Income Tax Rate for C-Corporations
All C-corporations pay a flat 21% tax rate on net business income.
Income Tax Rates for Pass-Through Entities and Sole Proprietorships
The federal small business tax rate for pass-through entities and sole proprietorships is equal to the owner’s personal income tax rate. For the 2019,2020 (and 2021) tax year, personal income tax rates range from 10% to 37% depending on income level and filing status.
New 20-percent deduction for pass-through businesses
Section 199A of the Internal Revenue Code provides many owners of sole proprietorships, partnerships, S corporations and some trusts and estates, a deduction of income from a qualified trade or business. The deduction has two components.
QBI Component. This component of the deduction equals 20 percent of QBI from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate. Depending on the taxpayer's taxable income, the QBI component is subject to multiple limitations including the type of trade or business, the amount of W-2 wages paid by the qualified trade or business and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business. It may also be reduced by the patron reduction if the taxpayer is a patron of an agricultural or horticultural cooperative. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction.
REIT / PTP Component. This component of the deduction equals 20 percent of the combined qualified REIT dividends (including REIT dividends earned through a regulated investment company (RIC)) and qualified PTP income. This component is not limited by W-2 wages or the UBIA of qualified property. Depending on the taxpayer's income, the amount of PTP income that qualifies may be limited depending on the type of business engaged in by the PTP. More Details
States corporate tax rate
Most states set a corporate tax rate in addition to the federal rate.
But, not all states levy a corporation tax rate. South Dakota and Wyoming do not have state corporate income taxes. Nevada, Ohio, Texas, and Washington levy gross receipts taxes instead of corporate taxes.
Types of Small Business Taxes
Federal and/ or Income Tax
If you have employees, you are responsible for paying employment taxes, also called payroll taxes, on their wages.
Employment taxes include social security taxes, Medicare taxes, and unemployment taxes.
Social Security Tax: 12.4% on wages paid up to $145,600 for 2021 (up from $142,800 in 2021). Employers pay half of this amount (or 6.2%), while the other half is deducted from the employee’s wages. If you’re self-employed, then you pay the full amount as part of your self-employment taxes.
Medicare Tax: 2.9% of all wages paid to an employee (no wage threshold), with the tax split between employer and employee. There are additional Medicare withholding requirements for employees who make over $200,000 per year.
Federal Unemployment Tax: 6% of the first $7,000 you pay to an employee. You can usually take a credit against this tax if you’ve paid state unemployment taxes.
State Unemployment Tax: Each state charges its own state unemployment taxes. What factor decide your company rate: typically depends on the size and age of your company, the industry, the historical rate of turnover at your company, and how many of your former employees have applied for unemployment benefits.
If your business is in a certain type of industry or sells certain types of products or services, you might be responsible for excise taxes on these transactions and activities. An excise tax is an indirect tax, meaning it isn’t directly paid by the consumer of the product.
Sales and Use Tax
There’s no federal sales tax in the U.S., but 45 states and thousands of localities levy sales tax. Business owners are responsible for calculating, collecting, and reporting sales tax to local and state governments.
If you own commercial property, land, or a brick-and-mortar location, then you’ll have to pay a business property tax to the city or county where the real estate is located.
Independent Contractor (Self-Employed) or Employee?
It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors.
Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.
Determining Whether the Individuals Providing Services are Employees or Independent Contractors
Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be -
An employee (common-law employee)
In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.
Common Law Rules
Facts that provide evidence of the degree of control and independence fall into three categories:
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Understand the various types of taxes you need to deposit and report such as, federal income tax, social security and Medicare taxes and Federal Unemployment (FUTA) Tax.
Depositing and Reporting Employment Taxes
You must deposit federal income tax and Additional Medicare Tax withheld and both the employer and employee social security and Medicare taxes. You also must report on the taxes you deposit, as well as report wages, tips and other compensation paid to an employee.
You must deposit and report your employment taxes on time.
"X" forms are used to report adjustments to employment taxes and to claim refunds of overpaid employment taxes.
Updating Your Business Address
There are several ways to notify the IRS that your address has changed.