How Much Does A Small Business Pay In Taxes?

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Thinking about starting your own business and concerned with how much you will pay in taxes? Don’t let the concern stop you, but do structure your company armed with the knowledge on how you and your company will be taxed.

Missing puzzle piece falling into place
 

And, let me say this: I am not an accountant and don’t pretend to be. I strongly recommend hiring a business accountant to take care of your accounting needs for your business. Just use this as a rough guide!


Payroll Taxes – The self-employed pay the entire 15.3%

A normal W2 employee pays 7.65% in payroll taxes. The employer pays the other 7.65%, for total payroll taxes of 15.3%. This goes to fund both Social Security and Medicare.

If you are self-employed, the government still needs that funding for Social Security and Medicare and therefore still requires the entire 15.3% payroll taxes. And, since you are self-employed, you have to pay for the whole thing.


Pass-through entities – Personal income tax rates apply here - not the corporate income tax rate.

Pass-through entities are sole proprietorships, partnerships, LLCs, and S-corps.

All this means is that these entities are not subject to the corporate income tax. Instead, the profits flow through to their owners and members. So, if you structure your company as one of these, you will report your portion of your company’s profits on your personal return. It will be taxed at your personal income tax rate.

There’s some nuance here, such as that an S-corp is a tax classification while an LLC is a type of business entity. One-member LLCs are considered sole proprietorships for tax purposes. An LLC can file as an S Corp for various reasons. If the business is set up as a sole proprietorship or a partnership, it is not necessarily an LLC and therefore doesn’t provide the owners’ personal assets with protection if the company had creditors. Forming an LLC would provide that protection.

Being taxed as a pass-through entity can also help avoid double taxation.


C Corporation, or a regular corporation – These are usually taxed at the corporate income tax rate, but it can cause double-taxation for the business owner.

If your business is set up as a C-corp, then the corporation will pay taxes on profits using the corporate income tax rate. This currently sits at 21%.

You might be thinking that 21% is lower than your personal income tax rate, but you need to consider if this will cause you, as the owner, to get taxed twice.

Double taxation happens when the corporation pays the 21% corporate tax on its profits and its shareholders (owners) pay personal income taxes on the dividends received from the corporation. The top personal income tax rate is 37%. Therefore, double taxation could cause the owner to pay taxes of 58% (21% + 37%).

A small business tax rate – How much are small business taxes? A small business tax rate does not actually exist and is why it’s so important to structure your company as the entity most suitable for you. If you’re trying to figure out how much are small business taxes for your business, you need to determine how you are structured. If you are a pass-through entity, you need to estimate your company’s profit and the rest of your gross income. Match that up after deductions to the personal income tax rates. If you are corporation, then the 21% tax rate will likely apply as well as your state corporate tax rate if applicable.

State Corporate Tax Rates – 44 states have one. Rates range from 2.5% in North Carolina to 11.5% in New Jersey. Missouri recently lowered its rate from 6.25% to 4%. Nevada, Ohio, Texas, and Washington have a gross receipts tax instead of corporate income tax on profits. South Dakota and Wyoming are the only two states that do not have a corporate income tax or a gross receipts tax.

Top small business tax deductions – consider these deductions both to help you’re your business and to offset profits.

  1. Car and Truck expenses if used for business purposes
  2. Salaries and Wages to employees
  3. Contract Labor – hiring freelancers
  4. Office supplies, postage
  5. Depreciation of certain business property, including section 179 deductions and bonus depreciation allowances
  6. Rent on business property
  7. Utilities and mobile phones
  8. Other taxes – real estate taxes, business property taxes
  9. Insurance – business owner’s insurance, business premise insurance, business continuation insurance, etc.
  10. Business Travel
  11. Advertising
  12. Home office
  13. Legal and Accounting fees
  14. Meals and Entertainment - As part of the Consolidated Appropriations Act signed into law in December 2020, the deductibility of meals is changing. Food and beverages will be 100% deductible if purchased from a restaurant in 2021 and 2022. It used to be more nuanced, generally at 50%.

I’ve learned a lot since co-founding our business about 16 months ago. The structuring and accounting were something I was familiar with, but I did not have the first-hand experience with it. It was paramount to have the experts advising us along the way and helping us understand “the why” to everything and making it happen. There have been tons of questions and learning, and I’m happy to share with anyone who is looking for some advice on starting a business. Don’t hesitate to reach out. -JCW

Read more information on Tax Strategies Services with One Bridge Wealth Management. Also check out our post on how to pick a wealth management firm.

 

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