year taxpayers (having a year-end other than December 31st) should consult tax professionals to determine their tax deadlines.
Business Tax Deadlines
Individual Income Tax Deadlines
How Much Should Your Small Business Pay in Taxes?
In summary, your small business tax liability represents the total of the following components. Multiple state and local taxes could apply, depending on your business location:
Lower Your Small Business Tax Bill with 1-800Accountant
Small businesses generally pay income taxes of 20-30% of net earnings, but you can partner with professionals to identify tax planning strategies. 1-800Accountant offers numerous affordable services to help you maximize deductions, lower your tax bill, and save money on professional fees.
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Small business tax services support your operations with year-round professional guidance. 1-800Accountant CPAs offer timely responses to your questions and help minimize your tax burden. Find business tax savings with 1-800Accountant’s payroll tax advisory, sales tax support, and numerous other small business tax services.
Professional Tax Advisory
Tax advisory professionals support your business with tax and financial planning, entity restructuring, and ongoing tax compliance. Reduce your tax burden and avoid errors with small business tax advisory services. Professional CPAs monitor due dates and tax rule changes so you can feel confident about your business tax compliance.
Outsourced Bookkeeping
Professional accountants and bookkeepers help you maintain accurate and timely records throughout the year. 1-800Accountant offers done-for-you bookkeeping services that track spending, categorize transactions and reconcile accounts. Accurate financial statements support your tax compliance and help you monitor your profitability.
Schedule a Free Tax Savings Consultation
Save money on professional accounting services and lower your small business taxes. Schedule a free consultation with 1-800Accountant and learn how tax professionals can support your business.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.