Taxes are a mandatory levy for every existing business, whether large or small corporations. In other words, it’s an obligation that a business owes to the state in which it operates. According to the Small Business Administration, small firms of all types pay an average federal tax rate of 19.8%, although the sole determining factor in the tax rate businesses pay remains the business entity structure. Your business entity influences which form you’ll need to file your federal income tax return and how much your business owes the government. Below, we’ve highlighted the federal tax rate for small business owners, particularly in California.
Small Business Tax Rate
Taxation is hard, and many small business owners don’t understand how their tax rate is calculated. Many business owners are unaware of the corporate income tax rate, what tax breaks are available to them, or what the term “pass-through revenue” really implies. A small business may be required to pay income tax, self-employment tax, employee taxes, and excise taxes. These, however, will vary based on the organization’s structure.
Tax rates, deductions, and related obligations for small businesses can change from year to year, and that’s why, as a small business owner, it’s important to stay current on tax rules so that you pay the correct amount each year.
The Federal Small Business Tax Rate
The main reason taxes are so difficult for small business owners is that there is no single “small business tax,” which means there is no single small business tax rate. People often think about the federal income tax and how it relates to their business when the issue of taxes is brought up.
Nevertheless, the federal income tax is only one of several taxes that a business may be obligated to pay. However, depending on your business structure, whether you have workers, or what products or services you provide to your clients or utilize to do business, your firm may have to pay one or more different taxes.
The amount of taxes that must be paid to the federal government by small businesses depends on different criteria. The level of income you get is always one of the most important factors, as is the type of business entity that your company is. But, the decision you make about how to organize your company might also have a significant impact on the amount of money you owe in back taxes to the Internal Revenue Service (IRS).
With that being said, we will examine business taxes from the perspective of the two primary categories, namely corporations and pass-through entities.
#1. Business Income Tax Rate for C-corporations (21%)
Because of the Tax Cuts and Jobs Act (TCJA), the federal income tax liability of C corporations is at a flat rate of 21% since 2018. Before 2018, C-corporations usually paid a tiered tax framework, with rates ranging from 15% to 35% of their annual revenue. Approximately only 5% of companies operating in the United States are classified as C corporations.
If your company is a regular C corporation for tax purposes, or if it makes the choice to be taxed as though it were, then you will pay a consistent rate of 21% on any net income that you generate. Your taxable income will be the amount of sales revenue that the expenses that are deductible legally did not affect. There is no longer a separate tax category for small businesses that applies to C corporations generally.
However, this low rate of income tax for a small business is only applicable at the entity level. If you pay yourself a salary, the money you take out of the business may be deducted as a valid business expense, but you will be required to pay individual income tax on the money you take out of the business in the form of a salary at the rate that applies to you personally.
#2. Business Income Tax Rate for Pass-Through Entitles (0%–37%)
A notable number of small businesses in the US today are structured as one kind of pass-through entity or another. Pass-through entities generally include S corporations, partnerships, limited liability companies (LLC), and sole proprietorships. All these entities share one certain thing in common, which is the fact that they normally do not have to pay any tax at the entity level.
However, in exchange, they will need to “pass-through” their taxable income to their shareholders, partners, or owners. By doing this, each of these parties on their own will then include that income on their tax returns. In other words, the pass-through requirement is a condition of the exchange.
As a general rule, the higher the tax rate on the income you earn through pass-through entities, the higher the taxpayer’s overall income. If you have a significant amount of money, whether it comes from your own company or other sources, you may find yourself subject to tax rates as high as the highest marginal tax bracket, which is now 37%.
2023 Personal Income Tax Rates
| Rates | Individual”s incomes | Couples Filling Jointly | Married Filling Seperately | Head of Household |
| 10% | $0 to $10,275 | $0 to $20,550 | $0 to $10,275 | $0 to $14,650 |
| 12% | $10,276 to $41,775 | $20,551 to $83,550 | $10,276 to $41,775 | $14,651 to $55,900 |
| 22% | $41,776 to $89,075 | $83,551 to $178,150 | $41,776 to $89,075 | $55,901 to $89,050 |
| 24% | $89,076 to $170,050 | $178,151 to $340,100 | $89,076 to $170,050 | $89,051 to $170,050 |
| 32% | $170,051 to $215,950 | $340,101 to $431,900 | $170,051 to $215,950 | $170,051 to $215,950 |
| 35% | $215,951 to $539,900 | $431,901 to $647,850 | $215,951 to $323,925 | $215,951 to $539,900 |
| 37% | $539,901 or more | $647,851 or more | $323,926 or more | $539,901 or more |
One might first think it would be profitable to be taxed as a C corporation because corporations pay a top tax rate of 21%, but people in the highest tax bracket pay a rate of 37% on their pass-through income. Nonetheless, in addition to lowering the corporation’s tax rate, the congress also helped create a new deduction for qualifying business income (QBI).
