Guide to small business tax rates

Navigating small business taxes can be challenging, but understanding how your business structure affects the tax rate you pay is key to successful financial planning. Whether you're operating as a sole proprietorship, partnership, or corporation, knowing the specifics of tax brackets, deductions, and credits can help you minimize your tax liability.

This guide will cover how small business tax rates vary by business structure, federal vs. state taxes and their impact on your business, and practical tips to lower your tax burden and increase savings.

What is the small business tax rate?

The small business tax rate refers to the percentage of your business income that you pay in taxes. This rate depends on the business structure you choose and where your business is located.

C corporations are taxed at a flat 21% corporate tax rate. Pass-through entities, such as sole proprietorships, LLCs, and S corps, are taxed at the owner’s personal income tax rate. That rate ranges from 10% to 37%, depending on income.

For example, if you’re a sole proprietor earning $100,000, the federal income tax will be calculated based on your personal tax bracket, which could range from 10% to 37% in 2025, depending on your taxable income.

Federal vs. state business tax rates

Your small business tax rate doesn’t solely depend on federal taxes. Many states impose their own income taxes. Some states have no income tax at all, while others may have high rates.

For instance, California applies a progressive tax on income, ranging from 1% to 13.3%, while Florida doesn’t have a state income tax. However, Florida businesses may still face franchise taxes.

It’s especially important to consider state-specific tax laws as you decide where to establish your business. States with no income tax, such as Texas and Wyoming, may offer advantages depending on your business model, but other states may have specific franchise taxes or gross receipts taxes.

Business tax by structure

Your business structure significantly impacts how you’re taxed and how much you pay in business taxes. The IRS treats each structure differently, and understanding these distinctions can save you money.

How to calculate your taxes

To calculate your business tax liability, follow these steps:

1. Identify your business structure: Determine whether you’re a C corp, S corp, LLC, or sole proprietorship
2. Calculate your taxable income: Subtract deductions for business expenses such as office supplies, equipment, and employee wages from your gross income
3. Apply the relevant tax rate: If you're a C corp, apply the 21% corporate tax rate. If you're a pass-through entity, apply your personal income tax rate based on your taxable income
4. Account for self-employment taxes for sole proprietors and LLCs: These can be 15.3% of your net income
5. Include state taxes: After calculating your federal taxes, factor in any state income taxes or franchise taxes

Tax calculation example

For a sole proprietor with $100,000 in taxable income in 2025, their federal tax would be calculated as follows:

• 10% on the first $11,925 = $1,192.50
• 12% on the next $35,225 (from $11,926 to $47,150) = $4,227
• 22% on the remaining $52,850 (from $47,151 to $100,000) = $11,627

Total federal tax = $17,046.50, plus state taxes.

Maximizing tax savings

Small business owners can use a variety of strategies to reduce their tax burden. One of the most effective ways is to maximize tax deductions and credits.

For instance, home office deductions allow you to deduct a portion of your home’s expenses if you use part of it exclusively for business. Similarly, you can deduct business mileage through proper mileage reimbursement, equipment purchases, and other necessary business expenses such as office supplies or advertising.

Tax credits such as the qualified business income (QBI) deduction allow you to deduct up to 20% of your business income if you qualify. This is a valuable tool for pass-through entities like LLCs and S corporations.

To further reduce your tax liability, maintaining thorough records is essential, and automated expense reporting can help streamline this process. Business accounting software can help you track deductions year-round, making it easier to file at tax time and avoid missing any potential savings.

Additional small business taxes to note

In addition to income taxes, small business owners face several other tax obligations. These taxes vary depending on your business structure and type of business operations. Below are some of the most common taxes small business owners need to be aware of:

Payroll taxes

If you have employees, you must withhold federal income tax from their paychecks and contribute to Social Security and Medicare taxes, collectively known as FICA taxes. As an employer, you’re responsible for both withholding the employee’s share of FICA and contributing your own share.

This means the total FICA tax rate for your employees is 15.3%, split evenly between the employer and the employee. The breakdown is:

• 12.4% for Social Security (on income up to $160,200 for 2025)
• 2.9% for Medicare (on all income)
• An additional 0.9% Medicare tax applies to income above $200,000 for single filers and $250,000 for married couples filing jointly

Failure to comply with IRS payroll tax rules can result in significant penalties, so it’s important to stay on top of your payroll tax obligations. As an employer, you are required to report and pay FICA taxes regularly, typically either monthly or semi-weekly, depending on your payroll size. With that in mind, payroll automation is a valuable consideration for compliance.

