The average tax rate for small businesses is around 19.8%. However, this can fluctuate greatly depending on several variables. But do you know how everything from the type of company to the state you reside in can influence the amount you pay?
If you are struggling, then let us assist. Read on as we answer the question “How much are small business taxes?”
How Much Are Small Business Taxes?
In the US, a small business is defined by its revenue and the level of employees. However, you may be surprised at how large businesses can become and still be classed as small businesses. Companies with revenue up to $40 million and 1500 employees can still fall under the umbrella of a small business.
This means that small businesses can have lots of different tax regulations placed on them depending on their size and business structure. To discuss tax, they can roughly be divided into corporations and pass-through entities.
Corporation Income Tax Rates
Corporations have paid federal tax at a rate of 21% since 2018. Before that tax used a tiered structure. However, only around 5% of businesses in the US are C corporations and though they can fall under the umbrella of a small business, it is rare.
Pass-Through Entities
Pass-through entities are businesses that have decided not to get taxed at the corporate rate. They can include an LLC, S-Corporations, sole proprietorships, and partnerships.
The term pass-through applies as business tax is not paid. Instead, the owners and members pay tax on the profit and losses from their individual taxes. In these instances, the tax gets determined using personal income tax rates.
Personal Income Tax Rates
Around 75% of small businesses fall under the category of an unincorporated pass-through entity. If your business is one of these federal rates and the state in which you reside determines the amount.
When classed as an unincorporated pass-through entity, then you need to know your personal income tax rate. However, this rate is extremely fluid depending on your circumstances.
For example, individuals who earn less than $10,275 will pay 10% personal income tax. This increases on a sliding scale. At the top end, anyone who earns more than $539,900 will pay taxes at a 37% rate.
This changes if married couples file taxes jointly. A combined income of less than or equal to $20,550 is taxed at 10%. The scale then increases with any couples with an income of more than $647,850 paying 37%.
Tax Rate for LLCs
LLC companies are different as they can choose from several options for taxation. Depending on how many people own the business, the IRS may decide to tax them as a sole proprietorship or partnership. They may also have the same tax as an S-corp.
They can also use the corporate tax rate. However, this gets complex. It would only be a benefit if the owner planned to keep profit in the business itself. Consultation with an accountant or business attorney should be sought before taking this option.
How Much Should My Business Set Aside for Taxes?
Your taxes will be paid quarterly, so make sure you are setting aside income to pay these on time. You will need to place roughly 30% to 40% of your income on one side. It is a good idea to keep them in a separate bank account and take them out when tax payment time comes around.
If you have a new business try to set aside 30% every time you get paid. Once you grow and are making a profit, set this amount aside every month.
When you have a year or two of trading under your belt, then look at last year’s figures. Quarter the amount and take 30% of each value. This is the amount to put away every three months.
Additional Taxes
As well as your income and business tax, other taxes apply to small businesses. These may vary by state and how you structure your business.
Payroll Tax
Payroll taxes are a combination of two payments: Social Security and Medicare. If you have employees then this is 15.3% of their gross wage. The employers take half of this amount from the employee’s wages and pay the rest themselves.
Federal unemployment taxes get paid by the employer and are not taken from the employee’s pay. This is the FUTA tax and is 6% of the initial $7000 paid in a year. As an employer, you may qualify for a tax credit that can lower this amount.
When a business does not have employees then they have to pay the self-employed version of payroll tax. This is 15.3% of income.
State Taxes
As well as federal tax, there are several state taxes you may have to pay. This depends on the state you are in. For example, not all states have an income tax.
Forty-five states have a sales tax. However, each of these has exemptions, rules, and rates. Get the help of an accountant or attorney who knows your local area to assist. Tri-merit.com can also advise on how to claim tax credits for your business.
As well as sales tax, 44 states have a corporate income tax rate. These can be as low as 2.5% to over 11% depending on the state. If you have a pass-through business you may also need to pay tax on their share of business profits.
If your company owns land or property you will also be expected to pay tax on this. Real estate and personal property taxes could be collected.
Organizing How You Pay Taxes
Now you can answer the question “How much are small business taxes?” you just need to check state laws. This is where it helps to have an expert to assist you. They will be able to advise on local exemptions and the best structure for the business.
If you found this article helpful, we have many more to assist. From finance to marketing, we can assist in making your business grow in the coming year.