If you own a single pass-through business and your taxable income is at or below $170,050 (or $340,100 for a couple filing jointly), you are eligible for this 20% deduction on your 2022 taxes. However, the QBI deduction may be restricted to taxpayers whose income is higher than those thresholds.
Additional Small Business Taxes
Small firms are subject to a variety of taxes in addition to the federal income tax. Even the most comprehensive tax preparation software may not include all of these. But you must pay these taxes to avoid getting into trouble, no matter where you are in the world.
#1. Payroll Taxes
In addition to federal unemployment taxes, Social Security and Medicare taxes are also part of the payroll taxes. These taxes are referred to as “FICA” taxes because they were established by the Federal Insurance Contributions Act. The FICA tax rate is 15.3% of an employee’s gross pay, with 12.4% going toward Social Security and 2.9% going toward Medicare. Businesses that have employees are subject to this tax. The employee’s wages are reduced by an amount equal to half of the FICA rate, and the employer is responsible for the remaining amount.
Meanwhile, the federal unemployment insurance (FUTA) tax is the sole responsibility of the employer; it is not deducted from the employee’s paycheck. The Federal Unemployment Tax Act (FUTA) imposes a tax rate of 6% on the first $7,000 an employee receives in wages on an annual basis. However, employers might also be eligible for a tax credit of up to 5.4%, which could drop their FUTA tax rate down to as low as 0.6%.
In many pass-through businesses, even though the owners do not have employees, they must pay self-employment taxes, which are the equivalent of FICA taxes for self-employed individuals. The rate of tax for those who are self-employed is 15.3 percent.
#2. Sales Tax
You may need to collect sales tax and remit it to the appropriate state agency. This is if the location in which your company operates imposes taxes on the sale of goods and the provision of services. A majority of businesses can successfully pass many of the sales tax burdens onto their customers; nonetheless, there are situations in which the firm itself winds up having to meet the tax bill.
#3. Property Tax
Many times, small businesses are usually expected to pay state and local property taxes. In certain circumstances, the tax obligation solely applies to the real property that the company owns. While in some areas, a portion of the tangible property that the company possesses, such as office supplies and commercial equipment, is subject to taxation as well.
In either scenario, it is essential to submit the necessary paperwork to guarantee that you comply with the rules of the state and municipal tax authorities in your area.
#4. Excise Taxes
Small businesses are subject to excise taxes if they are to engage in any of the following activities:
- Produce or deal in particular goods, such as alcoholic beverages, cigarettes, and guns, among others.
- Run particular categories of enterprises, like as betting establishments on sporting events
- Utilize a wide variety of commodities, sorts, and types of equipment, facilities, and products, such as airplanes and heavy-duty trucks.
- Obtain compensation for the provision of specific services, such as tanning salon services or telephone services.
Even though small businesses are subject to excise taxes, the cost of these taxes is usually included in the price of products and services that customers are buying.
California Small Business Tax Rate
If you run a small business in the state of California, you need to be aware of the annual tax rate as you will be liable for a wide variety of taxes. Additionally, when paying federal income taxes, business owners in California must also pay a variety of different kinds of state taxes.
Contrary to the situation faced by the federal government, California does not struggle with the issue of double taxation. If you have income that is susceptible to pass-through taxation, this means that your business may be liable for both business taxes and personal taxes.
As of the year 2021, the Tax Foundation placed California in the position of having the second-worst overall tax burden on businesses in the United States. This, combined with the state’s generally high cost of living, makes it a challenging environment to launch a new enterprise in California.
Small Business Rate of the California Corporate Income Tax
Small businesses in California are yet to benefit from the lower rate of corporate tax in California. Although California is well-known for being the home to several different metropolitan areas that are diverse, active, and expanding, such as Los Angeles, Oakland, and Sacramento
Colleges and universities in these metropolitan areas consistently produce well-educated young adults. There are therefore a lot of intelligent people living in these cities, many of whom belong to the upper class and have a comfortable lifestyle.
