All small businesses should be aware of and closely adhere to federal, state, and local tax obligations. The amount owed will vary depending on the business structure, location, and other factors. Currently, small businesses pay an average tax rate of 19.8% according to the Small Business Administration (SBA), but this will vary business to business.
What is a business tax? What is a corporate tax?
Unfortunately, there is no such thing as a single business tax. When businesses pay taxes, they need to account for all sorts of taxes from multiple sources. Here’s a brief list of a few major business taxes that most businesses will need to be concerned with:
Regardless of structure or location, all businesses must pay annual income taxes. Business income taxes are conceptually similar to income taxes for individuals. Corporations must pay income taxes on the income they generate after accounting for expenses.
Other types of businesses like LLCs or sole proprietorships are considered pass-through entities, which means owners treat business income as personal income and pay the income taxes for their business through their personal taxes.
Self employment taxes
Self employed individuals have to pay self employment taxes. Currently, the self employment tax rate is 15.3%, and it consists of 12.4% for social security and 2.9% for Medicare.
Self employment taxes apply if:
- Your net earnings are $400 or more
- You are an employee of a church or qualified church-controlled organization that elected an exemption from social security and Medicare taxes, and you make $108.28 or more in wages
Payroll taxes, also referred to as employment taxes, are taxes that all business owners with employees are responsible for withholding, reporting, and paying. Payroll taxes can be complex and there are several different subtypes of payroll taxes. For example, employers are responsible for the employer’s portion of payroll taxes while the employee is responsible for the rest.
We recommend consulting a licensed tax professional when calculating payroll taxes, which can be complex. Failing to meet payroll tax obligations can have serious consequences including fines and possibly even jail time.
When to pay small business taxes
Just as there isn’t a single business tax, there is no single deadline for small business taxes. The deadline to pay small business taxes will vary depending on the type of tax. For example, income taxes are paid on an annual basis while payroll taxes can be paid regularly throughout the year (the IRS offers a pay as you go service).
However, there is one set of deadlines that every business owner should be aware of, and these are deadlines for estimated taxes. If you believe you will owe more than $1,000 in business or corporate taxes for the year, you will need to pay estimated taxes on a quarterly basis.
Estimated tax deadlines
- July 15, 2020 (extended due to COVID-19)
- July 15, 2020 (extended due to COVID-19)
- September 15, 2020
- January 15, 2021
What is the business tax rate?
As mentioned before, the tax rate will vary depending on your business structure and location. It is usually helpful to first determine the average rate of taxes for your business structure. Then, determine the state and local taxes your business is responsible for.
First, c corporations pay a flat 21% on net business income.
Secondly, shareholders must also pay taxes on dividends or distributions from the business. This gets more complex as this further depends on whether or not the dividends/distributions are qualified, which means the stocks have been in possession for 60 days or more.
Dividend tax rates for qualified dividends range from 0% to 20% in 2020. Unqualified dividends are taxed as the shareholder’s personal income.
Owners of pass-through entities (e.g., LLCs, sole proprietorships) pay the same tax rate on business income as they do on personal taxes. Personal tax rates vary from 10% - 37%.
State and Local Taxes
In addition to federal business tax obligations, businesses need to be aware of state and local tax responsibilities. We highly recommend consulting a local tax professional in order to comprehensively assess all of the tax obligations your business must pay.
However, there are few business taxes (state and local) that are fairly common.
All businesses that sell a good or service must also pay a sales tax. Sales taxes are growing exceedingly complex because sales tax regulations vary by state and many businesses are shifting to selling online.
Some states calculated their sales tax based on where the seller is located, while other states calculate taxes based on where the buyer is located. There are several sales tax calculators available online but we recommend directly consulting a professional as many online resources tend to oversimplify.
State income taxes
State income taxes will vary by state and we recommend consulting your state’s tax department to find out what income taxes your business will owe. For example, South Dakota and Wyoming do not impose neither a corporate income tax nor a gross receipts tax.
All owners of commercial property are required to pay property taxes. Property taxes are often estimated at either the county or municipality level, and will largely vary based on the size of property owned.