As a business owner, you’ve probably had that moment: staring at your tax return, wondering why your tax bill is so high, and if you’ve somehow jumped into a higher tax bracket that’s eating up more of your hard-earned money. Well, that’s not precisely how tax brackets work.
Many business owners mistakenly believe that moving into a higher tax bracket means all their income is taxed at that higher rate. That’s not true—U.S. tax brackets are progressive. This means that different portions of your income attract different rates.
So, how much are you actually paying? And more importantly, how can understanding tax brackets help you lower your tax bill? Let’s break it all down.
1. What Are Income Tax Brackets?
Tax brackets are simply the different income ranges taxed at different rates. Instead of applying one tax rate to all of your earnings, the U.S. tax system uses a tiered structure—as your income increases, only the portion above certain thresholds is taxed at higher rates.
For example, in 2025:
- A single filer’s first $11,925 taxable income is taxed at 10%.
- The next portion ($11,926 to $48,475) is taxed at 12%.
- The higher you go, the more income falls into progressively higher brackets.
The key takeaway? No single tax rate applies to all of your income. Instead, different “chunks” are taxed at different percentages.
2. How the Progressive Tax System Works
The U.S. practices a progressive tax system, meaning higher earnings are taxed at higher rates—but only on the portion of income that falls into each bracket.
Example: How Tax Brackets Apply to a $50,000 Income
Let’s say you’re a Single filer earning $50,000 in 2025 (assuming it’s all taxable income!). Here’s how your taxes would break down:
- First $11,925 taxed at 10% → $1,192.50
- Next $36,549 taxed at 12% → $4,385.88
- The remaining $1,525 is taxed at 22% → $335.50
Total taxes owed: $5,913.88
Your effective tax rate (the percentage of your total income going to taxes) is about 12%, even though your highest tax bracket is 22%.
Key Takeaways:
- A higher income doesn’t mean ALL income is taxed at a higher rate.
- Your actual tax burden is lower than your top tax rate.
- Smart tax planning can help reduce how much of your income gets taxed at higher brackets.
3. What Is a Marginal Tax Rate?
The marginal tax rate is the rate applied to your last dollar of income—in other words, the highest bracket you fall into.
For example, if you’re a Single filer earning $75,000, your marginal tax rate is 22%. But that doesn’t mean you pay 22% on all $75,000—only on the portion above the lower brackets.
This is why knowing your marginal tax rate is essential for tax planning. If you’re close to the next bracket, you might use strategies like retirement contributions or business deductions to keep more income in a lower tax bracket.
4. What Is an Effective Tax Rate?
Your effective tax rate is the percentage of your total income that goes to the IRS.
Your effective tax rate is always lower than your marginal tax rate because different portions of your income are taxed at different rates.
For example, if you earn $100,000, your marginal tax rate might be 24%, but after accounting for lower tax brackets, your effective tax rate might be closer to 17-18%.
Why It Matters
- If you’re trying to estimate how much of your income is going to taxes, your effective tax rate is the better number.
- Your marginal tax rate is useful for planning tax-saving strategies, like deciding whether to defer income or invest in tax-advantaged accounts.
5. How Many Tax Brackets Are There?
There are seven federal tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
2025 Tax Brackets
- 10%: $0 – $11,925
- 12%: $11,926 – $48,475
- 22%: $48,476 – $103,350
- 24%: $103,351 – $197,300
- 32%: $197,301 – $250,525
- 35%: $250,525 – $626,350
- 37%: $626,351+
Note: Married filers, heads of households, and other filing statuses have different income thresholds but follow the same progressive structure.
6. How Tax Brackets Impact Business Owners
Pass-Through Business Owners (LLCs, S-Corps, Sole Proprietors)
- Your business income flows through to your personal tax return and is taxed at individual rates.
- If your income is close to jumping into a higher tax bracket, it may make sense to strategically time expenses or deductions.
C-Corporations
- Flat 21% corporate tax rate—no brackets, but C-Corp owners also pay personal taxes on dividends.
- Tax strategy may involve balancing salary vs. dividends to minimize taxes.
7. Tax Planning Tips for Lower Rates
- Maximize deductions: Reduce taxable income with business expenses.
- Contribute to retirement accounts: 401(k)s, IRAs, and SEP IRAs lower taxable income.
- Use tax credits: Research and development (R&D) credits, energy credits, and other tax incentives can lower your bill.
- Defer income if needed: If you’re close to the next tax bracket, delaying income may keep you in a lower bracket.
Tax Brackets Aren’t Just Numbers
Understanding tax brackets isn’t just about knowing how much you owe—it’s about making informed financial decisions that can reduce your tax burden.
By knowing how tax brackets work, you can:
- Avoid unnecessary tax jumps
- Use deductions and credits wisely
- Plan income distribution strategically
Taxes are one of your most significant business expenses—why not make sure you’re paying the least amount legally possible?
Tax Goddess has helped business owners like you claim more than $1.88 BILLION in tax savings!
Book a FREE Consultation with us now if you want to make more money without paying more taxes legally.
