With the many regulations, deductions, and procedures to consider, it’s easy to feel overwhelmed by the intricacies of your business taxes – regardless of your experience level as an entrepreneur.
To help you better understand your tax obligations, as well as how to minimize them, this article will walk you through the various small business taxes you may need to pay, how your business’s structure can impact these, and how you can file your business’s taxes quickly and easily.
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Small Business Taxes for Beginners
Since taxes are levied at different geographical levels, your business’s location will largely determine the specific taxes it needs to pay. We’ve broken down some common taxes that small businesses often need to pay at each of these levels.
This group of taxes is set by the national government and applies to businesses across the country, regardless of their location. Below are some of the main types of federal tax obligations you may encounter:
This is a tax imposed by the government on the total revenue generated by your business. However, the ways this tax is implemented, as well as the rates applied, can vary based on the structure of your business.
Estimated taxes are payments made to the Internal Revenue Service (IRS) throughout the year on income that isn’t subject to withholding, such as earnings from self-employment, business profits, dividends, and other sources. It must be paid by:
- Self-employed individuals with an expected tax bill greater than $1,000.
- Corporations with an expected tax bill greater than $500
Any primarily self-employed individuals must pay this tax if their net earnings exceed $400. Its purpose is to ensure that individuals who work for themselves contribute to Social Security and Medicare in the same way as employers in more traditional setups.
If your business employs any workers, it will have certain tax responsibilities related to these employees, such as Social Security and Medicare taxes, federal income tax withholding, payroll taxes, and federal unemployment tax (FUTA) – which apply in addition to any state employment taxes.
Often to discourage consumption, the government may levy excise tax against your business if it sells certain specific types of goods or services (such as alcohol, tobacco, or fuel, among others). This tax is commonly either structured at a flat rate or a percentage of the good’s sale price.
Capital Gains Tax
This is a tax levied against the profits your business makes on any investments or from the sale of assets that have gone up in value (e.g., real estate, stocks, and bonds). The rates at which this tax is levied depend on whether the gains you’ve made are short or long-term.
Your tax obligations are also largely dictated by the state in which your business operates, as each one establishes its own guidelines related to state-specific taxes. Many of these taxes explored in the section above are also levied at a state level, including:
- Income tax (such as corporate income and gross receipts tax)
- Employment taxes
- Excise tax
However, there is one tax that’s unique to this statewide level: sales tax. This is a consumption tax that the majority of states in the US levy on the sale of goods and services, typically at the point of sale. While your business will need to collect sales tax, it’s actually your customers who’ll be paying it when they purchase your items.
This makes a state’s sales tax rates an important reflection of its business friendliness since lower sales tax rates translate to lower prices – which are more appealing to customers. Delaware is a great example of this, as it attracts buyers regionwide due to its lack of a sales tax.
In this way, sales tax is a critical aspect of doing business in the US, and understanding it thoroughly is essential for your business to remain compliant with the state. However, this can be quite difficult – especially if you do business in more than one state or operate in a state with multiple levels of sales tax.
To see your state’s tax requirements, check out our state-specific Sales Tax for Small Businesses guide.
While the majority of taxes that businesses encounter are at the federal and state levels, there are a handful of local taxes to be aware of, including:
- Property Tax: This is a tax placed on real estate and tangible personal property owned or used by a business. This tax rate is typically set by local governments and can vary widely based on the locality and its budgetary needs.
- Excise Tax: Local municipalities may also decide to impose this tax on the sale of certain goods. If so, your business will be expected to pay it in addition to any state or federal excise taxes that apply.
Understanding your business’s tax obligations at all these levels is an essential part of keeping your business compliant and above board. As we delve further, we'll explore how different business structures influence these tax responsibilities.
Business Structures and Taxes
Each business structure implements these taxes in different ways — most notably due to the difference between how pass-through entities (such as sole proprietorships, general partnerships, and LLCs) and non-pass-through entities (such as corporations) are taxed.
Pass-through entities are only taxed once since profits flow straight to owners, where they are taxed as personal income. By contrast, non-pass-through entities face double taxation: once at the corporate level and again when profits are distributed to shareholders.
Sole Proprietorships and General Partnerships
These informal structures are typically characterized by their simplicity and ease of establishment but come with certain implications, especially in terms of taxation and liability:
- Sole Proprietorship: This business structure is owned by a single individual without any formal organization. Since the business isn't registered as a separate legal entity, the owner (known as a sole proprietor) directly files self-employment and personal income taxes on the net profit under his or her own name.
