Every year, about 4 million new businesses are formed in the United States. Among them are coffee shops, eCommerce stores selling custom T-shirts, and local architecture consultants. One thing they all have in common is taxes. In fact, many new business owners wonder exactly how much they’ll have to pay in taxes. Many even wish they’d taken a crash course in small business tax.
So how much can a new business expect to pay in taxes? There are a few factors that affect the answer, but business owners don’t have to make wild guesses. Just knowing a business’s structure and location gives some insight. In fact, one of the best things a business owner can do is start early. By evaluating the different factors that affect tax liability, business owners can get a pretty good sense of what they’ll owe. This means it’s easier to start budgeting for payments. Then it’s a matter of building a system managing their business taxes.
It depends on how it’s built
How a business is set up can affect factors like how its run and its tax liability. It can even affect exactly which taxes apply to your business. The average federal tax rate for all small businesses is around 20%, but certain businesses are open to a broader range.
- Pass-through entities - Entities in this category pay between 10% and 37% in federal taxes. Entities in this category are taxed between 10% and 37%. About 95% of businesses in the United States are pass-through entities. These include sole-proprietorships, These include sole-proprietorships, partnerships, and S corporations. LLCs that have not chosen to be federally taxed as corporations also fall into this category.
- Corporations - Entities in this category pay a flat tax rate of 21% as of 2018. Only about 5% of businesses qualify for this category, including C corporations. However, it should be noted that corporations are open to double taxation. This is because corporations pay shareholders in dividends. Shareholders then pay taxes on those dividends. While many dividends are taxed at the shareholders' usual individual rates, qualified dividends can be taxed as capital gains, which fall into a lower 0%- 20% range.
| While no two businesses are exactly alike, there are some general factors business owners can use to estimate what they’ll owe in taxes.
It depends on how much income is made
Corporations are taxed federally at a flat rate. However, pass-through entities are taxes within a range. They fall within different brackets based on income after deductions. These brackets can be adjusted, so you’ll want to check with the IRS to stay up-to-date. For example, here’s the breakdown for the 2023 tax year:
Tax Rate | Individual Taxpayer | Married Couple Filing Jointly | |||||||
10% | income less than $10,000 | income less than $22,000 | |||||||
12% | income over $11,000 | income over $22,000 | |||||||
22% | income over $44,725 | income over $89,450 | |||||||
24% | income over $95,375 | income over $190,750 | |||||||
32% | income over $182,100 | income over $364,200 | |||||||
35% | income over $231,250 | income over $462,500 | |||||||
37% | income over $578,125 | income over $693,750 |
But income doesn’t just affect federal taxes. A business’s income could also be taxed by a state or local authority. Capital gains are also taxed differently than regular income. You’ll need to track the profits made from the appreciation of investments or the sale of assets.
It depends on what deductions are available
Lowering your business’s taxable income can reduce what you’ll owe in taxes. Business deductions allow you to do just that. For example, the Qualified Business Income (QBI) Deduction helps eligible pass-through entities deduct up to 20% of qualified business income. In general, this deduction applies to a business’s net income. There is a maximum total taxable amount. If you’re over the income limit, you may still be able to save money with this deduction. In certain circumstances, businesses in a specialized trade or service may still qualify even if they exceed the maximum income.
It depends on where the business is located
What a business pays in taxes isn’t just a federal issue. In many cases, a business will also pay at least some taxes at a state level.
- State corporate income tax - As of 2021, 44 states impose a corporate tax on corporations. North Carolina currently charges the lowest rate of 2.5%. The highest rate, 11.5%, is in New Jersey. Nevada, Ohio, Texas, and Washington don’t impose a state corporate income tax. Instead, they enforce a tax on a company’s gross sales without deductions for expenses. South Dakota and Wyoming are the only states that don’t levy a corporate income tax or a gross receipts tax.
- Sales tax - Currently, 45 states and the District of Colombia all enforce sales taxes. There are also many local jurisdictions that impose sales taxes. But even if your business is located in one of the few places that don’t have a set sales tax, you’ll have to abide by the laws anywhere your business has established a nexus. This can be especially complicated for eCommerce businesses, who need to navigate sales tax when selling online.
- Property tax - Finally, if your business owns property, you’ll probably owe property taxes. Property can include buildings, land, vehicles, and even the inventory that belongs to a business. And state and local authorities may collect real estate or business personal property taxes.
Tools that can help you estimate and manage your business taxes
Your business tax obligation will vary based on several factors. A business’s structure, location, and income amount all impact. Fortunately, there are some tools that can help. Because businesses must pay quarterly business taxes, the IRS offers a tool to help estimate what you owe. ComplYant can also help you manage your business taxes. You’ll be prepared for important tax filings, have the resources you need, and never miss a deadline.
For more information about calculating your business’s tax obligation and preparing to file your year-end taxes, check out the webinar, 5 Year-End Tax Strategies for Small Business Owners. And sign up for a free account with ComplYant to take control of your business taxes today.
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