How Much Do Small Businesses Pay In Taxes?

Every dollar counts when you run a small business. Revenue, expenses, and margins are all tracked closely. However, one area that often surprises business owners is how much they end up paying in taxes. When you’re self-employed, managing a small team, or operating across multiple states, understanding your tax obligation is key to protecting your profits.

In this article, we’ll outline the federal, state, and local taxes that apply to small businesses in the United States. You’ll learn which taxes apply to your business structure, how rates are calculated, and what tax planning steps can help reduce your total liability.

What Determines a Small Business’s Tax Bill?

There is no flat tax rate for small businesses in the U.S. What you owe depends on several variables:

• Business entity type (LLC, S Corporation, C Corporation, Sole Proprietorship)  
• Net income after deductions  
• Payroll and employment activity  
• State and local tax rules  
• Industry-specific taxes or fees  
• Available credits and deductions  

Each factor influences how income is taxed, which filings are required, and how often you need to pay. Let’s look at each component in more detail.

Federal Income Tax

The largest share of taxes paid by small businesses usually comes from federal income tax. This applies differently depending on how your business is structured.

Sole Proprietorships, Partnerships, and LLCs (Pass-Through Entities)

Most small businesses are structured as pass-through entities. This means the business itself doesn’t pay federal income tax. Instead, profits “pass through” to the owner’s personal tax return.

The IRS treats this income the same way it treats wages or investment earnings. You pay individual income tax on your business profits, not a separate corporate rate.

2025 Federal Income Tax Brackets (Single Filers)

Income Bracket	Tax Rate
0 to $11,600	10%
$11,601–$47,150	12%
$47,151–$100,525	22%
$100,526–$191,950	24%
$191,951–$243,725	32%
$243,726–$609,350	35%
Over $609,350	37%

Example:  If your LLC earned $120,000 in profit, and you filed as a single taxpayer, your business income would be taxed at rates up to 24%, depending on your total income.

S Corporations

S Corporations are also pass-through entities, but they offer tax advantages when structured correctly. Business owners who are also employees can split income between salary and profit distributions, potentially lowering payroll tax liability.

C Corporations

Unlike other structures, C Corporations pay taxes on business profits separately from owners. The current federal corporate tax rate is 21%. If the corporation pays dividends to shareholders, those are taxed again at the individual level. This creates what’s often called “double taxation,” although with careful planning, C Corps can still be beneficial depending on the business goals.

Self-Employment Tax

If you are a sole proprietor, partner, or LLC member, you are required to pay self-employment tax. This covers your contribution to Social Security and Medicare. The 2025 rate is currently 15.3%, with 12.4% for Social Security and 2.9% for Medicare. This tax applies to net business income, not gross revenue.

Example: If you earned $90,000 in net profit from your business, your self-employment tax would be $13,770 in addition to your federal income tax. You can deduct half of your self-employment tax from your taxable income, but the full amount must still be paid.

State Income Taxes

Most U.S. states impose income taxes on either the business itself or the individual business owner, depending on the entity type. These state-level taxes are separate from federal obligations and vary significantly in how they are calculated, reported, and paid.

Business Structure Determines Who Pays

For pass-through entities (including sole proprietorships, partnerships, S corporations, and most LLCs), income is reported on the owner’s individual tax return. In these cases, the owner pays state personal income tax on their share of the business profits, even if those profits are not withdrawn from the business.

For C corporations, the business pays tax directly to the state on its net income at the corporate tax rate. If the corporation then distributes dividends to shareholders, those dividends may also be taxed on the individual level, depending on the state.

Common State Income Tax Models

Each state follows its own model for taxing income. Understanding your state’s approach is important for estimating your total tax liability and managing cash flow throughout the year.

Flat-Rate States

In flat-rate states, all taxable income is taxed at the same percentage, regardless of income level. This simplifies calculations and makes forecasting more predictable. Below are some examples.

State	Flat Rate Tax (2025)
Colorado	4.40%
Michigan	4.25%
Utah	4.65%
North Carolina	4.50%

Flat-rate states are generally easier to plan for, but they don’t always offer the same range of deductions or credits as states with graduated systems.

Graduated Bracket States

These states use a tiered tax system where the rate increases as income rises. Business owners with higher profits typically pay a higher effective rate.

State	Income Tax Range (2025)
California	1.00% to 13.30%
New York	4.00% to 10.90%
New Jersey	1.40% to 10.75%
Minnesota	5.35% to 9.85%
Oregon	4.75% to 9.90%

In these states, a business owner earning $300,000 may face a significantly different tax bill than one earning $60,000, even with similar expenses.

No Income Tax States

These states do not impose any state-level income tax on individuals or pass-through business income.

Examples:

• Texas  
• Florida  
• Washington  
• Wyoming  
• South Dakota  
• Nevada  
• Alaska  

While these states don’t tax personal or business income, they often generate revenue in other ways. For example, Texas applies a franchise tax based on gross receipts, and Washington imposes a business and occupation (B&O) tax on revenue.

Additional State-Level Considerations

Beyond basic income tax, several other factors affect your state tax obligations:

• Nexus Rules: If your business operates, sells, or has employees in multiple states, you may be subject to income tax in more than one jurisdiction. This is determined by nexus, which is established through physical presence, economic activity, or both.
• State Minimum Taxes: Some states impose a minimum annual tax or fee regardless of profit. For example, California requires most LLCs to pay a minimum franchise tax of $800 per year, even with zero income, while Illinois requires an annual franchise tax report and payment from corporations based on capital stock.
• Composite Returns and Withholding: In certain states, partnerships and S corporations may need to file a composite tax return on behalf of nonresident owners or withhold state income tax on distributed profits.
• Credits and Incentives: Some states offer tax credits or deductions for small businesses that invest in new equipment, hire employees, or operate in designated economic zones. These can reduce your total tax burden if planned properly.

