Discover everything you need to know about small business taxes for new LLC owners, from common tax types and benefits to different tax rates by state.
Taxes are inevitable, no matter the type of business you run. But, you shouldn’t pay more than you have to, to Uncle Sam.
That’s why understanding small business taxes, even if you’ll hire a Houston tax preparer at the end of the day, is vital to managing and keeping your tax obligations minimal.
But, before we dive into what small business taxes are and the different types, let’s take a step back to clarify what a small business is first.
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Is Your Business Really A Small Business?
The Small Business Administration (SBA) defines a small business using three factors:
- Your company type
- Your average annual revenues
- Number of employees
While the specifics may depend largely on your industry, the SBA considers any business with fewer than 1,500 employees and an annual receipt that’s less than $38.5 million (as of 2023) small.
To qualify as a small business, you must satisfy any of these criteria. The SBA has size standards broken down by industry to make it easy for you.
Besides SBA’s definition, there’s another definition of what a small business is by another government agency, HealthCare.gov
If you hope to someday apply for or qualify for the Affordable Care Act program, you need to understand what the ACA (Obamacare) considers a small business.
According to the HealthCare.gov website, a small business is any entity with 50 or fewer full-time equivalent (FTE) employees.
FTE, as the site defined it, is any employee who works at least 30 hours per week.
Understanding Small Business Taxes
The taxes you pay depend primarily on how your business is structured, your industry, and whether you have employees.
Generally, there are four types of taxes you’ll pay:
Income Tax
This tax is probably the most common business tax for small businesses. Except for partnerships, all businesses must file an annual income tax return.
On the other hand, partnerships file an information return with the IRS using Form 1065. The information return shows details about the partnership’s revenue, expenses, and tax credits for the year.
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Self-Employment Tax
As a business owner, you pay a self-employment tax (SE tax) to the IRS for the income you generated working for yourself.
The SE tax is about 15.3% and has social security and Medicare components. The social security portion of the tax is 12.4%, which you only have to pay for the first $106,800 you earn.
Employment Taxes
Part of your tax obligations as an employer is the employment taxes, which are paid to cover social security and Medicare taxes, federal income withholding, and federal unemployment tax for your employees.
Excise Tax
Unlike the other types of taxes above, an excise tax is industry-specific. You may be required to pay excise tax because of the type of business you operate or the kinds of equipment and products you use or manufacture.
For example, if you sell fuel and cigarettes or operate a trucking company, you may have to pay excise taxes on the products or services.
Other Business Taxes You May Be Obligated To Pay
Besides the taxes above, your state and local municipal governments also levy additional small business taxes you’ll have to pay for operating within their borders.
While these taxes can vary depending on where your business is based, generally speaking, state and local taxes can include:
- Sales tax
- Real estate tax
- Business personal property tax
- Franchise tax
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Tax Benefits Of Owning a Small Business:
Owning a small business has its perks. Besides allowing you to be your own boss and control your schedule, it also has several tax benefits.
As a small business owner, you can write off a number of expenses as tax deductions to help lower the amount you owe the government.
Common tax write-offs you can make include:
Business Meals
As a small business owner, you can write off 50% of the cost of meals that are directly related to your business, such as meals with clients or employees.
Work-Related Travel Expenses
When you travel for work, expenses like airfare, lodging, meals, and transportation can be deducted as long as the trip is primarily for business purposes.
Work-Related Car Use
If you use your car for business purposes, you can deduct expenses such as mileage, parking, tolls, and maintenance. Just remember to keep accurate records.
Business Insurance
To protect your business, you can claim a deduction for insurance coverages paid for liability insurance, property insurance, and workers’ compensation insurance.
Home Office Expenses
If you work from home, you can claim a deduction for a portion of your home expenses, such as rent, mortgage interest, utilities, and insurance, based on the percentage of your home used for business.
Office Supplies
Pens, paper, toner, and other consumables used in the course of business can be written off as office supplies.
Business Loans and Interests
When you borrow money for business purposes, you can claim a deduction for interest paid on business loans, as well as other fees related to borrowing.
