If you own or operate a small business, you know it takes hard work and attention to detail to make your company successful. But, typically, how much do small businesses pay in taxes each year? And how can you best plan ahead so you’re not caught off guard by a tax bill or due date?
First, it’s important to look at how much small businesses pay in taxes. On average, small businesses pay just under 20% in taxes. According to the Small Business Administration, those with one owner tend to pay less (approximately 14%), while those with two or more owners tend to pay more (around 23%).
How Business Tax Works
Corporate (or business) tax is assessed on any profits earned by a company. The tax assessed depends on the type of business you operate and the way you file your returns.
For example, many small business owners pay taxes using Schedule C as part of their personal tax return, whereas partners in partnerships and LLC owners are taxed on their share of business net income. Large corporations (C Corps and S Corps) are taxed based upon their net earnings.
How Are Small Businesses Taxed?
Now let’s try and make some sense of these numbers. When determining how much small businesses pay in taxes, one must keep in mind that small businesses pay a variety of taxes, of which Federal Income Tax is only one. Here are some of the taxes affecting small businesses.
If you own a small business with employees, you’ll need to pay payroll taxes. Social Security and medicare taxes (FICA taxes) are levied on both the employer and the employee. The Social Security tax rate of 6.2% and Medicare tax rate of 1.45% are paid by both the employer and the employee resulting in a combined tax rate of $15.3%. Self-employed individuals will have to pay the entire 15.3% tax themselves. For example, if you have a worker making $40,000 per year, the employer can expect to pay $3,060 in FICA payroll taxes.
Keep in mind that additional employer payroll taxes may apply depending on where you are located. One example of such a tax is unemployment tax, state and federal. Small businesses must pay a rate of 6% of the first $7,000 paid to each employee annually. Be sure to check with your tax advisor to see if your business qualifies for a tax credit of up to 5.4%.
If your business operates in the retail arena, you’ll also be required to pay sales tax on the items you sell. Sales taxes vary by state. California’s, for example, is 7.25%, so you can expect to pay that amount in sales tax for items sold during the tax period.
Multi-state Business Taxes
If you are a multi-state business, with operations and employees in more than one state, you will need to pay appropriate taxes for those locations. This includes not just payroll taxes, but also sales taxes and any other location specific taxes that might be in place.
In addition to your business taxes (payroll and sales), you’ll also be required to file an individual return, declaring any profits (or losses) accrued during the previous year. A seasoned tax professional can help you determine how much your small business owes in taxes.
Filing as an “S Corporation”
About three quarters of small businesses in the U.S. are considered “S Corporations.” S Corps aren’t taxed the same way large businesses are. Instead, profits (or losses) are shared by the individual stakeholders and are as part of their personal income tax returns. In contrast to larger “C Corporations,” this allows the S Corps to escape double taxation (where earnings are taxed as corporate profits and again as personal dividends or other income). For this reason, S Corps are frequently referred to as “pass-through” business entities.
If your business already operates at C Corp status, you may elect to file as an S Corp. As such, you must file IRS Form 2553. If you’re operating as an LLC and wish to file S Corp status, you must file IRS Form 8832. Finally, Form 1120S is the form used by S Corps and LLCs to file their personal tax. As with many of the issues surrounding small business taxes, you may wish to seek the counsel of an experienced tax attorney.
A Tax Pro Will Help Determine How Much Your Small Business Owes in Taxes
So, as you can see, determining how much small businesses pay in taxes can be quite complicated. At Moskowitz LLP, we’re here to guide you through the often complex and potentially confusing tax landscape. Our expert tax accountants, enrolled agents, and tax attorneys combine decades of invaluable skill to help ensure that you never pay a penny more than you owe. Want to know how much your small business owes in tax—and have the peace of mind in knowing your taxes are done right? Contact Moskowitz LLP today!