You are living your dream of being a small business owner in the U.S. Congratulations! You’ve grabbed control of your destiny and turned your back to the 9-to-5 grind. But wait—what’s that? It’s the sound of the taxman knocking on your door. Yes, even the smallest of businesses aren’t exempt from taxes (bummer!).
So, how much should you be paying in taxes as a small business owner? Are there special small business tax rates that won’t leave a hole in your pocket? Not really. The exact tax amount depends on a few key factors. Read on for the full breakdown.
Business Structure and Small Business Tax Rates
One of the main factors that determines how much a small business is required to pay in taxes is its structure or entity. The most common business structures in the U.S. include:
- Sole proprietorship: this type of business structure is owned and run by one person. As a sole proprietor, you are required to report income and expenses on your tax return.
- Partnership: as the name implies, a partnership is an unincorporated business entity where there are multiple partners or owners. As a partner in a sole proprietorship, it is your responsibility to report your share of the business income in your taxes.
- C Corporation: a C-corp is a business structure that is separate from its owner(s). It is its own legal entity and can own property, enter contracts, and be liable for debts. C-corps are required to pay corporate income tax on their profits, and shareholders may also pay taxes on dividends received, leading to double taxation.
- S Corporation: an S-Corp is a business structure that allows income, losses, deductions, and credits to pass through to business shareholders, avoiding double taxation. Shareholders report these on their respective tax returns, potentially saving money on taxes.
- Limited Liability Company (LLC): This is a business structure that protects owners (members) from personal liability. For tax purposes, an LLC’s income is typically passed through to the members, who report it on their respective tax returns, avoiding double taxation. However, the flexibility of an LLC means it’s also possible to tax it as a corporation.
Tax Rates for Sole Proprietorships, Partnerships, S-Corps, and LLCs
Now that we have established the role of your business structure in determining your taxes as a small business owner, let’s look at the exact tax rates.
You see, sole proprietorships, partnerships, S-Corps, and LLCs all have something in common: they are all pass-through business structures or entities. Pass-through entities pass business income or profits down to the business owner(s), meaning they are taxed at an individual rate. In other words, as an owner, you pay the taxes for your business (the IRS recognizes you and your business as one).
Individual tax rates depend on business income and tax brackets, explaining why there is no specific small business tax rate.
What are Small Business Tax Rates Based on 2024 U.S. Tax Brackets?
If you have a small business that qualifies as a pass-through entity, your tax rate will depend on the net income of your business and the tax bracket it puts you in. The table below shows the 2024 tax brackets.
| Tax Rates (2024) | Single Filers | Married Filing Jointly |
| 10% | Making less than or equal to $11,600 | Making less than or equal to $23,200 |
| 12% | Making more than $11,600 | Making more than $23,200 |
| 22% | Making more than $47,150 | Making more than $94,300 |
| 24% | Making more than $100,525 | Making more than $201,050 |
| 32% | Making more than $191,950 | Making more than $383,900 |
| 35% | Making more than $243,725 | Making more than $487,450 |
| 37% | Making more than $609,350 | Making more than $731,200 |
Tax Rate for C Corporations
C corporations in the U.S. pay a 21% tax rate, which is a flat federal income tax rate that was implemented in 2018. Before 2018, C-corps were taxed on a tiered system, with rates between 15% and 35%.
Other Taxes that Small Businesses Pay
Small business owners face several types of taxes beyond just income tax. Here’s a rundown of some common ones:
Payroll Tax: If you have employees, you must pay payroll taxes, which include Federal Insurance Contributions Act (FICA) taxes and Federal Unemployment (FUTA) taxes. FICA taxes fund Social Security and Medicare, with a total rate of 15.3%, split between employer and employee. Employers also pay FUTA taxes at a rate of 6% on the first $7,000 of each employee’s wages but can get a credit of up to 5.4%, reducing the effective rate to 0.6%.
Self-Employment Tax: If you’re self-employed, you pay both the employer and employee FICA taxes, totaling 15.3%. This ensures Social Security and Medicare are funded for self-employed individuals.
Capital Gains Tax: If you sell business assets for a profit, you may be required to pay capital gains tax. The rate varies from 0% to 20%, depending on your income and whether the assets were held short-term or long-term.
Property Tax: If your business owns real estate, you must pay property taxes based on local rates. This includes land, buildings, and business inventory.
Excise Tax: This applies to businesses that sell or manufacture specific products, like alcohol or tobacco, or provide certain services. These taxes are usually included in the product price and passed on to consumers.
State and Local Taxes: Depending on where you set up your business, you may be required to pay state and local taxes.
Wrapping Up
Beyond your specific tax rate or business structure, it is crucial that you take advantage of tax strategy as a business owner. There are legal ways to reduce your tax rate substantially and keep more money in your pocket. So, don’t leave money on the table. Start taking advantage of tax strategy for lower taxes today.
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