How Much Tax Does a Small Business Pay? A Useful Guide

With over 30 million small businesses in America, there’s a lot of collective opportunity for stress whenever April rolls around. That’s because it’s time to file year-end taxes.

This year businesses have been granted an extension until July due to the effects COVID-19 has had on personal and professional lives. Still, there’s no hiding from taxes and consequently, you should be prepared to file at some point this year unless you’re prepared to fight with the IRS which is something that we’d recommend avoiding.

So, how much tax does a small business pay?

That’s this post’s big question which, unfortunately, doesn’t have a straight answer. To help you arrive at your own figure, our team breaks down heaps of helpful context that’ll serve as an excellent jumping-off point!

Understanding Your Business Structure

When you start exploring business tax requirements, one of the biggest differentiating factors you’ll notice that’ll guide what information is relevant to you is your business’s structure.

There are several business structures that you can have. Here are four of the most common:

Sole-Proprietorship

The moment you walk out on the street and start selling sandwiches, used electronics or anything else, you’re a sole-proprietor. Sole-proprietorships are the simplest form of business structure and how this class is taxed is very similar to how you’re taxed as an individual. 

Even with this simple structure, you’ll need to manage self-employment taxes and in some cases, sales tax.

Partnership

If your business has multiple people running it, a partnership may be a tax-advantageous means of structuring your company. In many ways, partnerships are like sole-proprietorships in that income that goes through your business flows directly to “partners”. All partners have to do then is pay their personal income taxes.

To verify exactly how much income (or losses) flowed to partners through partnerships, businesses will need to file a 1065 form.

LLC

LLCs have become popular among businesses lately because they feature a lot of the advantages that partnerships do with a lowered liability (as the name suggests).

If an entity sues your sole-proprietorship or partnership, shareholders are directly liable to manage the fallout. If your LLC gets sued or chased down for tax reasons, you as an individual will have more mobility when it comes to keeping your personal assets safe.

Corporations

Corporations have several unique tax and regulatory obligations which can be hard for small business owners to navigate. On the plus side though, they offer the most protection to individuals when it comes to their operation since they’re seen as fully independent structurally.

The biggest companies in the world (Nike, Disney, etc.) are all corporations, in large part because of special tax credits they can claim, some of which this article by RDP Associates Inc. touches on, and the limitless amount of shareholders corporations allow.

Business Tax Burdens

Now that you have an idea of where you fall in the structure spectrum, the next step to understanding how much tax does a small business pay is learning about common tax obligations. Based on which business structure you embody and your other unique qualities, you may be exempt from some of the following:

Income Tax

Income tax is the great equalizer when it comes to taxes since everybody pays it in some form. If you have a corporation you’ll need to pay taxes on its net income in addition to the tax you’ll pay as an individual on the money you collect to fulfill your salary.

Other business classifications that offer “pass-through” income make it so all company money flows through your organization to shareholders which means you only pay personal income taxes.

Payroll Tax

Do you have employees working in your business? If you do, the government will want you to pay payroll tax.

Payroll tax goes towards social benefits like medicare and social security. These taxes will vary based on your state.

Self-Employment Tax

As a business owner, you don’t have a company that’s going to pay payroll taxes on your behalf. Consequently, you’ll need to make those contributions yourself.

That process is commonly referred to as paying self-employment taxes. You’re only obligated to pay self-employed tax if your venture generates over $400 in profit.

Property Tax

This is usually a concern of larger businesses but if your company owns property, you’ll need to pay property taxes. Property taxes vary based on where the property is located and may be taxed differently if you’re a corporation.

Sales Tax

Finally, most businesses that sell goods need to pay sales tax. Sales tax rates vary from state to state and even from county to county so make sure you’re passing the proper burden onto consumers or you’ll be on the hook to pay what’s owed out of pocket come tax time.

How Much Tax Does a Small Business Pay? Only You Can Know the Answer!

We hope that after learning all about business structures and tax obligations, you’ve realized that there’s no easy answer to “How much tax does a small business pay?” Each business’s burden will depend on how much they make, where they do business, how they’re structured and even on what they sell.

The best way to know what your tax obligation will be is to talk to a certified accountant. They can walk you though laws that impact your locality and assess your business’s unique qualities to give you a solid answer.

If you’re hungry for small business advice, we’re serving up additional information! Check out more content on our blog to keep fulfilling your need to know.