Small Business Bookkeeping, Payroll, and Taxes
December 19, 2024
Georgia Tax Planning Experts
December 19, 2024
The amount small businesses pay in taxes can vary significantly depending on several factors, including the business structure, revenue, location, and the nature of the business. Below is a breakdown of the main types of taxes small businesses in the United States typically pay:
1. Income Taxes
Income tax is one of the most common types of tax that businesses pay on their profits. The tax rate depends on the business structure and the amount of taxable income.
Sole Proprietorships, Partnerships, LLCs (Pass-Through Entities)
Pass-Through Taxation: In pass-through entities, such as sole proprietorships, partnerships, or LLCs (Limited Liability Companies), the business itself does not pay federal income tax directly. Instead, the income "passes through" to the owners' personal tax returns, and they pay taxes at the individual income tax rates.
Individual Income Tax Rates: For 2024, the federal income tax rates for individuals range from 10% to 37%, depending on income level.
- For instance, if your small business has $100,000 in net income, you would pay taxes on that income according to your personal income tax bracket, which could vary based on your other income sources (wages, investments, etc).
Example: If you're a sole proprietor and your business income is $80,000, that income is taxed at your personal tax rate, which could range from 12% to 24% depending on your total taxable income.
C Corporations
- Corporate Income Tax: A C Corporation is a separate tax entity, meaning it pays corporate income taxes on its profits. The corporate tax rate for C corporations is a flat 21% at the federal level (as of 2024).
- Additionally, when dividends are distributed to shareholders, they are taxed again at the individual level, which is known as "double taxation."
S Corporations
Like partnerships and LLCs, S Corporations (S Corps) are pass-through entities, so the business income is passed on to shareholders and taxed at individual rates. However, S Corps can provide certain tax advantages, such as the ability to reduce self-employment taxes on a portion of the income.
2. Self-Employment Tax
Small business owners who are self-employed (as in sole proprietorships, partnerships, or LLCs) must pay self-employment tax on their net earnings. This tax covers Social Security and Medicare contributions, which are typically withheld from employees' wages by employers.
- Rate: The self-employment tax rate is 15.3% on the first $160,200 of net income (for 2024). This is broken down into:
- 12.4% for Social Security (on income up to the limit).
- 2.9% for Medicare (no income limit).
- Additional Medicare Tax: If your net earnings exceed $200,000 (single) or $250,000 (married filing jointly), you may also be subject to an additional 0.9% Medicare tax on the excess earnings.
Example: If you earn $100,000 in net income from your business, you'll pay 15.3% (or $15,300) in self-employment taxes, in addition to income tax.
3. Sales Tax
If your business sells taxable goods or services, you may need to collect sales tax from customers on behalf of your state and local government.
Sales Tax Rates: Rates vary by state and local jurisdiction, typically ranging from 2% to 10%.
- For example, in Georgia, the statewide sales tax rate is 4%, but localities can add additional taxes, so the total rate may be as high as 8% or more.
Who Pays It: The business collects sales tax from customers and remits it to the state (and sometimes local governments). The business is not directly taxed on sales but must ensure it complies with local sales tax laws.
4. Property Taxes
- Small businesses may be subject to property tax if they own real estate or personal property (such as equipment, machinery, or inventory) used in their business operations.
- Who Pays It: Property taxes are typically assessed by local counties or municipalities. The rates and rules vary depending on the property’s location and its assessed value.
5. Payroll Taxes
If your small business has employees, you must withhold certain payroll taxes, including:
- Federal Income Tax Withholding: You must withhold federal income taxes from employees' wages based on their W-4 forms.
- Social Security and Medicare Taxes (FICA): Employers and employees each pay 6.2% for Social Security and 1.45% for Medicare, for a total of 7.65% each.
- Unemployment Taxes (FUTA and SUTA): Employers are also required to pay federal unemployment tax (FUTA) and state unemployment tax (SUTA). The FUTA tax rate is 6.0% on the first $7,000 of each employee's income, though businesses can often get a 5.4% credit, reducing the effective rate to 0.6%. SUTA rates vary by state.
6. Excise Taxes
Certain businesses are subject to excise taxes, which are taxes on specific goods or activities. This can apply to businesses involved in:
- Manufacturing, selling, or importing certain goods (e.g., gasoline, tobacco, alcohol).
- Operating heavy equipment (e.g., vehicles, air conditioning systems).
- Specific activities like indoor tanning or wagering.
Who Pays It: The business typically pays excise taxes, but may pass them on to consumers through higher prices.
7. Franchise Tax (State-Level)
- Some states impose a franchise tax or a business privilege tax on businesses for the right to operate in that state. This tax may be a flat fee or based on revenue, capital, or other measures.
- Georgia: In Georgia, for example, LLCs and corporations may be subject to a franchise tax, which is based on their net worth or the value of their assets in Georgia.
8. Other Potential Taxes
- State and Local Taxes: In addition to federal taxes, small businesses must comply with state and local tax laws, which can include things like business income tax, gross receipts tax, and various licensing fees.
- Use Tax: If you purchase goods for your business in a state that doesn’t charge sales tax, you may owe use tax in your home state on those goods.
How Much Do Small Businesses Pay in Taxes? Example
Let’s say you are a small business owner with a sole proprietorship in Georgia and you earned $100,000 in net income for the year. Here’s an estimate of the taxes you might owe:
- Federal Income Tax: If you're in the 22% tax bracket, you would pay approximately $15,000 in federal income tax.
- Self-Employment Tax: At 15.3%, you would owe $15,300 in self-employment tax.
- Georgia State Income Tax: Georgia’s state income tax rate ranges from 1% to 5.75% depending on income, so assuming you're in the 5.75% bracket, you might owe $5,750 in state income tax.
- Sales Tax: If you sell taxable goods, you must collect sales tax from customers, but this isn’t a tax on your business directly.
- Property Tax: If you own equipment or property, you will also have to pay local property taxes.
In total, assuming no other deductions or credits, you could be paying around $36,050 in income tax and self-employment taxes.
Conclusion
Small business taxes can be complex, and the specific amount a business will pay depends on factors like business structure, income, location, and business activities. For an accurate estimate of your tax liability, it’s recommended that small business owners consult with a tax professional or accountant who can help with tax planning, deductions, and filing.
Let me know if you want a more specific breakdown for a certain type of business or location!
