How Much Does a Small Business Pay in Taxes?

As a small business owner, you should expect to pay total taxes of 20% to 30% of your business’s net profit. Your tax planning strategy depends on whether you pay north or south of this range. Our article breaks down the different aspects of small business taxes so you can pay taxes seamlessly. 

Proper tax planning starts with understanding what goes into calculating a small business’s taxes, followed by partnering with a trusted tax advisor to help implement that understanding. Tax specialists can help navigate the complexities of tax forms, tax returns, income tax returns, business income tax credits, small business tax rates, local taxes, net earnings, tax credits, tax brackets, personal income tax, and more relevant small business tax year topics.

Let’s first look at the different types of small business taxes, then at the different business structures and how the type of structure you choose will affect your business’s taxes.

Different Types of Small Business Taxes

Here are the most common types of taxes a small business must pay. Adding to the complexity, each type of tax has its own small business tax rate. 

Income Taxes. Taxes paid on your business’s profit after all business expenses are paid and qualifying individual income tax deductions are applied.

Income Tax Rates: Starts at 10% and can go as high as 37%.

Self-Employment Taxes. Taxes paid on your business’s profit after all business expenses are paid. The government uses these taxes to fund Social Security and Medicare benefits.

Self-Employment Tax Rates: For 2023, you’ll pay 15.3% on the first $160,200 net profit and 2.9% on all net profits above $160,200.

Payroll Taxes. Taxes paid on the wages and salaries of employees. A state’s unemployment tax, which covers that state’s unemployment compensation fund, is also considered a payroll tax paid by the employer.

Payroll Tax Rates: You’ll pay 7.65% on each employee’s taxable earnings up to $160,200 and 1.45% above $160,200.

Capital Gains Taxes. Taxes paid when you sell a business asset - such as a vehicle, equipment, or a building - for more than what you originally paid for the asset.

Capital Gains Tax Rates: If you own the asset for less than one year, you’ll pay up to a 37% tax rate. If you have owned the asset for over a year, your tax rate will be 0%, 15% or 20%.

Sales & Excise Taxes. Sales taxes are typically collected as a percentage of the overall selling price of goods or services, such as a 7% sales tax on certain types of clothing. Excise taxes are imposed on specific goods and services, such as an 18.3 cents per gallon federal excise tax on gasoline in the United States.

Sales & Excise Tax Rates: Varies by jurisdiction and the product or service being taxed.

Dividend taxes. Taxes paid if a corporation makes a distribution to a stockholder. This is most common for small businesses if the business is a C corporation and makes a payment to the sole stockholder.

Dividend tax rates: Most corporate dividend payments are considered “qualified” and are subject to preferential tax rates of either 0%, 15%, or 20%. If a dividend is considered “non-qualified,” the tax rate can be as high as 37%.

Property taxes. Property taxes may be most common when talking about residential homes. Still, the same concept can apply to other types of property, including machinery, vehicles, or other assets owned by a business.

Property tax rates: Varies by jurisdiction and the asset being taxed.

Business Structures and How Each is Taxed

You can pick from five primary business structures for your business. Here’s a quick look at each type and how each is taxed.

Sole Proprietorships. A sole proprietorship is an unincorporated business run by one person. The business itself doesn’t pay any taxes. Instead, all the business’s profit is considered to pass through to the owner. This is referred to as a “pass-through entity.”

How a Sole Proprietorship is Taxed: A sole proprietorship's owner pays income and self-employment taxes on the business’s profit. After combining the business’s total federal income tax, state income tax, and federal self-employment tax liabilities, the business’s total tax rate is usually between 20% and 30%.

Partnerships. A partnership is an unincorporated business run by two or more people. Similar to a sole proprietorship, the business is considered a pass-through entity. Instead, all the business’s profit is considered to be the owner's income.

How a Partnership is Taxed: After the partnership calculates its total net profit, the profit is divided among the partners. Each partner pays income and self-employment taxes on their share of the partnership’s profits. After combining all types of taxes, each partner’s total tax rate is usually between 20% and 30%.

