Unlike corporations, small businesses are owned mostly by individuals. All partnerships, sole proprietorships, and LLCs are exempt from business taxes and pay taxes at the federal income tax rate of the owner.
So if you own a small business, you’ll be taxed on your income and your business won’t face any taxes. However, this doesn’t mean that you will not pay any taxes on your business. The Social Security and Medicare taxes you pay are outside of your personal tax. As a business owner, you’ll also pay self-employment tax which is 15.3%. This also includes the Social Security tax (12.4%) and Medicare (2.9%)tax. And of course, if you have employees working for you, you’ll contribute to their Social Security and Medicare taxes as well.
Surely, the rates are high but as a small business owner, there are many deductions available for you to claim.
Small Business Taxes Explained
Whether your company’s tax classification is partnership, sole proprietorship, or a Limited Liability Company (LLC), you are going to pay taxes on the income you earn.
With that being said, there are no specific tax brackets for small businesses. You’ll simply fall into one of the tax brackets set by the Internal Revenue Service for federal income taxes. In conclusion, the rate in which you’ll pay your taxes is determined by federal tax brackets.
More information about 2020’s Federal Tax Brackets
Many of your business-related expenses are indeed tax-deductible. As long as the expenses are directly for your business, there is a way for you to deduct these expenses from your taxable income. The highlights of small business deductions include
- Salaries and Wages
- Employee training costs
- Benefits provided to employees
- Per diem
- Fees charged by banks, including ATM fees
- Janitorial expenses
- Marketing and advertising expenses
- Loan interests
Combining the deductions that you can claim as an individual, there isn’t a tax burden on small businesses. Even if you can’t keep up with your taxes, Uncle Sam has many solutions in which you can pay your taxes with ease. So even if you can’t keep up with your business taxes, you can set up a payment plan with the IRS.
How much taxes do small businesses pay?
According to the U.S. Small Business Administration, small businesses pay a tax rate of about 20%. Keep in mind that this is just the average of the tax for individual taxpayers or businesses. The SBA calculates this tax rate by dividing the taxes paid by the taxable income. The average tax rate for each tax classification is also listed below.
- Small S Corporations: 26.9%
- Sole Proprietorships: 13.3%
- Small Partnerships: 23.6%
Since it is hard to figure out an average tax rate for the Limited Liability Companies, the agency didn’t provide any information regards to that. If you’re having trouble with listing the right deductions for your small business, make sure to read the article below.
More details about Small Business Tax Deductions