As a small business owner, it's important to understand the taxes you're responsible for paying and the options available for financing them. This article will help you understand what taxes do small businesses pay and how they work, as well as how to determine your tax rate.
How Small Businesses Are Taxed
Tax rates for small businesses depend on the business type, income level, and what deductions or credits a business can claim. Taxes are calculated differently for different types of businesses. For example, sole proprietorships pay taxes as personal income. Partnerships pay taxes through partners' personal returns, but in some states, partnerships also file corporate returns if certain requirements are met. Corporations file their own tax returns and shareholders file personal returns based on dividends received from the corporation.
Different Types of Taxes For Small Businesses
What taxes do small businesses pay? There are several types of small business taxes. Income tax is the one most people understand. This is the tax on income from a business, which includes profits and money earned from any business-related activities. Payroll taxes are the federal and state taxes paid by employers for each worker employed by the company, such as Social Security and Medicare taxes. Then there is the self-employment tax. This is essentially another name for payroll tax but it refers only to your own income or net earnings from self-employment, such as freelance work or owning a side hustle business like selling crafts online at Etsy or eBay or driving for Uber/Lyft part-time on weekends.
How Much the Average Small Business Pays in Taxes
The average small business tax rate is 19.8%, which means that for every $100 you earn, you pay $19.80 in taxes. This doesn't mean that all businesses pay at this rate, though. The amount of tax you pay will depend on your business' profit margin and total taxable income. Because small businesses tend to have higher operational costs than large corporations, they usually don't make enough profit to justify paying corporate income taxes on the money they earn. Instead, many small businesses must file as "pass-through entities" if they want their profits taxed as personal income rather than at the corporate level. This means that any net profits made by these pass-through entities will be subject only to personal income taxes — which would typically be collected in a single year during tax season from an owner's W-2 forms — instead of both personal and corporate ones over time throughout an entire year.
Small Business Tax Rate by Business Type
If you are a corporation, your small business taxes will be calculated at a flat rate of 21%. If you are a sole proprietor you should expect to pay around 13.3% in taxes, while partnerships will pay closer to 23.6% in taxes. S-corporations end up paying 26.9% in taxes. These numbers are calculated after all your business expenses are accounted for. There are additional income qualifications, but these percentages are a good average of what you can expect to pay in small business taxes.
Small Business Tax Rate by State
Small business taxes vary by state. In some states, you may have to pay the same small business tax rate as larger companies. In others, your company will qualify for a special small business tax rate. Additionally, since some states handle things like sales tax, income tax, and even excise taxes, these numbers can vary greatly and impact the overall small business tax rate you or your company will experience. It’s best to check for details with your state to ensure you pay all the correct small business taxes.
How Deductions and Credits Affect Your Tax Rate
Deductions and credits are a way to reduce the amount of taxes you pay. Deductions are tax-advantaged expenses that can be subtracted from your business income. Credits, on the other hand, are payments that can be subtracted from your taxes owed. Because deductions reduce taxable income while credits directly reduce the amount you owe in taxes, they can both be used to lower your tax rate. Generally speaking, deductions and credits will not affect whether or not you owe money; they only change how much money you'll pay. The more deductions your business has, the lower your taxes because the percentage will be calculated from the amount after the deductions are applied.
How to Pay Small Business Taxes
Many businesses can simply pay taxes when they file their annual tax returns. Others pay quarterly taxes and other tax types. To pay your taxes, you will need to file a tax return and make payments. Payment of taxes is one of the most important aspects of running a business. Make sure that all of your business taxes have been paid on time by checking out this list:
- Sales Tax
- Use Tax
- Excise Taxes
- Income Tax
- Property Tax
- Unemployment Insurance Tax
- Corporate Tax
When to Pay Small Business Taxes
The most common way to pay taxes is to file quarterly. If you're self-employed, this means paying income tax on a quarterly basis. Most small businesses use accounting services to ensure that they pay all of their federal taxes for small business and other taxes on time.
Determining Your Tax Rate
Once you know what tax bracket you fall into, it's time to calculate your actual tax rate. The easiest way to determine this is to look at your total taxable income. You divide the total tax owed by the total taxable income to get this rate.
How Much Should you Set Aside for Taxes if you Own a Small Business?
There are a lot of taxes small businesses have to pay. When you're starting a small business, it's important to know how much you should be setting aside for taxes. That way, you'll have enough money to pay your taxes at the end of the year and won't accidentally go over your budget. In general, most professionals recommend setting aside 25%-30% of your taxable revenue for taxes each year. When you know what taxes do small business pay, you’ll be able to more accurately determine what to set aside to pay them. You may even end up paying a lower tax rate depending after all of your deductions are accounted for.
Consider Financial Assistance & Loan Options for Help
Sometimes, you miscalculate what you owe and you need a business loan to pay taxes. It’s important to pay these on time so that you don’t end up paying too much in fees. If you're a small business owner, there are financial assistance and loan options available to help you pay your taxes.
Small Business Loans
Small business loans are a helpful tool for paying your corporate and other business taxes. You can use them to pay quarterly taxes, annual taxes, and even sales taxes without compromising your cash flow. At Fora Financial, we have small business loan options that can help you pay your taxes.
Revenue advance loans are a type of financing that allows you to get paid in advance for your work. You can use revenue advances to pay for taxes and other business expenses like advertising and salaries. To pay off a revenue advance, you agree to make payments based on a percentage of your revenue going forward.
When you get a lump sum loan and pay it back in predetermined monthly installments, that is an installment loan. They may have fixed or variable interest rates and can be used to pay business taxes and other important business expenses. Installment loans are often used to purchase equipment and other tangible assets.
Paying taxes for small businesses is critical. You don’t want to find out what happens if you file your business taxes late. As you can see, there are many different types of taxes for small businesses to consider. It’s important to take the time to understand how each of these taxes works so that you can avoid penalties and keep more money in your pocket. If you need more money to pay taxes, Fora Financial can help with a variety of lending options.