
Understanding small business taxes can be complicated, as several factors determine what a small business pays in taxes. This comprehensive guide will help you understand the different types of tax rates, the impact of business structure on tax obligations, and other critical aspects of taxable income for small businesses.
What Determines the Tax Rate for a Small Business?
The tax rate a small business pays depends on various elements, such as the business structure, the location of the business, and its total taxable income.
Business Structure
The business structure is one of the most significant factors affecting how much small businesses pay in taxes. There are several structures available:
- Sole Proprietorship: This is the simplest form where the small business owner pays taxes on business income as part of their individual income tax returns.
- Limited Liability Companies (LLCs): These are often considered pass-through entities, meaning the profits or losses pass through to the owners’ personal tax rate.
- C Corporations: These businesses pay a flat corporate tax rate on their profits, separate from the owner’s personal tax rate.
Small businesses that operate as pass-through entities like sole proprietorships, LLCs, or S Corporations may face lower tax rates compared to C Corporations, which are subject to a corporate tax rate.
Taxable Income
Taxable income is the amount on which a small business calculates its tax bill. It is derived from the business income minus any deductible business expenses. Common deductions for small businesses may include:
- Health insurance premiums
- Employment taxes like FICA taxes
- Tax deductions for employee’s wages
- Property tax and sales taxes
Taxable income influences the amount of federal income taxes a business must pay, as well as the state income tax liabilities.

Types of Taxes Small Businesses Pay
Income Tax
Income taxes for small businesses are usually based on the business’s tax liability, which considers both federal income taxes and state income tax obligations. Federal income tax rates vary depending on the total taxable income of the business, while state income tax rates differ from state to state.
Federal Income Tax
Federal income taxes for small businesses depend on whether the business is a pass-through entity or a C Corporation. Pass-through entities report their business income on their individual income tax returns, while C Corporations are taxed at a flat corporate tax rate.
State Income Tax
State income tax varies significantly depending on the location of the small business. Some states have higher income tax rates, while others may not impose state income taxes on business income at all.
Self-Employment Tax
Self-employment taxes apply to small business owners who work for themselves. These taxes cover Social Security and Medicare taxes. The self-employment tax rate is currently set at 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare taxes.
Small business owners must pay self-employment tax liabilities if their net earnings from self-employment are $400 or more. Making estimated tax payments throughout the year can help manage self-employment tax obligations.
Payroll Taxes
Payroll taxes include employment taxes that small businesses pay on behalf of their employees. These taxes include contributions to Social Security and Medicare, also known as FICA taxes. Paying payroll taxes is mandatory for any small business with employees, as it directly impacts the employee’s wages.
Small businesses must also pay unemployment taxes and other employment taxes to both federal and state agencies. Calculating these taxes accurately is crucial to avoid penalties.
Excise Taxes
Excise taxes are specific to certain goods and services. If a small business sells products like gasoline, tobacco, or alcohol, it will need to pay excise taxes. These taxes are typically included in the price of the product and are paid to the government by the business.
Capital Gains Tax
When a small business sells assets or investments at a profit, it may incur a capital gains tax. The capital gains tax rate depends on how long the asset was held before being sold. Long-term capital gains are usually taxed at a lower rate than short-term gains.
Tax Credits and Deductions for Small Businesses
Small business owners can significantly reduce their tax liability by taking advantage of various tax credits and deductions. Some common tax credits include:
- Health insurance tax credits for offering coverage to employees
- Tax advantaged fringe benefits for providing benefits like retirement plans
- Energy efficiency tax credits for investing in sustainable practices
Deductible Business Expenses
Small businesses can deduct a variety of expenses to lower their taxable income. These deductions might include:
- Office supplies and equipment
- Marketing and advertising costs
- Travel expenses related to business operations
Deductions can significantly reduce the amount of income taxes a small business needs to pay, making them an essential part of small business tax calculations.
Tax Planning Tips for Small Business Owners
Estimated Tax Payments
Making estimated tax payments throughout the year can help small business owners avoid large tax bills at the end of the tax year. Self-employed individuals are generally required to make quarterly estimated tax payments to cover both income taxes and self-employment taxes.
Consulting a Tax Professional
Hiring a tax professional like Vyde can be invaluable for small business owners. A tax professional can provide personalized advice, help optimize tax deductions, and ensure compliance with all federal and state taxes.
Record-Keeping for Tax Efficiency
Maintaining accurate records of business expenses, income, and other financial transactions is crucial for minimizing tax liability. Good record-keeping helps ensure that small businesses can take full advantage of all available deductions and credits.

Understanding small business taxes and the various factors that influence tax rates is crucial for small business owners. This knowledge empowers you to make informed decisions and potentially reduce your tax liability. Collaborating with a tax professional such as Vyde and staying updated on available tax credits and deductions can help ensure your business remains tax-efficient and compliant.
Running a small business is challenging, especially when it comes to managing taxes. If you’re struggling with your small business tax management, don’t hesitate to reach out to Vyde. Our expert services can help you navigate the complexities of tax compliance and optimize your financial strategy. Let us support you in achieving your business goals!
Frequently Asked Questions (FAQs)
1. What percentage does a small business pay in taxes?
The percentage a small business pays in taxes varies based on its business structure, location, and taxable income. Small businesses that are pass-through entities typically pay between 10% to 37% in federal income taxes, depending on their total taxable income.
2. How do estimated tax payments work for small businesses?
Estimated tax payments are periodic payments made to the IRS to cover income tax, self-employment tax, and other tax liabilities throughout the year. Small business owners are usually required to make these payments quarterly to avoid underpayment penalties.
3. What is the self-employment tax rate?
The self-employment tax rate is currently 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare taxes. This tax is mandatory for small business owners with net earnings of $400 or more.
4. Are all small businesses considered pass-through entities?
No, not all small businesses are considered pass-through entities. C Corporations are not pass-through entities and are subject to the corporate tax rate. LLCs, sole proprietorships, and S Corporations typically qualify as pass-through entities.
5. Can small businesses deduct health insurance premiums?
Yes, small businesses can often deduct health insurance premiums as a business expense. This deduction can lower the business’s tax liability and reduce overall taxable income.