- General Partnership: A similarly informal business structure owned by two or more individuals. Just like sole proprietorships, personal income taxes are filed under the names of the partners involved. The key distinction here is that all partners share the responsibility and are personally liable for any actions taken against the business.
While simpler and less expensive to establish compared to more formal structures, sole proprietorships and general partnerships have zero tax benefits, which can become costly as the business grows and becomes more profitable.
In order to get the benefits of a more formal business structure, many entrepreneurs choose to form their business as a limited liability company (LLC). This allows for the limited liability benefits of a corporation with simpler maintenance and compliance rules.
By default, this structure is treated as a pass-through entity for federal income tax purposes. This means that the LLC itself doesn't pay federal income taxes on its profits, but rather, the LLC's income “passes through” to its members and owners, who then report it on their personal income tax returns.
With this default tax status, the distribution of the LLC’s profits is based on each member's percentage of ownership, as stipulated in the LLC operating agreement. Once distributed, this income is then subject to personal income tax at the rate of each individual member.
While taxed as a pass-through entity by default, LLCs have the option to elect to be taxed as a C corporation or S corporation. In the right circumstances, these tax elections can potentially offer an LLC significant savings on their taxes.
In essence, LLCs are a simple structure that small business owners can easily take advantage of for tax flexibility and options to maintain these in the long term.
See our guide to LLC taxes for more information.
Corporations are the only entities that pay a separate corporate income tax based on net earnings. The current income tax rate is a flat 21%.
A corporation is a formal business structure characterized by its ownership by shareholders. Unlike the LLC structure, corporations offer enhanced personal liability protection for their shareholders, making it a more intricate entity to maintain. However, this complexity comes with certain advantages, including:
- Profit Carry Over: Corporations are taxed at a rate of about 15% for profits carried over to the next tax year. This is ideal if you anticipate tax years with a lot of uninvested profit, as the reduced tax rate allows you to retain more of your carried-over earnings compared to LLCs in a similar situation, providing you with more capital for future investments or distributions.
- Investor Appeal: The corporate tax structure is more attractive to potential investors, especially in C corporations, as they are only taxed on dividends when they receive them. This distinction is critical when compared to LLCs, where an investor might be taxed even if they haven't received any distribution.
- Enhanced Credibility: Banks and other financial institutions often view corporations as more creditworthy than other business structures, which can lead to easier access to business loans, credit lines, and other financial products.
While forming a corporation might seem cumbersome, for businesses that are anticipating significant profit carryovers, aiming to attract investors, or seeking the credibility of this more complex structure, the corporate framework could be the ideal fit.
For more information, see our guide on how corporate income taxes work.
A Subchapter S corporation, known more commonly as an S corporation, is a unique tax election that allows a business's income to pass directly through to the owner's personal tax return and bypass the initial corporate tax level. It is not a business structure.
This federal tax election offers a number of advantages, including:
- Avoidance of Double Taxation: One of the most significant benefits of an S corp over a C corp is the ability to avoid double taxation. Just like an LLC, this means a business’s profits are only taxed once, at the personal income tax level of the owners.
- Tax Savings for LLC Owners: Owners of an LLC who opt for S corp status become employees of their LLC for taxation purposes. This arrangement can lead to reduced self-employment taxes.
However, for an S corporation to be beneficial in your situation, your business must satisfy the following criteria:
- It is able to pay its owners a “reasonable salary”
- It regularly generates profits and pay distributions
- It can offset the S corp expenses with a positive tax advantage
- It meets the IRS’ special rules for S corps.
Check out our S Corp Taxes guide for a closer look at how taxation works for these corporations.
Tax Deductions in 2024
A business’s total taxable income is its net revenue minus allowable deductions. You can minimize your tax liability by taking advantage of these deductions to reduce your taxable income. Some common ones include:
- Self-Employment Tax: A portion of the self-employment tax that owners of LLCs must pay is tax deductible.
- Start-Up Costs: Any expenses associated with launching your business in your first year are tax deductible.
- Charity and Gift Contributions: Charitable donations made through an LLC can be written off.
- Business Travel Expenses: If you have any expenses related to business travel, such as train tickets, food you bought while traveling, or accommodation, it’s likely deductible.
- Depreciation: If your business owns any long-term business assets, it can likely deduct any depreciation in the value that has occurred over time. These assets could be machinery, buildings, and other business property.
- Office Supplies and Services: Everyday essentials related to your business, from computers to stationery, are tax-deductible.
