Small business tax rates can be confusing for new small business owners, as there seems to be never ending changes. Things have really changed in 2019, due to the tax reform act that was passed in 2017.
In fact, this was the first year that you could see these changes taking place because of the tax reform act, also known as the Tax Cuts and Jobs Act of 2017. The new act also replaced the tax reform act of 1986.
The information provided here will help you understand tax rates for small businesses better. Always keep in mind, however, that tax rates change annually. Next year’s tax rate may be higher or lower than this years. Different types of businesses pay a different percentage depending on a few factors like size, employees, revenue, and a few other factors.
As of this year, 2019, C-corporation businesses, began paying a 21% tax rate on their income. They used to pay less, around 19.8%. Other tax rates are as follows:
Businesses with One Owner–sole proprietorships–pay 13.3% in 2019
Small Partnerships businesses–these type pay 23.6% in 2019
S corporations(see definition below)–these entities pay 26.9% in 2019
Business Types
C-Corporation — Is any business whos income is taxed separate from its owners such businesses include Walmart, Kmart, Home Depot, and many other big box stores. Small businesses can also be C-corporations, depending on other factors.
One Owner aka Sole Proprietorship — Is an unincorporated business where one owner is responsible for the business. Spouses are often included in this. Sole proprietors file taxes for their business income on their personal taxes instead of paying business tax. .
Small Partnerships — A partnership doesn’t pay tax on its income, but passes any profits or losses to each partner. At tax time, the partnership must file a tax return reporting its income and loss, and each partner must report his or her share of the income and loss.
S Corporations — Are also corporations, but they are not taxed differently or separately from the owner.
Taxes are never fun to deal with. As a rule, many small business entrepreneurs get confused when it comes to their tax liabilities. Hiring a certified tax professional is a smart move when this happens.
Items like corporate tax rate, their eligibility status for certain tax cuts, and tax terms like ‘pass-through also cause confusion with many small business owners. Other taxes that business owners must play include payroll taxes, unemployment taxes and other types of taxes they do not always know about.
New small business owners should learn the basics of taxes and how they will be affected by any changes that come up. The following information is designed to help you understand business taxes better and explains the type of business taxes your company may need to adhere to. As well as how the new tax laws will affect you if at all.
Different Types of Small Business Taxes
There are a plethora of federal taxes businesses must pay, you could be responsible for one or all of them. These taxes depend on a few factors of your business, like whether you have employees or not, what your business structure is, and the types of products or services that you offer consumers.
On average, there are six types of federal taxes you could be responsible for as a business owner. Most businesses will pay at least these six, and then any additional taxes that may affect your business.
1. Yearly Income Tax On Your Business
Obviously, your yearly income tax is one of the most important taxes you need to pay whether you are an individual or a small business owner. Such income as work wages, other investment income, property tax and monetary gains from the property you own are all affected by income tax payments. A business must pay taxes on the net income that it earns annually. Net income is income after expenses are accounted for.
However, there are a few business types that do not pay business taxes. These types of businesses include:
One Owner/Sole Proprietorships
Limited Liability Companies (LLCs)
The business owners, however, pay tax on the income they earn, but it is filed on their personal tax returns. Whether their filing status is single or joint, their tax rate is determined by the amount of taxable income they have made including business income. The business income of these types of businesses is counted as earned wages on personal tax returns.
2. Taxes on Employees and Payroll
If you have staff that works for your business, you are responsible for paying taxes on payroll, they are reflected on the employee’s paycheck. Payroll taxes include:
Federal income tax withholding
Social Security
Medicare
Unemployment taxes wither state or federal level
Many businesses employ payroll companies to deal with payroll and employment taxes. These companies take care of all the taxes that needed to be paid as well as issuance of employee’s paychecks.
Business owners who do not pay their payroll taxes on time and file them when they are supposed to can incur high penalties and even criminal charges can be brought about depending on the seriousness of the violation.
Most businesses take care of half of the Social Security and Medicare taxes on their employee’s wages, and the other half is withheld from the employee’s paychecks.
Business owners who do not pay their payroll taxes on time and file them when they are supposed to can incur high penalties and even criminal charges can be brought about depending on the seriousness of the violation.
Most businesses take care of half of the Social Security and Medicare taxes on their employee’s wages, and the other half is withheld from the employee’s paychecks.
3. Taxes on Self-Employment
Net income from self-employment is quite different as far as tax rates go. The IRS says that the self-employment tax rate you are responsible for is a percentage of your net earnings. Essentially, the rate is 15.3% of your net earnings. This is split between Social Security and Medicare. For Social Security you are supposed to pay 12.4% and on Medicare you are to pay 2.9%.
For self-employed individuals, they must pay these types of taxes out of their own wages. Although, there are special rules when the person is self-employed as a church worker or on a fishing crew.
Be sure to check with your accountant or tax professional for any further information and how tax rates frequently change.
