Did you ever wonder why taxes are so often mentioned in the same sentence as death? They’re both unpleasant, and you can’t, in the end, avoid either of them. But that doesn’t have to get you down! Your business is killing it and your customers are being served. You just need to keep Uncle Sam and the KGB—oops . . . the IRS—off your back. And to do that, you need to know what the small business tax rates are.
So, let’s walk through it together.
What Is a Business Tax?
The taxes you pay and how you pay them depend on how you set up your business, but there are three general types of business taxes:1
1. Income Taxes
All businesses have to file an annual income tax return. C corporations pay income tax at the corporate rate, while all other businesses are considered “pass-through” entities and are taxed at the individual rate.
2. Estimated Taxes
Freelancers, independent contractors and small business owners who expect to owe at least $1,000 in taxes need to estimate and pay quarterly taxes. If you don’t pay them, or don’t pay enough, you can be hit with penalties and interest, and open yourself up to all kinds of unpleasantness.
3. Self-Employment or Employment Taxes
People who are self-employed have to pay self-employment taxes, which are Social Security and Medicare taxes.
You have to pay self-employment taxes if:
- Your net earnings are $400 or more.
- You work for a church or a qualified church-controlled organization that elected an exemption from social security and Medicare taxes, and you make $108.28 or more in wages.3 This does not apply to ministers or members of a religious order (such as nuns).
If you have employees, you have to pay employment taxes, which include:
- Social Security and Medicare taxes
- Federal income tax withholdings (this is technically paid by your employee, but you’re responsible for making sure Uncle Sam gets it)
- Federal unemployment (FUTA) tax
There are also various excise taxes depending on the type of business. This could be anything from taxes on trucks and impact to the environment or for things like sweepstakes giveaways or winnings from playing daily fantasy sports.
What Is the Business Tax Rate for 2020?
Now that we know what kinds of taxes businesses pay, what are the rates? It depends on how you set your business up. There are basically two ways to do it:
This one is easy-peasy (sort of). The Tax Cuts and Jobs Act of 2018—aka the tax reform bill—cut the income tax rate to a flat 21% for all businesses that are set up as C corporations. Simple enough, right? But there’s one more thing.
If the corporation pays dividends, shareholders pay taxes on those on their personal tax returns. So, C corporation profits are taxed twice. There are two types of dividends: qualified and unqualified. Let’s take a look at those:
- Qualified: If you’ve owned the stock for longer than 60 days, that dividend is qualified. Qualified dividends get favorable tax rates and are taxed at long-term capital gain rates.
- Unqualified: Also known as ordinary dividends, these are taxed at the shareholder’s regular income tax rate (more on that below!).
The tax rate for pass-through entities is the same as the owner’s personal income tax rate. The top rate is 37% for single taxpayers making more than $518,400 and for married couples filing joint returns making more than $622,050. The rest of the rates are: 4
- 35% for incomes over $207,350 ($414,700 for married couples filing jointly)
- 32% for incomes over $163,300 ($326,600 for married couples filing jointly)
- 24% for incomes over $85,525 ($171,050 for married couples filing jointly)
- 22% for incomes over $40,125 ($80,250 for married couples filing jointly)
- 12% for incomes over $9,875 ($19,750 for married couples filing jointly)
There is also an alternative minimum tax (AMT). The AMT only applies to certain high-income earners who may otherwise avoid paying any individual income taxes.5
So, which types of businesses are pass-through entities?
- Sole Proprietorship: A business where you are the only owner. You are the boss and totally responsible for everything that happens. It’s really important to keep your personal finances and business finances separate so you don’t get into any tax trouble.
- Partnership (Limited and Limited Liability): A business owned by two or more people. Limited partnerships (LPs) have a greater potential for personal conflict between the partners, since only one of the partners has unlimited liability—meaning they’re on the hook for any debts or bills if the business goes belly-up. The partners with limited liability also tend to have limited control of the business. In a limited liability partnership (LLP), however, all partners are protected from debts and obligations against the partnership.
- Limited Liability Company (LLC): LLCs help separate personal assets and liabilities from business ones, reducing your personal risk if your business is unable to pay its bills. In an LLC, your profits and losses can pass through to your personal income without facing corporate taxes, but members of an LLC are considered self-employed and must pay self-employment taxes.
- S Corporation: An S corporation is structured to avoid the double taxation that happens in a C corporation. S corporations allow profits, and some losses, to pass directly through to the owners’ personal income without being subject to corporate tax rates. But there are some limits to S corporations: You can’t have more than 100 shareholders, and all shareholders must be U.S. citizens. Plus, S corporations still have to follow strict filing and operational processes.
State and Local Taxes on Businesses
Depending on where you live, you may also have to pay state and local taxes. The types and amounts of taxes you’ll pay are different depending on your location. This is where a tax pro can really come in handy. Our small business tax Endorsed Local Providers (ELPs) focus on the local. They live in your community and can guide you through complex state, county or city tax laws.
There are three big state and local taxes to be aware of:
- State income taxes: Unless you live in one of the states that doesn’t have them, you will owe state income taxes.
- Property taxes: If you own commercial property, you will have to pay property taxes, which are typically assessed at the county or city level.
- Sales taxes: If you sell things, you’ll be responsible for collecting sales taxes. If you sell things online, this can get complicated, because some states charge based on where the seller is located, while other states charge taxes based on where the buyer is located.
Someone Who Can Help You With Your Taxes
We don’t have to tell you that business taxes are a hassle. It is such a hassle that most small business owners spend anywhere from 21 to 120 hours every year on bookkeeping and taxes.6 That’s time you could be spending serving your customers, or developing your team, or, well, literally anything else that you feel is a more productive use of your time.
Our small business tax ELPs are there to help advise you and guide you through any questions you might have about federal, state or local taxes. They can help you file your returns and maximize your deductions.