As a small business owner, you’re responsible for everything related to your business activities, including paying any tax liability owed on your annual income. But how much are small businesses supposed to pay in taxes?
If you start looking into it, you’ll likely conclude that there is no straightforward answer. In most cases, tax liability varies from business to business, just like taxes paid on your personal income. The type of entity, tax brackets, location, and whether a business has employees all factor into how much is owed.
We’ve compiled this 2020 guide to help you better understand your small business tax obligations. We will cover the small business tax rate, which taxes you have to pay, and how to prepare for paying your taxes. For a complete overview, we recommend reading from start to finish. However, if you’re looking for the answer to a specific question, use the links below to find the most relevant section.
- Are all small businesses required to pay income taxes?
- Which taxes do small businesses have to pay?
- What are the small business tax rates for 2020?
- What is the business tax rate by state?
- What is estimated tax and when are payments due?
- How should a small business prepare for paying taxes?
Yes, small businesses are required to pay taxes. According to the IRS, all businesses must pay income taxes with the exception of partnerships, which pass along profits and losses to individual partners. However, not all types of entities pay the same taxes or rates because tax requirements are based on how the small business is classified.
Most small businesses are considered pass-through entities, which means the owner reports business income on their personal income taxes for the year. Pass-through entities are also allowed to deduct 20% of their qualified business income thanks to the 2017 Tax Cuts and Jobs Act.
There are several types of business taxes a small business may have to pay, as outlined below.
C corporations have to pay business income taxes based on the company’s net income. However, other types of business entities, such as sole proprietorships, partnerships, and S corporations, do not have to pay business income taxes. Instead, small businesses in these categories pay taxes based on their individual income tax rate because they report business income on their personal tax returns.
If your small business has employees, you will be responsible for payroll taxes—also known as employee taxes. Payroll taxes include:
- Income tax withholding: Employers are responsible for withholding federal income taxes on behalf of employees. How much is withheld depends on the employee’s income and allowances claimed on their W-4.
- Social Security taxes: Currently, the Social Security tax rate is 12.4%—both the employer and employee pay 6.2% toward Social Security taxes.
- Medicare taxes: The current Medicare tax rate is 2.9%—both the employer and employee pay 1.45% toward Medicare taxes. As the employer, you are responsible for paying an additional 0.9% for employees who earn more than $200K.
- Federal unemployment (FUTA) taxes: The FUTA tax rate is 6.0% on the first $7K paid to an employee.
According to the IRS, if you personally made $400 as an employee of your business, you also need to pay self-employment taxes. Self-employment taxes are designed to cover contributions to Social Security taxes and Medicare taxes that are not withheld automatically as they would be by your employer. The self-employment tax rate is 15.3%, which breaks down to 12.4% for Social Security and 2.9% for Medicare.
If your small business owns real estate such as storefronts or a manufacturing facility, you are required to pay property taxes. The property’s value and the rates set by the local tax authority determine property tax rates.
Most states have statewide sales taxes, with the exception of Alaska, Delaware, Montana, New Hampshire, and Oregon. Sales tax rates vary from state to state and many counties set their own local rates. To determine your small business’s sales tax rate, you need to combine the local and state tax rates based on where you operate.
Fortunately, the burden of paying sales taxes passes on to the customer. You can charge customers sales tax on most goods and some services—if your state requires service-based sales tax—at the time of purchase. You are then responsible for passing on the collected sales tax to the state.
In addition to regular sales tax, some goods and services require an excise tax. Historically, an excise tax is a supplementary tax that brings in revenue or helps to discourage certain behaviors, like smoking. Excise taxes vary from state to state and are based on the specific good or service.
The corporate tax rate for 2020 is 21%. However, as mentioned earlier, many small businesses do not fall into this category. The small business tax rate that you need to pay is based on your income, including the profits your business made over the year.
