There are more than 31 million small businesses in the United States. In fact, these companies make up a staggering 99.9% of all businesses in the country.
Are you at the helm of a small but mighty enterprise? If so, then you may wonder what your tax implications will be like this year. How much do small businesses pay in taxes and what should you expect?
Today, we’re breaking down the numbers so you can prepare ahead of time.
Understanding the Basics of Business Tax
Each year, the IRS sets specific tax rates for different business types. These rates factor in different elements, such as inflation adjustments. In 2021, businesses classified as “C” corporations will pay 21% in taxes, although there have been proposals to spike this number to 28% in the future.
While this number is important to know, it doesn’t apply to small business taxes, as corporations are taxed on their net earnings.
The most recent tax reform changes affecting small businesses happened in 2017. In December of that year, President Donald Trump signed the Tax Cuts and Jobs Act. This Act changed the way small businesses paid taxes, as well as the actual amount that they paid.
Most small business owners file their business taxes using Schedule C on their personal income tax returns. The full title of this form is Schedule C: Profit or Loss From Business. Note that this applies only to business owners whose companies are classified as sole proprietorships or single-member LLCs.
If you’re part of a partnership or the owner of a multi-member LLC, then the IRS taxes you on your personal share of the total business net income.
The Small Business Tax Rate
If the tax rate for “C” corporations is 21%, then what is the rate for small businesses? The answer isn’t quite as cut-and-dry as you might think.
This is because the vast majority of small businesses are not classified as corporations. Whether we’re talking about a sole proprietorship, partnership, or LLC, these entities won’t usually pay actual business taxes. Rather, they’ll be taxed as part of their owner’s personal tax returns.
This setup is known as a pass-through entity. It can get complicated, primarily because a business owner may have other forms of income, apart from the business. Yet, the business-specific earnings will get mixed in with those other earnings.
2021 Federal Tax Brackets for Individual Taxpayers
Still, business owners are taxed at a personal income tax level. To get a general idea of what you’ll pay, it helps to take a look at the current Federal tax brackets for single taxpayers. These numbers are based on your overall income, as follows:
- Incomes of $9,950 or less: 10%
- Incomes between $9,951 and $40,525: 12%
- Incomes between $40,526 and $86,375: 22%
- Incomes between $86,376 and $164,925: 24%
- Incomes between $164,926 and $209,425: 32%
- Incomes between $209,426 and $523,600: 35%
- Incomes over $523,601: 37%
Note that these numbers represent individual taxpayers, only. If a taxpayer is married and files jointly, then the income range will increase. Taxpayers will calculate all of their total income, including earnings made by their small business, on Form 1040 or Form 1040-SR.
On average, most small business owners pay an estimated tax rate of 19.8%, as defined by the following breakdowns:
- Small business sole proprietorships: 13.3%
- Small business partnerships: 23.6%
- Small business “S” corporations: 26.9%
Tax Specifications for LLCs
For tax purposes, the IRS treats these businesses as either sole proprietorships or partnerships. If the LLC chooses, then it can also self-represent as a corporation. An LLC with more than one member will usually be classified as a partnership.
As with most other small businesses, LLCs are considered pass-through entities. Individual members will make quarterly payments to the IRS four times each year.
Other Small Business Taxes to Consider
In addition to any income tax, small business owners must also pay self-employment taxes. This rate is currently set at a flat rate of 15.3%. Of that amount, 12.4% is designated for Social Security and 2.9% goes to Medicare.
While these taxes are important to remember, they aren’t the only ones that small business owners must consider. In addition to income taxes and self-employment taxes, business owners must also factor in:
- Payroll taxes
- Unemployment taxes
- Workers’ compensation taxes
- Capital gains taxes
- Property taxes
- Taxes on investment dividends
As you might imagine, it can be extremely challenging to keep track of all of these numbers via a manual spreadsheet alone. As such, most small business owners prefer to use some type of advanced tax preparation software when filing taxes.
Or, they may outsource a tax preparer to crunch the numbers for them. A company like https://www.taxfyle.com/tax-preparation-outsourcing can take the guesswork out of small business tax preparation.
Common Business-Related Tax Deductions
All of the taxes listed above can quickly add up, and affect a company’s bottom line. For this reason, it’s important to be aware of common tax deductions that can help business owners save as much money as possible come tax time.
One of the most important ones to know is the Qualified Business Income (QBI) Deduction. Congress established this deduction to help small business owners maintain profitability. It allows owners to deduct up to 20% of their qualified business income from their taxes.
In addition to the QBI deduction, also stay aware of certain expenses that can serve as tax write-offs. These include:
- Business travel expenses
- Business use of your home
- Business use of your car
- Rent expense
- Retirement plans
- Employees’ pay
- Business interest expenses
Your accountant can explain each of these deductions in greater detail, and inform you on whether your company qualifies for them.
How Much Do Small Businesses Pay in Taxes? Know the Facts
There is no universal answer to the common question, “How much do small businesses pay in taxes?” Rather, the answer will depend on a number of factors including the type of business it is, the total income of the owner, and which deductions apply.
A financial expert can help you navigate every step of the tax preparation process. If you’re finding these calculations difficult to juggle, then reach out to one to make the effort easier and more accurate.
In the meantime, we’re here with all of the business-related news you need. Be sure to check back often for more informative guides!