How Small Businesses Pay Their Taxes: A Comprehensive Guide
As a small business owner, navigating the complex world of taxes can seem daunting. From federal income taxes to state and local taxes, there are many different types of taxes that small businesses are responsible for paying. Understanding your tax obligations and how to pay them is crucial for the financial health and legal compliance of your business.
In this comprehensive guide, we'll break down everything you need to know about how small businesses pay their taxes. We'll cover the types of taxes small businesses are required to pay, the tax rates and deadlines to be aware of, and the steps you need to take to calculate and pay your taxes accurately and on time.
Types of Taxes Small Businesses Pay
The specific taxes your small business is required to pay will depend on factors like your business structure, number of employees, and the states where you operate. Here are some of the main types of taxes small businesses are responsible for:
Federal Income Tax
All businesses, except for partnerships, are required to file an annual federal income tax return7. Corporations pay a flat 21% tax rate on business profits, while pass-through businesses like sole proprietorships, partnerships, and S corporations pay taxes on business income at the owners' personal income tax rates19.
The individual income tax rates for 2023 are:
- 10%: $0 to $11,000
- 12%: $11,001 to $44,725
- 22%: $44,726 to $95,375
- 24%: $95,376 to $182,100
- 32%: $182,101 to $231,250
- 35%: $231,251 to $578,125
- 37%: $578,126 or more
So if you own a sole proprietorship and your total taxable business income for the year is $100,000, you would pay taxes on that income based on your individual tax bracket.
Self-Employment Tax
If you're self-employed, either as a sole proprietor or partner in a partnership, you are required to pay self-employment taxes. The self-employment tax rate is 15.3%, which consists of 12.4% for Social Security and 2.9% for Medicare17.
The Social Security portion (12.4%) applies only to the first $160,200 of your net earnings in 2023. Any income above that is not subject to the Social Security portion of the self-employment tax. The Medicare portion (2.9%) applies to all of your net earnings.
Payroll Taxes
If your small business has employees, you are responsible for withholding and paying payroll taxes on their wages. The main payroll taxes are:
- Social Security taxes (6.2% paid by employer and 6.2% withheld from employee wages)
- Medicare taxes (1.45% paid by employer and 1.45% withheld from employee wages)
- Federal unemployment taxes (FUTA) (6% on first $7,000 of each employee's wages)
Most states also have their own payroll taxes, such as state unemployment insurance and disability insurance, that employers are responsible for paying17.
Excise Taxes
Some small businesses are required to pay excise taxes if they manufacture or sell certain products, use various types of equipment, facilities, or products, or receive payment for certain services19. Examples include:
- Environmental taxes
- Fuel taxes
- Communications and air transportation taxes
- Wagering taxes
State and Local Taxes
In addition to federal taxes, your small business may be subject to state and local taxes depending on where you operate. Common state and local taxes include:
- State income tax: 44 states levy a corporate income tax, with rates ranging from 2.5% to 11.5% as of 202219. Pass-through entities pay state income tax at the owner's personal tax rate.
- Sales tax: Most states and some local governments impose a sales tax on the sale of goods and certain services. Rates vary by jurisdiction.
- Property tax: Businesses that own real estate are subject to local property taxes based on the assessed value of the property.
Small Business Tax Rates and Deadlines
The tax rates and deadlines for the various taxes your small business owes will depend on your business structure and the specific taxes you're required to pay. Here's an overview of some key rates and deadlines to be aware of:
Federal Income Tax Rates and Deadlines
- C corporations: Flat 21% tax rate on business profits. Tax returns due April 15 (or October 15 with extension)18.
- Pass-through businesses: Business income taxed at owner's personal income tax rates (10% to 37%). Tax returns due March 15 for partnerships and S corps, April 15 for sole proprietorships (or September 15 and October 15 with extension)18.
Self-Employment Tax Rate and Deadlines
- 15.3% (12.4% for Social Security up to $160,200 of net earnings, 2.9% for Medicare on all net earnings)17
- Taxes are reported on Schedule SE and filed with your personal tax return (Form 1040) by April 157
Payroll Tax Rates and Deadlines
- Social Security: 6.2% employer portion, 6.2% employee portion (on wages up to $160,200 in 2023)17
- Medicare: 1.45% employer portion, 1.45% employee portion (on all wages)17
- FUTA: 6% on first $7,000 of each employee's wages17
- Deposits generally due either monthly or semi-weekly, depending on the amount of tax liability. Quarterly tax returns due by the last day of month following the end of quarter7.
State and Local Tax Rates and Deadlines
- Vary by jurisdiction. Check with your state and local tax authorities for applicable rates and deadlines.
How to Calculate and Pay Your Small Business Taxes
Now that you understand the types of taxes your small business may be responsible for and the applicable rates and deadlines, let's look at the steps you need to take to actually calculate and pay your taxes.
1. Determine Your Business Structure and Tax Obligations
The first step is to determine your business structure and which types of taxes you're required to pay based on that structure. For example, if you're a sole proprietor, you'll pay self-employment taxes and income taxes on your business profits. If you're a corporation, you'll pay corporate income taxes.
