The United States tax system is complex and can be especially daunting for small business owners to navigate. There are many moving parts to the US tax code, and keeping track of everything can be difficult, especially if you’re running a business.
That said, there are general trends regarding how much tax small businesses pay. In this article, we’ll break down the different types of taxes that small businesses typically owe, and we’ll give you an idea of how much you can expect to pay in taxes each year.
Types of Taxes that Small Businesses Pay
As a small business owner, you’re probably well aware of the many different taxes you must pay. But do you know how much tax your small business pays? According to a report by the National Small Business Association (NSBA), the average small business spends $9,662 annually on federal taxes. That’s a significant amount of money.
And it’s not just federal taxes that small businesses have to worry about. They also have to pay state and local taxes and self-employment taxes. The NSBA estimates that small businesses pay an average of 30.2% of their profits in taxes each year.
So, how does your small business tax bill stack up?
The first step in understanding your small business’s tax burden is knowing which taxes you’re responsible for paying. There are a few different types of taxes that businesses must pay, and which ones you owe will depend on the structure of your business.
Here’s a look at the different types of taxes small businesses have to pay and how much they typically pay in each type of tax.
The most common types of taxes that small businesses pay are:
- Income tax
- Payroll tax
- Self-employment tax
- Property tax
- Sales tax
- Use tax
Income Tax
All businesses must pay income tax on their profits. The amount of income tax you owe will depend on your business’s profitability and structure.
You’ll pay personal income taxes on your business profits if you operate as a sole proprietorship. If you have a partnership or LLC or are looking to start an LLC in Florida or any other state, you’ll pay taxes on your share of the profits. And if you have a C corporation, the corporation will pay taxes on its profits, and then you’ll also pay taxes on the dividends you receive from the corporation.
The tax rate for business income varies depending on how much profit your business generates. The federal government imposes a progressive tax rate on business income, which means that businesses with higher profits will pay a higher tax rate than businesses with lower profits.
For example, the tax rate for businesses with taxable income between $0 and $50,000 is 15 percent. But for businesses with taxable income of more than $10 million, the tax rate jumps to 35 percent.
Payroll Tax
If you have employees, you’re also responsible for paying payroll taxes. The Federal Insurance Contributions Act (FICA) tax is the most common payroll tax, which funds Social Security and Medicare.
The FICA tax consists of the Social Security tax and the Medicare tax. The Social Security tax is a flat tax of 6.2 percent, and the Medicare tax is a flat tax of 1.45 percent.
Employers are responsible for paying half of the FICA taxes, and employees are responsible for paying the other half. So, if you have employees, you’ll need to withhold the employee portion of the FICA taxes from their paychecks and then pay both your share and your employees’ share to the IRS.
In addition to the FICA tax, employers must also pay federal unemployment taxes. The federal unemployment tax rate is 6 percent on the first $7,000 of each employee’s wages, for a maximum tax of $420 per employee per year.
State unemployment tax rates vary, but they’re typically around 1 to 5 percent of an employee’s wages.
Self-Employment Tax
If you’re self-employed, you’re responsible for paying the entire FICA tax yourself. This is because no one else can withhold the taxes from your paycheck—you are your employer.
The self-employment tax rate is 15.3 percent (12.4 percent for Social Security and 2.9 percent for Medicare). This may seem like a high tax rate, but it’s lower than the FICA tax rate for employers.
This is because employers are only responsible for half of the FICA tax, while self-employed individuals are responsible for the entire tax. So, while the self-employment tax rate is higher than the employer portion of the FICA tax, it’s still lower than the overall FICA tax rate when you include both the employer and employee portions.
Property Tax
If you own your business’s property (e.g., office space, warehouse, etc.), you’re also responsible for paying property taxes. Local governments usually levy property taxes, and the tax rate will vary depending on the location of your property.
The amount of property tax you owe will depend on the value of your property. For example, if your business owns a $500,000 office building, you can expect to pay around $5,000 in property taxes yearly.
Sales Tax
If you sell products or services subject to sales tax, you’re responsible for collecting sales tax from your customers and then paying it to the government.
The sales tax rate varies depending on the state and location of your business. For example, the sales tax rate in New York City is 8.875 percent, while the sales tax rate in nearby Nassau County is only 4 percent.
Businesses that sell taxable products or services must obtain a sales tax license from their state and then collect sales tax from their customers when they make a sale. The businesses are then responsible for remitting the collected sales taxes to the government.
Other Taxes
There are other taxes that businesses may be responsible for, depending on the type of business and its location. For example, employers in some states are required to pay disability insurance taxes, and businesses that sell alcohol or tobacco products may be responsible for excise taxes.
Final verdict
As you can see, there are various taxes that small businesses must pay. The amount of tax you’ll owe will depend on the type of business you have, your location, and your income. However, the average small business pays around $8,000 in taxes yearly. It’s important to research the tax requirements for your specific business to ensure you comply with all applicable laws. The best way to stay compliant is to work with an accountant or tax professional who can help you navigate the tax laws and ensure you’re paying all your taxes.
So if you’re considering starting a small business, be sure to factor taxes into your budget.
