Small Business Tax Rate Guide

As a small business, you’ll usually pay federal, state, and possibly local income taxes on your taxable net income. The tax rate varies based on your state, earnings, and business structure, such as whether you operate as a corporation or a pass-through entity.

There are many small business taxes, but this article will focus on the common ones: sales, use, and employee payroll taxes.

Understanding tax rates and their impact on your business will help you plan payments effectively and explore ways to maximize your tax savings. We’ll start with an overview of federal and state income taxes before moving on to sales, use, and payroll taxes like FICA. 

Federal income taxes for small businesses

You pay federal income taxes on your company's taxable income. Taxable income is the amount remaining after deducting business expenses, tax deductions, exemptions, and credits from your total revenue.

Some small businesses are taxed at a flat rate, meaning they pay a fixed percentage of their income regardless of how much they earn.

C-corporations are taxed at a flat rate 

For example, C-corporations are taxed at a flat federal rate of 21%.

Pass-through entities and others face tiered tax rates 

Other businesses face tiered (progressive) tax rates, meaning the tax percentage increases as income rises. For instance, sole proprietors and LLCs (taxed as pass-through entities) pay taxes based on individual income tax brackets, which increase with higher earnings.

When is it a pass-through entity?

You operate a pass-through entity if you have a: 

• Sole proprietorship
• S Corporation
• Partnership, or
• LLC that isn’t treated as a C corporation. 

"Pass-through" refers to a type of business that does not pay federal income taxes at the entity level. Instead, its income and losses are passed through to the owners, who report them on their personal tax returns.

Because the income flows directly to the owner, the business does not have a separate federal tax rate. Instead, the owner's personal income tax rate applies, which is determined by their filing status and total taxable income for the year.

The IRS updates tax brackets annually, with rates currently ranging from 10% to 37%.

For the tax year 2025, which applies to the income tax returns to be filed starting tax season 2026, the tax brackets look like this:

• 37%: for incomes over $626,350 
• 35% for incomes over $250,525 
• 32% for incomes over $197,300 
• 24% for incomes over $103,350 
• 22% for incomes over $48,475 
• 12% for incomes over $11,925 
• 10% for incomes $11,925 or less

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State income taxes for small businesses

As with federal income taxes, your small business can pay either state corporate or personal income tax rates based on the business structure and entity type.

Corporations

If your small business is treated as a C corporation for federal tax purposes, your state will likely do the same. Corporate rates currently apply in 44 states and range from 0% to 9.80%. They often vary by income, but several states charge flat rates.

Here is a sample of current corporate tax rates for some populous states:

While some states (like Ohio and Texas) don’t have corporate taxes, they may still charge taxes on gross business receipts. Plus, you might pay local corporate taxes in any state.

Pass-through entities

In most states, you’ll pay your standard personal income tax rate on your pass-through entity’s taxable business income. These rates currently range from 0% to 13.30%. However, some states, such as California and Ohio, require or offer a special business state tax rate.

Small business income tax rate for select states:

Some exceptions, including Texas, make certain pass-through entities pay franchise taxes instead. You’ll also want to check local tax rates in your county or city. 

Sales and use taxes

As mentioned at the beginning of the article, sales and use taxes are common, and most states require you to collect sales taxes from customers who purchase taxable services and goods. 

Sales tax is a tax added to the sale of goods and services. It’s usually a percentage of the purchase price and is included in the final cost.

If you make out-of-state purchases for your business, you might also owe use taxes on those goods. You must regularly remit these taxes to the state’s taxation agency.

Base sales and use tax rate for select states:

Your small business will often owe additional county or city sales and use taxes. Check with your locality for the latest rates and requirements.

Payroll taxes

If you have employees, you must also pay different federal, state, and local payroll taxes. Two of the most common examples include the Federal Insurance Contributions Act (FICA) and unemployment taxes.

FICA taxes

FICA taxes fund the Social Security and Medicare systems and total 15.3% of each employee’s eligible gross earnings. They’re allocated 2.9% to Medicare and 12.4% to Social Security. As the employer, you pay 7.65% and withhold the other 7.65% from your employees’ pay. 

However, Social Security taxes only apply to the first $168,600 each employee earns in 2024. Plus, you must withhold an extra 0.9% from your employees’ paychecks if they earn enough ($125,000 to $250,000 based on filing status) to owe the additional Medicare tax.

Unemployment taxes

Besides the FICA taxes, you’ll usually also contribute taxes to the federal and state unemployment systems that compensate eligible employees out of work. While the federal rate is 6% on the first $7,000 that each eligible worker earns, you could pay as little as 0.6% based on a tax credit received for contributions to your state’s system.

At the state level, employees pay part of the unemployment taxes in Alaska, Pennsylvania, and New Jersey. However, as the employer, you are fully responsible in other locations. Wage bases and minimum and maximum rates vary widely by state, and the type of employer and how long you’ve been in business can impact rates.

How to calculate your small business taxes

Small business taxes can be complex, so here is a simple example showing how you would calculate your state and federal income taxes based on two business structures: the C corporation and the sole proprietorship.

Assume you’re a single taxpayer and own a small business in Pennsylvania. Your taxable income is $75,000 after all expenses, exemptions, deductions, and credits. 

As a C corporation, your federal corporate tax for small businesses would be 21% of $75,000, which amounts to $15,750. Based on Pennsylvania's 8.49% corporate tax rate, you would owe an additional $6,367.50. That brings you to $22,117.50 owed in federal and state corporate income taxes.

However, if your business type were a sole proprietorship, where you’re taxed as an individual, your federal income taxes would follow the tax brackets and rates for individual taxpayers mentioned above.  

Again, your total taxable income is $75,000. In this example, that means: 

• 10% of the first $11,600 (which is $1,160)
• 12% of the next $35,550 ($4,266)
• 22% of the remaining $27,850 ($6,127)

This totals $11,553, and the Pennsylvania flat 3.07% personal income tax rate adds $2,302.50. Totaling your federal and state taxes at $13,855.50–much lower than with the C corporation.

Remember to always consult with an advisor on the best options in your individual case.

Maximizing your tax savings 

Besides understanding which taxes you need to pay, a way to maximize your tax savings is to: 

• Get an overview of your expenses and understand which are deductible.
• Get an overview of the IRS business tax deductions.
• Track your (deductible) expenses.

Common deductible expenses include rent, employee wages, meals, depreciation, advertising, business mileage, office supplies, and startup costs.

Tracking business expenses may seem tedious, but it’s essential for reducing taxes since many costs are deductible. When you deduct your expenses, you lower your taxable profit, which decreases the amount you owe.

Also read: Small Business Expenses - Maximize Your Deductions. 

IRS business tax deductions

Various write-offs can help you save on your taxes. For example, the QBI deduction, which stands for qualified business income, can give you up to a 20% tax break on your small business income.

It applies to many owners of sole proprietorships, partnerships, and S corporations. Learn who’s eligible for a QBI deduction now. 

The specific write-offs can change with new legislation and from state to state, so keep yourself updated. Check out our self-employment tax deductions guide to learn more.

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