Utility Costs
You can claim a deduction for utility expenses, such as electricity, gas, water, and phone service, that are necessary for the operation of your business.
Marketing and Advertising
Expenses related to advertising and promoting your business, such as website development, print ads, social media advertising, and other marketing expenses, can be written off.
Employee Expenses
You can claim a deduction for expenses related to your employees, such as salaries, wages, benefits, and training.
Inventory
As a small business owner, you can claim a deduction for the cost of the inventory you purchase and sell as part of your business, such as raw materials, finished goods, and supplies.
Software and Website
You can claim a deduction for expenses related to software and website development, such as licensing fees, hosting fees, and design and development costs.
Keep in mind that technology expenses can add up, so it’s always good to keep track of them.
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Small Business Tax Rates By State
In the U.S., tax rates can vary significantly by state, from those that don’t levy any state-level taxes on small businesses to those with tough tax laws.
No state income taxes
If you’re in Alaska, Florida, Nevada, South Dakota, Texas, Washington, or Wyoming, you can breathe a little easier when tax time comes around since these states don’t impose any state income taxes on small businesses.
States with flat rate tax system
States like Illinois, Indiana, North Carolina, Kentucky, Massachusetts, Michigan, Pennsylvania, and Utah have flat tax rates for businesses – meaning you’ll be taxed at the same rate as other businesses, regardless of your size or revenue.
Graduated state tax rates
Then, there’s California, Colorado, Connecticut, Hawaii, Arizona, New Jersey, New Mexico, Minnesota, Maine, Maryland, Louisiana, Kansas, New York, Iowa, Oregon, Vermont, Rhode Island, Wisconsin, Ohio, Missouri, Vermont, Montana, Virginia, and Nebraska – that have a progressive tax system, where the tax rate increases as your income increases.
A hybrid state tax system
A few states, like Arkansas, Delaware, Georgia, Idaho, Mississippi, North Dakota, and South Carolina, operate a hybrid system where features of both flat and progressive tax systems are combined.
It’s also worth noting that some states have additional taxes or fees that small businesses may be subject to.
For example, New York has a Metropolitan Transportation Business Tax that applies to businesses operating in certain areas of the state.
And in addition to its state income tax, Pennsylvania also has a Capital Stock and Foreign Franchise Tax that applies to some businesses.
Final Thoughts on Small Business Taxes…
Overall, it’s important to do your research and understand the tax regulations in your state so you can plan accordingly.
Whether you’re just starting out or have been running your business for years, staying on top of your taxes can help you avoid headaches down the road.
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FAQs: Small Business Taxes For New LLC Owners, Sole Proprietors, & Self-Employed
How much should a small business set aside for taxes?
When it comes to setting aside money for taxes, it’s a good idea for small businesses to aim for 25-30% of their revenue.
Of course, the exact amount will depend on a variety of factors, but setting aside a portion of your income for taxes can help you avoid any surprises come tax time.
What percentage does a small business pay in taxes?
A general range is about 15-30% of your income. Though, the particular amount will depend on a few different things like your business’s structure, income, expenses, and location.
Remember that taxes can be complex, so it’s always a good idea to consult with a tax professional to ensure you’re paying what you owe while also taking advantage of any deductions or credits that may apply to your business.
What is the average small business tax rate?
According to the National Small Business Association, the effective tax rate for small businesses is usually around 19.8%. However, keep in mind that your specific tax rate may differ depending on your business’s individual circumstances.
When do I need to file small business taxes?
The deadline for filing small business tax returns depends on the business’s structure.
Sole proprietors and single-member LLCs usually have to file their tax returns by April 15th.
Partnerships and multi-member LLCs typically have until March 15th, and corporations have until either March 15th or April 15th (depending on whether they’re an S corporation or not).
How do I calculate taxes for my small business?
Generally, you’ll need to calculate your taxable income, figure out your tax bracket, and then subtract any deductions or credits that apply to your business.
It’s always a good idea to consult with a tax professional or use accounting software to make sure your taxes are calculated accurately.
