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What Does Your Small Business Pay Taxes On? 

By March 15, 2024March 19th, 2024Tax Advice
An accountant using a calculator figuring out what does a small business pay taxes on.

Taxes—not the most exciting word to wake up to in the morning. But taxes are a fact of business life that every business owner must face and embrace. It is frequently said that “knowledge is power,” and knowledge is both powerful and necessary in knowing what each business must pay taxes on and when and how to pay them. 

How Much Do Small Businesses Pay in Taxes 

Accurate budget planning is necessary to achieve business success, and knowing how to plan for business taxes is a critical part of budget planning. Business taxes vary by business structure.

Sole proprietorships, limited liability companies (LLCs), and partnerships pay taxes at the personal rate of the owner(s) rather than as a separate corporate entity. For sole proprietorships, the average tax rate is 13.3%. For small S corporations, it is 26.9%, and for small partnerships, it is 23.6%, with an overall average of 19.8%. The percentage paid also varies by state. These states have no income tax: Wyoming, South Dakota, Alaska, Florida, and Montana.

What Must Each Business Pay Taxes On 

Here are the tax categories identifying what a business must pay taxes on: 

  1. Income tax. Small businesses that are not corporations will need to plan for tax rates that are tied to the tax rate of the business owner(s). 
  2. Self-employment tax. Small business owners will pay FICA tax which includes Social Security and Medicare taxes. 
  3. Payroll tax. Taxes must be calculated and withheld for each employee including federal income tax withholding and FICA.  
  4. Capital gains tax. If the owner’s business investments appreciate in value, or if a profit is made on selling business assets, taxes will be paid on the capital gain, and the rate will be based on whether the gain is short- or long-term. 
  5. Property tax. These taxes are paid on any land or buildings that the business owns. These taxes are levied by local governments. 
  6. Dividend tax. Dividends distributed as a portion of company profits will be taxed on how and when an investment is owned. 
  7. Sales tax. Sales tax is imposed by most states, some cities, and counties. A small business must collect sales tax and submit it to the appropriate taxing authority at their defined sales tax rates. 
  8. Excise taxes. Small businesses may be subject to taxes levied on specific goods and services. 
  9. Franchise taxes. Franchised businesses must pay a franchise tax in about a dozen states.

Best Practices for Business Tax Purposes 

Not only should a business owner know what their business must pay taxes on, but it is important to follow best practices including hiring the right accountant, properly recording and reporting all income to the IRS, keeping accurate records, and separating business from personal expenses. It’s important to correctly classify your business, properly manage all aspects of payroll, take advantage of all capitalization rules, and seek your accountant’s advice on your business plan. 

Seek Professional Accounting Assistance 

Contact Orcutt & Co., based in Milford, OH. We deliver comprehensive financial management for small business owners and individuals, providing strategic solutions that best address client needs and aspirations. Our comprehensive accounting services keep you organized and give you the data you need to make prudent business decisions including bookkeeping, payroll, and tax.