To determine your small business tax rate, you need to determine your business profits plus whatever your individual income was from other sources. Add your total income together and apply the corresponding tax rate to each portion of your income. In 2020, the current income tax rates range from 10% to 37%. Other small business tax rates to keep in mind include:
- Self-employment tax rate: 15.3%
- Social Security tax rate: 12.4%—employer is responsible for 6.2%
- Medicare tax rate: 2.9%—employer is responsible for 1.45%
- Additional Medicare tax rate: 0.9%—only paid on wages exceeding $200K
- Federal unemployment tax: 6%
- Property tax rate: 0.3% to 2.21% depending on the state
- Sales tax rate: 1.76% to 9.55% depending on the state
Note that you may also have to pay excise taxes based on the types of goods or services that you sell. Since excise taxes vary significantly depending on product and location, you will need to look up the individual rate that applies to you.
In addition to federal business taxes, most states levy their own corporate income tax. State corporate income tax applies to C corporations and ranges between 2.5% and 12%.
Pass-through entities—sole proprietorships, partnerships, S corporations, and limited liability companies (LLC)—pay taxes on their profit according to their state’s income tax rate. State income tax rates range from 1% to 13% (California’s top income tax rate is the highest). Keep in mind the nine states that don’t have statewide income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, Tennessee, and New Hampshire. However, Tennessee and New Hampshire require tax on interest and dividends.
Note that certain localities have their own laws, which means they can impose higher tax rates. That’s why it’s important to do your research before filing your taxes to ensure you’re paying the correct small business tax rate. When in doubt, refer to your state’s department of treasury website.
Small business taxes are typically paid in quarterly estimated payments. If you expect your small business to owe at least $1,000 in taxes, you need to make estimated payments. If your business is classified as a corporation (rather than a pass-through entity) and you expect to owe more than $500, however, you must make quarterly payments.
The deadlines for quarterly estimated payments are as follows:
- April 15
- June 15
- September 15
- January 15
If any of these dates fall on a holiday, taxes are due the following business day.
To calculate your estimated tax payments, use Form 1040-ES using your prior year’s taxes as a guide.
Now that you have a better idea of what to expect when your small business taxes are due, it’s time to start preparing. Whether you prepare taxes on your own or get help from a tax professional, having everything in order will make it easier. Plus, the more prepared you are, the less you risk making a major mistake while completing your income tax return.
Consider these important reminders when filing small business taxes
When you’re getting ready to file taxes, keep these important considerations in mind:
- The corporate tax rate is different than the rate applied to pass-through entities.
- Partnerships file an information return; all other business entities file an income tax return.
- In most cases, you must pay federal income taxes and state income taxes on business profits.
- The small business income tax rate you pay depends on several factors, including the type of business structure your company falls under.
- You will need to pay estimated quarterly taxes if you are likely to owe more than $1,000 as a pass-through entity or $500 as a corporation.
- Remember that small business tax rates can change on a yearly basis.
- When in doubt, reach out to a tax professional for guidance on the latest small business tax laws. Tax software can also be helpful if you’re struggling to fill out forms.
- The IRS and Small Business Administration offer free tax resources for small businesses.
- Setting funds aside throughout the year is a smart move so you don’t have to worry about coming up with a lump sum.
Closely track income and expenses
Small business owners can’t be expected to do it all on their own; there are simply too many moving parts and receipts are easily lost. That’s where QuickBooks Online comes in handy. From bookkeeping basics to invoice tracking, you can rest assured that all transactions are carefully accounted for and stored securely.
That way, when you need a detailed account of your expenses and income for the year, you’ll find it neatly organized. Plus, the efficient automation, user-friendly interface, and useful tools this sophisticated software offers will make running your business much easier all around.
Research deductions and credits
Business tax deductions and tax credits are incentives that can help you save on what your business owes. Before filing your income tax return, make sure to do your research to see which business deductions and credits may apply to you, including:
- State and Local Tax (SALT) deduction
- Business expense deductions
- Self-employment deduction
File your small business taxes with confidence
Whether you are a sole proprietor or part of a partnership or LLC, understanding the current small business tax rates and how they apply to your company is essential. You can significantly reduce your tax season stress with this guide, your organized business finances from QuickBooks Online, and careful planning.
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