You'll also need to determine which state and local taxes apply to your business based on where you operate. This may include state income taxes, sales taxes, property taxes, and more.
2. Keep Accurate Records of Income and Expenses
To calculate your taxable income, you'll need detailed records of your business income and expenses throughout the year. Keep track of all revenues from sales of goods and services as well as any other income sources like interest, rents, or royalties.
On the expense side, keep records and receipts for all business purchases, including inventory, supplies, equipment, rent, utilities, marketing costs, employee wages, insurance premiums, and other operating expenses. Many of these expenses will be tax-deductible.
Having organized and accurate financial records is crucial for calculating your taxes correctly and maximizing your deductions to lower your tax bill. Using accounting software can help you track everything effectively.
3. Estimate and Pay Quarterly Taxes
Many small businesses are required to pay estimated quarterly taxes if they expect to owe taxes of $1,000 or more for the year7. This applies to sole proprietors, partners, and S corporation shareholders who expect to owe at least $1,000 in tax, and corporations that expect to owe at least $5007.
To calculate your estimated quarterly taxes, estimate your expected taxable income for the year and calculate how much tax you'll owe. Divide this number by four and make payments each quarter by the IRS deadlines, which are typically April 15, June 15, September 15, and January 157.
4. Take Advantage of Tax Deductions and Credits
Small businesses can reduce their tax bill by taking advantage of tax deductions and credits. Some common deductions include18:
- Business use of your home or vehicle
- Depreciation on equipment and property
- Salaries and wages paid to employees
- Supplies and inventory
- Insurance premiums
- Rent and utilities
- Professional fees (accountants, lawyers, etc.)
There are also various tax credits available for small businesses, such as:
- Work Opportunity Tax Credit for hiring workers from certain disadvantaged groups5
- Credit for small employer health insurance premiums18
- Research and Development (R&D) Tax Credit5
Work with a tax professional to identify which deductions and credits your business qualifies for.
5. File Your Annual Tax Returns
Finally, you'll need to file your annual tax returns with the IRS and any applicable state tax agencies. The specific forms you need to file will depend on your business structure.
Some common forms include:
- Form 1040 (sole proprietors, report business income on Schedule C)
- Form 1065 (partnerships)
- Form 1120 or 1120-S (corporations)
- Form 940 (FUTA taxes)
- Form 941 (quarterly payroll tax returns)
Be sure to file your returns by the applicable deadlines to avoid penalties and interest. If you need more time, you can request an extension.
The Bottom Line
As you can see, paying taxes as a small business owner involves a lot of moving parts. You're responsible for a variety of federal, state, and local taxes, each with their own calculations, forms, and deadlines.
The key to staying on top of your tax obligations is to educate yourself on the requirements, keep meticulous records, and set aside money throughout the year to cover your tax bills. Working with a knowledgeable accountant or tax preparer can also ensure you're paying all necessary taxes while maximizing your deductions and credits.
By taking the time to understand and plan for your business taxes, you'll avoid costly penalties and set your business up for long-term financial success. Use this guide as a starting point, but be sure to consult with a tax professional for advice tailored to your specific business.
References:
1 https://www.irs.gov/businesses/small-businesses-self-employed/business-taxes[2] https://www.nfib.com/content/news/minnesota/were-1-minnesotas-corporate-tax-now-highest-in-u-s/
3 https://quickbooks.intuit.com/r/payments/small-business-payment-methods/
4 https://www.sba.gov/business-guide/manage-your-business/pay-taxes[5] https://www.uschamber.com/co/run/finance/small-business-tax-credits[6] https://www.youtube.com/watch?v=v-xhOV_tiNA[7] https://www.irs.gov/businesses/small-businesses-self-employed/filing-and-paying-your-business-taxes[8] https://www.forbes.com/advisor/business/small-business-statistics/
9 https://www.pcmag.com/picks/top-payment-solutions-to-help-grow-your-small-business[10] https://www.fdic.gov/about/diversity/sbrp/16.pdf[11] https://www.nationwide.com/business/solutions-center/finances/how-much-small-businesses-pay-taxes[12] https://taxfoundation.org/data/all/global/corporate-tax-rates-by-country-2023/
13 https://www.cbo.gov/publication/59149[14] https://www.adp.com/resources/articles-and-insights/articles/s/small-business-payroll-taxes.aspx[15] https://covid19.ca.gov/business-and-employers/
16 https://www.cbo.gov/publication/59149[17] https://www.adp.com/resources/articles-and-insights/articles/s/small-business-payroll-taxes.aspx[18] https://www.businessnewsdaily.com/7720-small-business-taxes.html[19] https://www.lendingtree.com/business/small-business-tax-rate/
20 https://www.hrblock.com/tax-center/newsroom/company-news/hr-blocks-annual-outlook-on-american-life-report-provides-insight-into-middle-america-and-factors-influencing-the-nations-economy/
Material prepared herein has been created for informational purposes only and should not be considered investment advice or a recommendation. Information was obtained from sources believed to be reliable but was not verified for accuracy. It is important to note that the federal tax laws under the Internal Revenue Code (IRC) of the United States are subject to change, therefore it is the responsibility of taxpayers to verify their individual taxation obligations.
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