Compared to other states, California is doing a better job luring entrepreneurs and small businesses to the state. The state of California imposes some of the highest corporate taxes of any other state in the United States. Many business owners have been forced to look for other states to incorporate their companies into because of the high taxes and onerous regulations that exist in their home state. States like Texas and Florida are examples of such states that are more business-friendly than others.
Different Types of Business Taxes in California
In the state of California, there are three different kinds of income taxes that companies need to be aware of
- Corporate tax
- Franchise tax
- Alternative minimum tax.
Nearly all commercial enterprises are obligated to pay at least one of these taxes, and the majority of those enterprises must pay more than just one of these taxes.
The corporate tax applies to both corporations and limited liability companies (LLCs). The California corporate tax rate for small businesses is approximately 9%, which is higher than the standard rate, and it is applied to the taxable net income of a company. However, corporations must also pay the alternative minimum tax (AMT), which is normally somewhere around 6.5%. It acts as a check on a company that is writing off expenses to lower the amount that it pays for corporate taxes. Although it’s not a must for corporations to pay the franchise tax, they have to pay the AMT.
All types of corporations, including S corporations, limited liability corporations, limited partnerships, and limited liability partnerships, are subject to the franchise tax. It prevents companies from attempting to reduce their taxable income to lower their overall corporate tax burden. Franchise taxes are often levied against companies that are not required to pay corporate taxes because they do not generate positive net earnings. This is because franchise taxes are considered an alternative to corporate taxes. The current California tax rate for a small business, which is 6.65 percent, is determined by federal regulations.
California Tax Rates for Small Business
The California tax rate for small business state income taxes are as follow:
| Rates | Single Filer/couples filling seperately | couples Filing Jointly/ Qualifying Widow(er) | Head of Household |
| 1% | $0 to $9,324 | $0 to $18,662 | $0 to $18,662 |
| 2% | $9,325 to $22,106 | $18,650 to $44,213 | $18,663 to $44,216 |
| 4% | $22,107 to $34,891 | $44,214 to $69,783 | $44,217 to $56,998 |
| 6% | $34,892 to $48,434 | $69,784 to $96,869 | $56,999 to $70,541 |
| 8% | $48,435 to $61,213 | $96,870 to $122,427 | $70,542 to $88,323 |
| 9.3% | $61,214 to $312,685 | $122,428 to $625,371 | $83,324 to $425,250 |
| 10.3% | $312,686 to $375,220 | $625,372 to $750,441 | $425,251 to $510,302 |
| 11.3% | $375,221 to $625,368 | $750,442 to $1,250,737 | $510,303 to $850,502 |
| 12.3% | $625,369 to $999,999 | $1,250,738 to $1,999,999 | $850,503 to $999,999 |
| 13.3% | $1,000,000 and above | $2,000,000 and above | $1,000,000 and above |
Conclusion
There is no single federal tax form or even a single tax rate that applies to all firms, which can make filing taxes for a small business more difficult than it has to be. Your choice of business entity structure will determine how you submit your federal taxes as well as the tax rate that applies to the income your small business earns.
Companies that are structured in the form of companies are subject to the corporate tax rate, which is now 21%. Other types of business formations, such as sole proprietorships, partnerships, and S corporations, are categorized as pass-through companies. This means that the revenue generated by these types of businesses is subject to the owner’s personal tax rate, which can range anywhere from 10% to 37%.
Small Business Tax Rate FAQs
What is the Average rate a Small Business have to Pay in Taxes?
According to the Small Business Administration, all sorts of small businesses will typically pay an average federal tax rate of around 19.8 %.
Do you pay the $800 California LLC fee for the first year 2023?
Under the terms of the budget bill that Governor Gavin Newsom approved and signed into law, individuals running LLC or partnership regarded as a small business in the state of California will not be required to pay the annual $800 minimum tax rate imposed on business entities during their first year of operation. However, the exemption will only apply to businesses that are established between the years 2021 and 2023.
What is the by state tax rate for small businesses?
The Tax Cuts and Jobs Act, in addition to other state tax laws, has led to modifications in several state income taxes. There isn’t an income tax in every state. According to research conducted by the Tax Foundation, a number of states have more favorable tax conditions for small businesses in comparison to other states.
Related Articles
- SOCIAL SECURITY TAX LIMIT: What is the Social Security tax limit for 2023?
- Corporate Accounting: Job Description and Salary
- HOW TO FILE BUSINESS TAXES FOR LLC: Where, When & Everything You Need to Know
- 401k Contribution Limits 2023: A Comprehensive Listing & All You Need(Updated)
- TAXABLE INTEREST: Meaning & How Taxable Interest Is Taxed