State Model	Who Pays	Complexity	Planning Considerations
Flat Rate	Business owner or corporation	Low	Predictable, fewer deductions
Graduated Brackets	Business owner or corporation	Medium to High	Requires income modeling
No Income Tax	N/A	Low to Medium	Monitor for franchise or gross receipts taxes

Understanding your state’s tax structure is key to setting aside the correct amount throughout the year and avoiding penalties. At USA Tax Gurus, we help businesses operating in multiple states manage these differences.

Payroll Taxes

If you have employees, you are responsible for several payroll-related taxes:

• Employer share of Social Security (6.2%)  
• Employer share of Medicare (1.45%)  
• Federal Unemployment Tax (FUTA)  
• State Unemployment Tax (SUTA)  
• State-specific payroll assessments

These taxes are paid separately from employee withholdings and are calculated based on wages. Businesses with multiple employees or a high payroll burden should plan for payroll taxes as a major recurring expense.

Sales Tax

If you sell taxable goods or services, you are responsible for collecting and remitting sales tax. Each state sets its own rate and defines what is taxable. Many states also allow cities or counties to add local sales tax on top of the state rate. For example, in Los Angeles, California, the combined sales tax rate is 10.25%, which includes state, county, and city components.

Online sellers or service providers may also have economic nexus in multiple states, which means they are required to collect sales tax based on the location of the customer, even without a physical presence.

Excise Taxes and Industry-Specific Fees

Some businesses are subject to federal or state excise taxes. These are typically imposed on products like:

• Fuel  
• Alcohol  
• Tobacco  
• Firearms  
• Transportation services  
• Communications

If your business operates in a regulated industry or sells taxable goods, excise taxes must be included in your pricing and financial planning.

Estimated Taxes and Filing Frequency

Small business owners must often pay estimated taxes quarterly, not annually. These estimated payments cover income and self-employment tax.

Payment Period	Income Earned	Estimated Tax Payment Due
1st Quarter	January 1 – March 31, 2025	April 15, 2025
2nd Quarter	April 1 – May 31, 2025	June 16, 2025 (due to Sunday)
3rd Quarter	June 1 – August 31, 2025	September 15, 2025
4th Quarter	September 1 – December 31, 2025	January 15, 2026

Notes: If the due date falls on a weekend or federal holiday, it moves to the next business day.

These deadlines apply to federal estimated tax payments for both income tax and self-employment tax. C corporations follow a different schedule depending on their fiscal year-end.

Who Needs to Pay Estimated Taxes?

You must make estimated payments if:

• You expect to owe $1,000 or more in tax after subtracting withholding and credits.
• Your business income is not subject to regular withholding (common for LLCs, sole proprietors, S corps).

How Much Do Small Businesses Actually Pay?

While the exact tax burden varies by industry and entity, here are general estimates based on national data and common structures:

Business Type	Average Total Tax Rate (Federal + State + Payroll)
Sole Proprietorship	25%–30% of net income
LLC (Single Member)	25%–30% of net income
S Corporation	20%–28% of net income (after salary optimization)
C Corporation	21% on profits + 15%–23.8% on dividends

Example: A small business earning $120,000 in net profit might pay:

• $28,800 in federal income and self-employment tax  
• $6,000 in state income tax (depending on location)  
• $1,800–$3,000 in payroll taxes (if hiring employees)  

Total tax burden: $36,600–$38,000, or approximately 30%–32% of net income.

What Affects How Much You Pay?

Several factors impact your total tax liability:

• Business Structure: The way your business is set up (LLC, S Corp, or C Corp) directly affects how profits are taxed and whether you owe self-employment tax.
• Income Distribution: S Corporation owners can pay themselves a reasonable salary and take the rest of their income as distributions, which are not subject to self-employment tax.
• Deductible Expenses: Tracking and maximizing deductible expenses reduces taxable income. This includes mileage, home office use, software, marketing, and retirement contributions.
• Retirement Planning: Contributing to a Solo 401(k), SEP IRA, or defined benefit plan can lower current tax liability while building future wealth.
• Accountable Plans: Reimbursing yourself for business expenses through an accountable plan keeps income lower without losing deductions.
• Tax Credits: Certain credits, such as the R&D credit, work opportunity credit, or small business healthcare credit, can reduce your final tax bill.

How a Tax Advisor Helps You Pay Less

Tax laws are complicated, and planning once a year is not enough. A tax advisor or virtual CFO helps you:

• Forecast your tax obligations  
• Plan distributions and payroll  
• Use deductions strategically  
• Avoid underpayment penalties  
• Optimize entity structure  
• Stay compliant with federal and state rules

At USA Tax Gurus, we work with service-based small businesses to reduce tax liabilities, manage compliance, and create year-round tax strategies. Our CPAs and enrolled agents provide personalized planning that meets your revenue goals, not just your filing deadlines.

Reduce Your Business Taxes With Help From Professional CPAs

Small businesses in the U.S. can expect to pay between 25% and 30% of their net income in taxes once federal, state, and payroll obligations are factored in. This percentage varies depending on your business structure, location, revenue, and planning.If you’re unsure how much you should be paying (or if you’re paying more than necessary), it’s time to get help.  At USA Tax Gurus, we help business owners lower their tax liability with smart planning, real-time tracking, and proactive support. To learn more, book a meeting with us today or call (213) 212-2210.