Small Business Taxes 2026: Complete Guide to Tax Types, Rates & Structures
Understanding how the IRS views and taxes different business structures is crucial for both new entrepreneurs and seasoned business owners, especially with significant changes taking effect for 2026.
Understanding How Your Business Structure Affects Your Taxes
Sole Proprietorships
The simplest structure uses Schedule C on Form 1040 for pass-through taxation. Beyond regular income tax, you'll pay self-employment tax at 15.3% (12.4% Social Security + 2.9% Medicare).
Key 2026 updates: Social Security wage base increases to $184,500 (up from $176,100 in 2025). You'll pay the 12.4% Social Security tax only up to this threshold, though Medicare tax applies to all income. High earners exceeding $200,000 ($250,000 married) pay an additional 0.9% Medicare tax. You can deduct half of your self-employment tax as an above-the-line deduction.
Single-Member LLCs
Taxed identically to sole proprietorships as "disregarded entities." The advantage is liability protection, not tax savings. You can elect S-Corp or C-Corp taxation if beneficial.
Multi-Member LLCs
Default to partnership taxation. The LLC files Form 1065 (informational return), and each member receives Schedule K-1 showing their share. Active members typically pay self-employment tax on their share, subject to the same Social Security wage base limits.
S-Corporations
The strategic choice for reducing self-employment tax. Owner-employees take a "reasonable" salary (subject to full payroll taxes), but additional profits distributed as dividends aren't subject to self-employment tax.
Example: On $150,000 net income, a sole proprietor pays $22,950 in self-employment tax. An S-Corp owner taking an $80,000 salary and $70,000 distribution pays about $12,240—saving $10,710.
The trade-off: added complexity including payroll management, quarterly filings, and additional forms. Generally, makes sense when net income exceeds $60,000-$80,000 annually.
C-Corporations
Separate tax entities paying flat 21% corporate tax. The catch: double taxation, corporations pay 21% on profits, then you pay personal tax on dividends (typically 15-20%).
Makes sense when reinvesting substantial profits rather than distributing them, seeking venture capital, or planning to go public. For most small businesses, pass-through alternatives are more attractive.
Beyond Income Tax: Other Essential Business Obligations
Employment Taxes
When you hire employees, you withhold 7.65% for Social Security and Medicare, plus pay a matching 7.65% from your own pocket, totaling 15.3%. For 2025, Social Security tax applies only to the first $176,100 of wages per employee.
Federal Unemployment Tax (FUTA): 6% on first $7,000 of wages, typically reduced to 0.6% (about $42 per employee) after state unemployment tax credits.
Key deadlines: quarterly Form 941 deposits, annual Form 940, W-2s by January 31, Form W-3 to Social Security Administration.
Sales Tax
Forty-five states plus DC levy sales taxes. You must collect and remit in every state where you have nexus — physical presence or economic nexus (typically $100,000 in sales or 200 transactions).
Good news for 2026: expanding marketplace facilitator laws mean platforms like Amazon, Etsy, and eBay handle sales tax for you. If you sell through your own channels, you're responsible for registration, collection, and remittance.
State and Local Taxes
Nine states have no income tax: Wyoming, South Dakota, Alaska, Florida, Montana, Texas, Tennessee, Washington, and Nevada. Others impose significant income taxes, and some cities add their own (NYC: 4.4-9% corporate tax; San Francisco: gross receipts tax).
Managing Tax Cashflow Challenges
When tax bills exceed available cash, consider business financing to bridge the gap—often cheaper than IRS penalties and interest. Revenue advances offer flexible repayment scaling with business performance. The IRS offers short-term payment plans (120 days or less, no fee for balances under $100,000) and long-term installment agreements.
Building a Sustainable Tax Strategy
Make quarterly estimated payments (April, June, September, January) if you expect to owe $1,000 or more. Safe harbor: pay at least 100% of prior year's tax (110% if income exceeds $150,000) to avoid underpayment penalties.
Set aside 25-35% of business income for taxes throughout the year. Schedule annual mid-year tax planning meetings with your accountant, not just at tax time—to review structure, deductions, and strategic decisions.
2026 Key Takeaways
Social Security wage base: $184,500
Self-employment tax rate: 15.3% (unchanged)
C-Corp tax rate: 21% (unchanged)
Enhanced employer childcare credits available
New immediate expensing for domestic R&D costs
Important Disclaimer: This article is for educational purposes only and not tax, legal, or financial advice. Fora Financial does not provide tax, legal, or accounting advice. Tax laws are complex and change frequently. Consult with a qualified CPA, Enrolled Agent, or tax attorney for personalized advice tailored to your situation.
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