In particular, you should always be looking to take advantage of above-the-line deductions: These deductions can reduce your adjusted gross income (AGI), essentially lowering the figure upon which your income tax is calculated. Some common examples are:
- Contributions to certain retirement plans
- Student loan interest
- Self-employed expenses (health insurance premiums, etc.)
By using these deductions, you can decrease your total taxable income and potentially place yourself in a lower tax bracket, further saving you money.
However, to maximize these benefits, we always recommend consulting with tax experts to ensure you're finding all available deductions relevant to your business.
How to File Your Business Taxes
While the process of filing your business taxes will vary greatly depending on your individual obligations and business structure, there are some fundamental steps you’ll generally need to complete.
Below, we've broken down this process to give you a broad overview of what to expect, regardless of your business’s specific situation.
Step 1: Gather Your Documentation
Proper tax preparation requires meticulous recordkeeping. Before diving into the filing process, make sure you have all of the following on hand:
- Personal details (e.g., Social Security number, date of birth, and address)
- Your tax returns from last year
- Employer Identification Number (EIN)
After this, be sure to organize all the documents on the earnings side of your business. This could include:
- Invoices sent to clients
- Sales records indicating business income
- Payment processing reports (i.e., from services like PayPal or Stripe)
Finally, you’ll need to gather all the documents related to the expenses of your business, such as:
- Rent receipts for your business location
- Utility bills
- Office supply purchase records
- Mileage records
- Employee salary records
Note: Depending on your business entity, you may need different information for your tax return.
Step 2: Find The Right Tax Forms
With all this documentation ready, it’s time to move on and identify the right IRS tax forms for your business. The form you need will largely depend on your business structure:
- Sole Proprietorships and Single-Member LLCs: Owners report all of their business income and expenses using a Schedule C form attached to their personal income tax return. Tax returns must be filed by April 15 (or the next business day if it falls on a weekend or holiday).
- Partnerships and Multi-Member LLCs: These business structures must submit an information return using Form 1065, and each member will receive a Schedule K-1 detailing their share of the profit or loss. Filing must be completed by March 15 or the next business day.
- C Corporations: Corporations (and LLCs treated as one) are required to submit a separate corporate tax return using Form 1120 by April 15 or the next business day.
- S Corporations: Corporations and LLCs taxed as an S corp must submit a separate corporate tax return using Form 1120-S, with shareholders reporting their profit or loss using a Schedule K-1. These must be completed by March 15 or the next business day.
With the appropriate documentation gathered and the correct tax forms for your business entity on hand, you’ll be ready to fill them out and submit them.
Step 3: File Your Taxes
Most businesses opt to file online since it is faster, safer, and more secure than paper submission. The IRS offers two tools you can use to file your taxes online: Free File and Free Fillable Forms. If your business’s AGI is less than $72,000, you should use Free File; otherwise, you’ll have to use Free Fillable Forms.
However, there are a few considerations you’ll need to bear in mind before using these tools:
- They cannot be used for filing back taxes.
- They cannot be used for state taxes, only federal ones.
- They do not offer error-checking services.
Ultimately, it’s only recommended you use either of these tools if you’re well-versed in filing your business’s taxes with a paper application. While the option is there for you to use these tools to e-file these documents yourself, many small business owners prefer to enlist the help of a professional to submit their tax returns.
Business Taxes FAQs
The four primary types of business taxes are income tax, self-employment tax, employment tax, and excise tax, though your business may also be required to pay a number of additional federal and state taxes, such as capital gains and property tax.
IRS business tax rates vary based on the type of business, its structure, and its taxable income. For corporations, the flat federal tax rate is 21%. However, sole proprietors, LLCs, and partnerships report business income on personal tax returns, with the rate depending on the individual's tax brackets.
In general, if your net earnings from self-employment exceed $400, you need to file and pay taxes. However, specific requirements can vary based on business structure.
Consult the guidelines of your state tax authority or a professional for detailed information about your particular situation.
Businesses are taxed on their taxable income, which is the gross income minus allowable deductions. This includes revenues from sales, services, and other business operations.
Deductions can include business expenses like payroll, rent, supplies, and other operational costs. The net amount is what's subject to taxation.
- LLC Taxes
- Sales Tax for Small Businesses
- Why Investors Prefer C Corporations
- Business Bookkeeping
- Capex vs. Business Expenses
- Tax Deductible Business Expenses
- S Corp Taxes
- Employee Taxes for Small Businesses
- How Do Corporate Income Taxes Work?
For all related content, have a look at our Business Taxes Resources page.