Small Business Tax Rates and How They Are Calculated
Almost 99.9 percent of the businesses in the United States are small businesses, as per America’s Small Business Administration (SBA). However, business tax rates for small businesses vary unlike that of large corporations. While an average small business or enterprise pays 19.8 to 20 percent of its income as taxes, the figure varies dramatically depending on the income, state, business structure, tax deductions, etc.
Here’s Why Small Business Taxes Are Tricky
The United States is flooded with small businesses taking up nooks and corners of every street. This is not surprising given that small businesses are rewarding careers and a good source of side income for the working population. Like large corporations, small businesses are subject to federal and state taxes.
However, the business tax rates for large companies aren’t applicable to them. Therefore, calculating an estimated tax bill can be tricky as there are no fixed small business tax rates. This is where the business tax services come into play to guide the business owners and take care of the taxation processes.
For small business owners who intend to handle the taxes themselves, we have compiled this business tax rates calculator guide. This blog will get you started on how taxes work differently for small businesses compared to large corporations and how to calculate them. So, without further ado, let’s dive right into it.
Various Types of Taxes Paid by Small Businesses
Things would have been simple if there were one single type of taxes paid by the small businesses. However, that is not the case, and small companies in the States pay various kinds of taxes to the government.
Let us take a look at the different taxes a small business is required to pay.
1. Income Tax
When we say business tax, we generally mean the income tax. An individual or business entity in the US is required to pay a share of their income as income tax to the government. However, the tax rate depends on the individual’s or business’ income and the tax bracket they fall into. The tax rates for individuals and businesses are specified by the Internal Revenue Service.
Small businesses need to share a significant share of their income as income tax.
2. Payroll Tax
If the employer withholds a particular amount from an employee’s paycheck for FICA (Federal Insurance Contributions Act) and federal income tax withholding taxes, they need to pay the payroll taxes. Depending on the particulars, the business might need to report the payroll taxes through form 941 or e-filing, FICA taxes, or payments to the IRS on a monthly or quarterly basis.
Therefore, small businesses need to pay the payroll taxes for the employees working with them. Here’s how to calculate payroll taxes for your business.
3. Self-Employment Tax
The self-employment tax is actually the FICA (Federal Insurance Contributions Act) tax and covers your Medicare and Social Security. For salaried employees, their company might withhold an amount to pay for the FICA taxes from their salary. However, self-employed individuals need to pay these taxes on their own.
If you own a small business, you will need to pay self-employment tax in addition to the income tax. IRS says that an independent contractor or sole proprietor needs to file an income tax return if their earnings exceed USD 400.
4. Property Tax
If your business owns a piece of land, real estate, or property, it has to pay the property taxes. The local entities apply and collect the property taxes for local purposes. For the properties owned by the small business, the owner holds the direct liability if it is not a corporation.
5. Capital Gains Tax
If the assets owned by the business appreciate in value and you make a profit on their sale or the business investments, you need to pay the capital gains tax. The capital gains tax is calculated on the basis of the difference in the value of the asset or investment, which is the net gain. It depends on whether the gain is short-term or long-term.
6. Dividend Tax
Small businesses or large corporations might distribute their shares to the shareholders. When the company experiences a profit, it distributes a portion of it to its shareholders as dividends. However, the businesses are required to pay taxes on the dividends.
7. State and Local Taxes
The businesses might need to pay income taxes and property taxes at the state level, depending on the state. Each region has its own set of rules that define the tax amount the business might need to pay. Therefore, check out the state-wise tax regulations in the United States and figure out the applicable business tax rates for your small business.
8. Sales Tax
Forty-five states in the US and many localities require small businesses to apply sales taxes. However, the rules and the tax rates might vary from region to region. Therefore, to figure out small business tax rates applicable to you, you’ll need to get the information according to your state and locality.
How Does the Small Business Tax Rates Vary?
The small business tax rates depend on various factors, such as the state and business structure.
1. Depending on the State
The tax laws in the USA can vary drastically from one state to another. States like Indiana, Wyoming, Florida, Montana, New Hampshire, South Dakota, Alaska, and Nevada have negligible individual taxes. Additionally, Wyoming and South Dakota don’t have corporate gross receipts taxes or income taxes.
The states like Louisiana, Iowa, Maryland, New York, Vermont, Minnesota, and California have higher tax rates on sales, property, and individual income.
2. Depending on the Business Structure
In addition to the state, the small business tax rates depend on the business structure. The tax rates are different for corporations, sole proprietorships, partnerships, and limited liabilities corporations. Therefore, while figuring out small business tax rates, one should know the category their business falls under.
Small Business Tax Rates Depend on The Business Structures
Paying taxes for small businesses can be tricky as there are no universal forms or small business tax rates. Therefore, the taxes you pay depend on how you file them and the business structure.
The businesses can be a corporation, sole proprietorship, partnership, S corporation, or Limited liability companies (LLCs) in the United States. However, it is very important to understand what each business structure stands for and how it affects business tax rates.
Let us look at different types of business structures and what they imply.
1. Corporation
A corporation is a business identity registered separately from its owner. The corporation pays taxes on a fixed tax rate, which is 21 percent of the net income as of now.
2. Limited Liability Corporation
The limited liability corporations protect their owner from the debts and liabilities in the name of the business. The taxes on LLCs are calculated on the basis of their share of net business income.
3. Sole Proprietorship
When an individual owns a business that is not a corporation, we call it a sole proprietorship. The business tax rates for sole proprietorship are calculated based on the owner’s net income.
4. Partnership
Similar to a sole proprietorship, when multiple individuals own the incorporated business, it is a partnership. The business tax rates, in this case, are calculated on the individual owners depending on their share in net business income.
How Do Different Business Entities Pay Taxes?
Let us take a close look at how the business entities pay taxes. It depends on how the type of business and is different for each business structure. The businesses can be a corporation, sole proprietorships, partnerships, S corporations, and Limited liability companies (LLCs).
- The businesses listed as corporations in the USA pay a corporate tax rate of 21%.
- The sole proprietorships, partnerships, and S corporations pay taxes at the owner’s own income rate and not at business tax rates. We call them through-pass entities.
- Limited liability companies have the freedom to pay taxes at a corporation rate or a through-pass entity on the owner’s income.
Let Us Manage Taxes for Your Small Business
The small business tax rate depends on the state, locality, and type of your business structure. Therefore, to calculate the taxes for your small business, you need an in-depth knowledge of the applicable regulations for your state and locality and the type of business your company falls under. However, if you have no time to dedicate to tax research, our expert accounting professionals can help you out.
We are proficient in accounting and business tax services and have a team of professionals onboard. Moreover, with the help of cutting-edge technology and software, we ensure high accuracy and fast results. So, connect with us at 1800 580-5375, and let’s start working on your business taxes together.