“How much do small businesses pay in taxes?” It’s a question we get around this time every year, so we thought a post to guide you through the answers would be useful.
Small business taxes can be mind-boggling. They can get difficult and complicated pretty quickly, and it’s no fun to think about having to pay even more money when your margins are so tight as it is.
It shouldn’t be that way, and our mission is to do everything we can to make the process as smooth as possible. So, hopefully, today’s post delivers a little helpful knowledge and some peace of mind.
Do Small Businesses Pay Tax?
First, to avoid confusion, we need to answer the basic question: do small businesses pay tax? … yes!
Businesses that are not classified as some type of tax-exempt nonprofit entity and make a profit above a certain amount are required by the U.S. government to pay taxes on their revenue.
Taxes that are paid to federal, state, and local government authorities are then used to pay for essential services such as national defense, highways, law enforcement, our judicial system, and all kinds of municipal-level projects that keep our cities safe, attractive, and operating efficiently.
We all have experienced times in which we thought our tax dollars could be spent better. Without those things in place, however, it would be difficult for small business owners to stay in business and continue making a profit.
So even though it can be frustrating to go through the process of maintaining records, filing returns, and paying taxes, it is simply a necessary part of the world we live in.
As CPAs helping small business owners just like you with their taxes for a long time, we understand what you go through. And we believe you deserve for your tax-paying experiences to be as stress-free as possible. Hopefully, the rest of this post better informed and prepared.
What Taxes Do Small Businesses Pay?
There are several types of taxes that small businesses are required to pay. In another post, we cover “5 Types of Business Taxes (And Why Your Business Structure Matters).” Here’s a quick summary of those taxes you’ll likely be responsible for paying:
- Income Tax
- Estimated Payments
- Self-Employment Tax
- Employment (Payroll) Tax
- Federal Excise Tax
The IRS has more details on which business taxes you’re required to pay here.
Beyond those, you may also be required to pay property tax if you own (instead of lease) your own business property. Sales and & use tax is also something that everyone pays each time we purchase items. But the 5 mentioned above are ones you will need to plan for each year to file them accurately and on time without a lot of headaches.
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What Percentage Does a Small Business Pay in Taxes?
There is no one rate when it comes to small business taxes. How much of your company’s revenue you will be taxed on depends on how your business is structured.
The Tax Cuts and Jobs Act of 2018 established a flat 21% tax rate for U.S. corporations. Prior to that, they paid anywhere from 15-35%. Only 5% of companies in our country are classified as C corporations; the remaining 95% are some type of “pass-through” entity.
In a “pass-through” entity, the company itself does not pay taxes directly. Instead, those taxes are filed as a part of the owner’s individual tax return. In the case of a partnership or an LLC with multiple owners, each person is responsible for reporting their share of profits on their returns.
Most of our clients, and most businesses in the U.S., are either a:
- Sole proprietorship
- or LLC
If your business is structured in one of these ways, you will simply pay your personal rate on those taxes when you file. Currently, the personal individual income tax rates for single filers are:
- 10% – less than or equal to $10,275
- 12% – above $10,275
- 22% – above $41,775
- 24% – above $89,075
- 32% – above $170,050
- 35% – above $215,950
- 37% – above $539,900
A 20% Qualified Business Income (QBI) deduction is available for 2022 for entities other than C-corps who may have to file at a percentage higher than the 21% corporate rate. The full deduction only applies to single filers reporting less than $170,050 (or $340,100 for “married filing jointly”). Those above that amount may receive less. Consult your CPA to get the exact information that fits your situation.
How Much Do Small Businesses Pay in Taxes?
Now that you know roughly how much of a percentage you can expect to pay in taxes as a small business owner, the next natural question is likely to be “how much do small businesses pay in taxes?”
The exact answer will naturally vary from company to company since no two businesses’ revenues and expenses will be the same. It can also depend on how well you are able to take advantage of valuable deductions.
Far too many people leave good money on the table when it comes to their taxes. It can happen because they either 1) don’t take the time to look for deductions or 2) they’re not good at keeping up with receipts.
Fortunately, there are several ways that you can reduce your tax burden as a small business owner.
- Ordinary and Necessary Expenses – A small business owner can usually deduct what it costs them to run their company by keeping track of “ordinary and necessary expenses.” This includes things like advertising, labor costs, interest, and insurance.
- Other Deductions – Some deductible expenses that often get overlooked include (but are not limited to):
- Bank fees
- Dues and subscriptions
- Legal fees
- Taxes and licenses
For more on this topic, check out a post we did on “6 Top Tips For Filing Your Small Business Taxes The First Time.” Even if you’ve been filing for decades, it’s worth a read if it saves you money!
We Know Small Business Taxes
For the past four decades, our tax pros have been helping small business owners keep as much of their hard-earned money as possible. We understand how frustrating and stressful tax time can be. That’s why we work as hard as we do to make it as easy as possible.To find out how we can help you with your small business taxes this year, schedule a call today!