Limited Liability Companies (LLCs). LLCs are a business structure (also a pass-through entity) that protects the owner(s) from personal responsibility for the business’s liabilities and debts.

How a Limited Liability Company is Taxed: The IRS considers an LLC a partnership for tax purposes. Therefore, each LLC owner pays income and self-employment taxes on their share of the LLC’s profits. Each owner’s total tax rate is usually between 20% and 30%.

S Corporation. An S corporation is another pass-through entity that protects the owner(s) from personal responsibility for the business’s liabilities and debts, similar to an LLC.

How an S Corporation is Taxed: An S corporation's owner(s) pays income taxes on their share of the business’s profits. However, not all an owner’s share of business profits is subject to self-employment taxes. Because of lower self-employment taxes, each owner of an S corporation usually pays an overall tax rate of between 15% and 25%.

C Corporation. A C corporation protects the owner(s) from personal responsibility for the business’s liabilities and debts, similar to LLCs and S corporations.

How a C corporation is Taxed: This is the only type of business entity that pays a tax. The business pays a corporate tax rate of up to 21% on its net profit.

How C corporation Owners are Taxed: The owners of a C corporation have two options to pay themselves - with dividends or by being paid a salary. While dividends have a lower tax rate (20% maximum) than salaries (37% maximum), remember that a C corporation can deduct wages from its net profit.

The strategy of getting a C corporation’s taxable income as close to $0 as possible by maximizing the total amount of tax-deductible salaries often yields a lower tax rate than by issuing dividends and not maximizing the total amount of tax-deductible salaries.

When combining the corporate tax rate and either the income tax rate or the dividend tax rate, each owner of a C corporation usually pays an overall tax rate of between 15% and 25%.

Small Business Tax Deductions

The easiest way to reduce your small business’s tax rate is by taking advantage of tax deductions. Here are some of the most common deductions.

• Advertising and Marketing. You can deduct anything you use to promote your business.
• Inventory. If you buy something to turn around and sell that same item, you can deduct the cost of that item.
• Vehicle Expenses. You can deduct the use of a vehicle if it’s used for business purposes. There are two ways to calculate this deduction: a.) Take the total miles driven for business purposes and multiply it by a standard rate per mile as defined by the IRS (65.5 cents for 2023), or b.) Add up all actual expenses for the vehicle in question (i.e., fuel, insurance, repairs, etc.)
• Travel. You can deduct all transportation, lodging, and food expenses if you travel on official business.
• Business Meals. You can wine and dine a current or prospective customer and deduct 50% of the meal’s cost.
• Salaries and Benefits. Wages and salaries are one of the largest expense categories for small business owners.
• Taxes. You can deduct state and local income taxes against federal income taxes. (Sorry, you can’t deduct federal income against federal income taxes.)
• Depreciation. If you buy something expensive, like a vehicle or a piece of equipment, you may be required to spread the cost of these assets over several years. However, there are special rules for small businesses that allow the entire cost of certain assets to be tax deductible in the year of acquisition. 

How to Get Your Small Business Taxes Done Right

As you can see, when it comes to taxes, there’s a lot of information on tax laws, tax rates, and tax income you need to keep track of as a small business owner. Here are some tips to help you make tracking and paying your taxes easy.

• Set aside a percentage of all deposits. Budgeting to pay your taxes is essential if you don’t want to fall behind. Consider setting aside a flat percentage, for example, 30%, of every cash deposit for taxes. You might be a little over some months and a little under in other months, but you won’t be at zero.
• Get a schedule. Put together a calendar that shows every tax-related due date - deadlines when payments need to be made and deadlines when returns must be filed. Put any late payment or tax filing at the top of your priority list until it gets corrected.
• Partner with a trusted tax advisor for tax preparation. Remember that you don’t have to figure out small business taxes and business income alone. A 1-800Accountant small business tax expert is just a few clicks away. Please contact our tax professionals with any questions about compliance with your small business taxes.