Small Business Brief


What Percentage Does a Small Business Pay in Taxes?

Out of the thousands of business owners in the U.S., about 20% don’t know the percentage of taxes they have to pay.

As a small business, you have a lot of responsibility on your shoulders. The last thing you want to try to figure out are taxes. Yet, if you don’t, you could face stiff fines and penalties for underpaying.

Do you want to know what percentage does a small business pay in taxes? Learning more about how businesses are taxed will help you plan and make sure you don’t get on the bad side of the IRS and state tax authorities.

Read on to learn what percentage of tax you can expect to pay and how to best prepare your taxes.

What Taxes Do Small Businesses Pay?

What taxes are small businesses responsible for? Just about every business has to pay federal taxes and state taxes. How much depends on a number of factors.

The US and most states use a progressive tax system. The amount of taxes you pay will depend on your business profits. The more profit you have, the more you’ll pay.

It’s much different than a flat tax because, with a flat tax, you just pay the same percentage no matter how much your business makes.

The legal structure that you choose could impact the percentage of taxes you pay. The same with your location, your industry, and the number of employees you have.

Payroll Taxes

Does your business have employees? If so, then you need to pay payroll taxes. Payroll taxes are used to fund retirement programs of Medicare and Social Security.

When you pay your employees, you withhold 6.2% of their gross earnings for Social Security and 1.45% for Medicare. You’re responsible for matching that.

You then send the funds to the IRS on a monthly basis. That may be more frequent depending on your business and the number of employees.

Taxes and Business Structures

The other consideration is your business structure. With some structures, you need to separate your business income taxes from your personal income taxes. In other structures, your business and personal taxes are essentially the same.

Self-Employment Taxes

Self-employed and sole proprietors will have their personal and income taxes on the same return. You’ll pay a percentage of income taxes based on your net business income. This is true for single-member LLC businesses, too.

You will report your business income and expenses on Form Schedule C, which will be attached to your 1040.

What percentages can you expect to pay in taxes? You can expect to pay 15.3% in self-employment taxes. This is your contribution to Medicare and Social Security. Since you don’t have an employer to match your contribution, you’re responsible for both employee and employer portions.

You can deduct 50% of your self-employment taxes on Form 1040.

You will pay income taxes based on your net income for the year. This is on a progressive system, so you want to check out the latest tax brackets. These are updated every year, so you want to check them when the IRS releases them towards the end of each year.

The amount of taxes you’ll pay at the state and local level will depend on your location. Check with your state’s department of revenue to find out the percentages of taxes you’ll pay there.

S-Corp Companies and Partnerships

Companies that are S-Corps will pay business and personal income taxes separately. In this case, the owner or partners draw a salary from the corporation, so they’re treated separately by the IRS.

The corporation will be taxed at the corporate tax rate, which is capped at 21%. On your personal return, you’ll be taxed on your adjusted gross income, which is your income minus deductions and tax credits.

LLCs with more than one member or partnerships will be taxed separately as well.

For some self-employed people, it makes sense (and saves money) to have a single-member LLC and elect to be taxed as an S-Corp. This could save you from paying more in self-employment taxes if you earn a lot during the year.

This arrangement doesn’t work for everyone, so you want to talk to a tax professional to make sure that this is a good move for you.

Industry Taxes

Certain industries may have to pay additional taxes. For instance, E-commerce companies may have to pay more state taxes in the states where they ship products and have customers.

If you have customers outside of the state where you do business, you want to make sure that you work with a tax professional to stay up to date with your tax responsibilities.

Preparing Your Taxes

Now that you have more insight as to how much in taxes you can expect to pay, how can you be prepared for tax season?

During the course of the year, you want to track your profit and loss. This will help you prepare for how much taxes you’ll have to pay.

For self-employed people, one of the biggest challenges is paying estimated taxes. If you’re going to owe more than $1,000 in federal taxes, you have to pay estimated taxes quarterly.

You should save up at least 20% of your income as soon as you get paid and set it aside in a savings account. That will ensure that you’re paying enough taxes and send payments to your state and the IRS.

Taxes can be daunting and tax laws are changing fast. It’s a smart move to hand off your taxes to tax preparation services to get them done right.

What Percentage Does a Small Business Pay in Taxes?

Did you learn what percentage does a small business pay in taxes? The tax laws in the U.S. are confusing, and it can be difficult to know what you should expect to pay come tax time.

How much you pay will depend on your location, your industry, the number of employees, and your business structure. Most importantly, the percentage of taxes paid will depend on your business profits.

Need more business tips and insights? Check out the small business forum on our site for tips from other entrepreneurs.