4. Sales Tax
Over 40 of the states in the United States charge sales tax to customers. Sales tax rates are different depending on where you go. For example, in Michigan, the sales tax is 6% and food is not taxable unless it is prepared food such as sandwiches you get at a gas station. However, in Alabama, their state rated sales tax is 4%, but local rates can be as high as 9%. Another example is New Hampshire, where there is no sales tax either at the state leverl or local level in New Hampshire. While many of the states have State sales tax, the United States does not have Federal sales tax.
Business owners must collect, add up, and report sales tax to their state and local government offices.
Sales tax on purchases they make, is what the customer pays at the end of their transaction, when they check out and finalize their purchases. Sometimes, merchants and e-commerce companies also collect and have to report sales taxes from their out-of-state customers.
Being a small business owner, it is up to you to find out the tax regulations in the area in which your business is located.
5. Tax on Specific Items, Excise Tax
Depending on the industry your business is in and whether it sells certain types of products or services, you could be responsible for excise taxes as well as other types of taxes.
Excise tax is not a direct tax, it is included in the price of specific merchandise like alcohol and cigarettes. A business that sells these types of products or services is responsible for collecting said excise taxes and sending them to the IRS.
6. Property Tax on Personal Property
Whether you own a business or a home, you are eititled to pay property tax on the property. Any property tax amounts you pay, go to your local municipal offices and government offices. Any questions you have on your property taxes should be directed to the municipal offices in the city or county in which you live.
When Do you Pay Your Small Business Taxes?
When you have to pay your business taxes is an important factor of owning a small business. Many business owners must pay estimated income taxes and self-employment taxes frequently. But some individuals pay their taxes one time before the deadline that is set by the IRS.
Estimated taxes are taxes you pay consistently, throughout the year, and are based on what you believe your income will be at the end of the year. If you expect to owe more than $1,000, you will need to make estimated tax payments quarterly, every 3-4 months in the year. Any of the estimated tax payments that you make throughout the year, are deducted from your total liability when it’s time to file your tax return. Failure to pay your federal tax when you need to could cause trouble for you and your business.
Types of Small Business Taxes
Corporate income tax rate was reduced to 21% as opposed to its original 35% due to the Tax Reform act passed in 2017. Now, thanks to this act, it does not matter how much business income you make, you will not pay more than a 21% tax rate on your business income. The only time this changes is if you take out a dividend or distribution from your company, then those rates will differ.
Businesses such as S-corporations, Limited Liability Companies, general partnerships and sole proprietors do not file business taxes. They report their income and losses to the IRS by way of their personal tax returns, and pay taxes at their individual rate which depends on whether they file single or jointly.
As it has always been, the more money you make the higher taxes you will be subject to pay. Be sure to keep this in mind around tax time.
What Are the Dividend Tax Rates for C-Corporations?
Dividend tax rates will depend on whether they are qualified or nonqualified dividends. In 2019, the rate on qualified dividends ranges from 0% to 20% depending on the amount of your income.
What are the Tax Rates for LLCs, Partnerships and Sole Proprietorships
The tax rate for all three types is equal to the owner’s personal income tax rate. In 2019, personal tax rates now begin at 10% up to 37%. These rates are dependent upon the amount of business income that was earned and whether they file joint or single.
Additionally, as of 2019, sole proprietors and such businesses are able to deduct up to 20% of their business income before their actual tax rate is calculated. However, there are set limits based on the business income.
General Employment Taxes
- Social Security Tax: 12.4% for 2019. Once income reaches more than $128,400, it changes.
- Medicare Tax: all employees must have medicare taken out of their paychecks. The going rate for this is 2.9%. However, this amount is split between the employer and the employee.
- Federal Unemployment Tax: when employees earn the first $7,000, 6.2% is deducted for Federal Unemployment Tax which will be reflected on their paychecks.
- State Unemployment Tax: all states charge a different state unemployment tax rate. Most of the time it will depend on how big or small your company is, how old your company is, what industry it is categorized as, and whether you have a high turnover rate or not at your business. It is also based on how many, if any, of your past employees have filed for unemployment or not.
Small Business Tax Rates at the State Level
Businesses must pay more than just federal level taxes, they are also responsible for state and local taxes. There are three main state tax level rates:
Corporate — For the majority of states in the US, C-corporations must pay a tax rate of 4-9%.
Gross Receipts Tax — Not all states charge this type of tax. But if they do, it is based on gross sales not net income. One thing to remember with this type of tax is that you can not take deductions out before the rate is added up and decided upon.
Franchise Tax — Some states that charge all three taxes, corporate, gross receipt, and a franchise tax. Franchise tax rates are decided when asset values and stocks are decided upon. In general, the tax rate for franchise tax runs from .01-0.9%.
What Else Can Affect Your Tax Bill?
Much to a small business owners chagrin, there are a few other factors that can affect your final tax bill:
- Tax Deductions
- Operating Losses
- Tax Credits
Two businesses that end up with the same amount of taxable income at the end of the year could end up paying different tax amounts due to these other credits or deductions.
In determining your business tax rate, you would be wise to work with a expert in the tax field such as an accountant, lawyer, CPA, or another tax expert. Business taxes are confusing for small business owners, and working with a qualified expert would be beneficial to you and your business.
