Small businesses are an important driver of the US economy. According to the Small Business Administration, approximately 30 million small businesses operate in the country, making small businesses the vast majority of employer firms in the country. These businesses provide jobs to about 58.9 million workers.
There’s no one definition of a small business. A business’s small-ness varies by industry. What makes a business small depends on size standards, which mostly based on the average annual receipts or the average number of employees.
Small Businesses Tax Rates
Most small businesses are not corporations; about 90% of them are pass-through entities, according to the National Federation of Independent Business. What this means is that the owners of these businesses report business income on their personal taxes. They pay no taxes themselves at the business level.
President Trump’s Tax Cuts and Jobs Act, which was signed in December 2017 and went into effect in 2018, brought some changes in how small businesses pay taxes. The act was designed to simplify the federal tax code and give entrepreneurs larger tax returns through individual income tax rate cuts and by doubling the standard deduction.
The Small Business Deduction (Section 199A) allows small businesses that are organized as pass-through entities to deduct up to 20% of their taxable income from an S-Corporation, LLC, sole proprietorship, or partnership.
Payroll Tax
Apart from income taxes, employers are required to shoulder a portion of payroll taxes. These payroll taxes are an added expense over and above the expense of an employee’s gross pay. The employer’s portion of this tax includes 6.2% of Social Security taxes, 1.45% of Medicare taxes, federal unemployment taxes (6% on the first $7,000 of income for each employee), and state unemployment taxes (rate varies by state).
Capital Gains Tax
A capital gains tax paid on the profit made from the sale of an investment. The tax you are required to pay on a capital gain depends on how long you held the asset before selling it. Long-term capital gains rates are taxed at different, generally lower rates, but to qualify for these rates, you need to hold on to an asset for more than one year.
Property Tax
Businesses are required to pay real estate taxes on the assessed value of their property. If you own real estate in your business, you are required to pay property tax on that property. If the property is sold, the business property tax is divided between the former and the new owners for the year. If you buy real estate for your company, the property will be registered with the local taxing authority and you will be notified about increases in your assessed value and the amount of tax that you owe for that period.
Dividend Tax
Dividends are the profit that a corporation pays to its shareholders. All dividends are taxable and all dividend income must be reported. Dividends are commonly distributed as cash, but they may also come in the form of stocks, debt payments, property, and other forms.
State Tax
Most US states collect a state income tax on top of the federal income tax. In addition, several local governments impose their income taxes based on state income rates.
The highest state income tax rates in the US are imposed by California, Hawaii, Oregon, Minnesota, and New Jersey. Seven states, however, have no income tax, namely, Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Nine states have flat taxes, where everyone pays the same percentage.
Overall, how much you will pay as a small business will ultimately depend on where you are in the country.
Need Help with Your Small Business Taxes?
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