Self-employment taxes

Self-employed individuals, including owners of sole proprietorships and LLCs, are responsible for paying both the employer’s and employee’s portion of FICA taxes. This is often referred to as the self-employment tax. The total self-employment tax rate is 15.3% on net earnings, which includes:

• 12.4% for Social Security (on income up to $160,200 for 2025)
• 2.9% for Medicare (on all income)
• An additional 0.9% Medicare tax applies to net earnings above $200,000 for single filers and $250,000 for married couples

While self-employment tax can feel like a significant burden, there’s good news: You can deduct half of your self-employment tax on your income tax return to reduce your taxable income. Keep in mind that these taxes apply whether or not you draw a salary or take profits from your business. Self-employed individuals must file Schedule SE (Form 1040) to calculate and report their self-employment taxes.

Excise taxes

Excise taxes are specific taxes imposed on certain goods and activities, such as alcohol, gasoline, tobacco, or airline tickets. If your business deals with any of these products or services, you may be required to pay excise taxes.

There are federal excise taxes and state excise taxes, which can vary depending on your location and business type. For example, if you sell gasoline, you'll need to pay a federal excise tax of 18.4 cents per gallon. If your business operates in certain industries, such as transportation or telecommunications, you may be required to pay excise taxes specific to those services.

The IRS requires businesses to file excise tax returns regularly, depending on the type of tax. Some businesses may be subject to specific excise taxes that apply to their operations, so it’s important to consult with a tax professional to ensure compliance with all relevant excise tax regulations.

Other taxes for small businesses

In addition to the taxes mentioned above, there are other tax obligations that may apply to your small business, depending on your operations and business model:

• Sales tax: If your business sells products or certain services, you may be required to collect and remit sales tax to your state or local tax authority. The rate varies depending on the state, and some states may also impose local sales taxes.
• Property tax: If your business owns real estate or certain other tangible assets, such as equipment or inventory, you may be subject to property tax. Local governments typically assess property taxes based on the value of the property and charge an annual fee.
• State and local taxes: Depending on where your business operates, you may be subject to various state and local taxes. These can include business license fees, gross receipts taxes, or local business taxes that vary by city or county.

Understanding these different types of taxes means small business owners can better plan for tax liabilities and avoid costly mistakes, including common accounting mistakes that can trigger audits. Always consult with a tax professional to stay compliant with both federal and state tax laws, and consider when to hire an accountant to handle complex tax situations.

Tax considerations for e-commerce and foreign businesses

If your business operates internationally or in e-commerce, you’ll need to follow additional tax rules:

E-commerce tax law

With the continued rise of online sales, nexus laws have become increasingly important for e-commerce businesses. These laws determine whether a business has a taxable presence in a state. If your business sells products across state lines, you may be required to collect and remit sales tax in states where you have a physical presence or economic nexus.

Economic nexus occurs when a business reaches a certain level of sales or transactions in a state, even if they don’t have a physical presence there. For example, South Dakota v. Wayfair, Inc. (2018) established that states could require online retailers to collect sales tax if their annual sales exceed $100,000 or if they have 200 transactions in the state.

Taxes for foreign businesses

For businesses operating internationally, foreign income can be subject to taxes both in the U.S. and in the country where the business is based or maintains operations. The U.S. tax system taxes its citizens and residents on worldwide income, so if your business earns money abroad, you will likely need to report that income on your tax return.

Additionally, many countries impose their own corporate income taxes on foreign earnings. To avoid double taxation, the U.S. has treaties with various countries that may offer tax relief through mechanisms such as the foreign tax credit. This allows you to offset some of the taxes paid to foreign governments against your U.S. tax liability.

If your business has international operations or generates income from foreign markets, consult with a tax professional who can help navigate the complexities of international tax law and make sure you’re compliant with both U.S. tax regulations and the tax laws of the countries in which you operate.

Reduce the stress of tax season with Ramp

Tax season doesn’t have to be stressful. With Ramp’s accounting automation software, you can simplify the entire process for your business.

Ramp automates expense tracking, reporting, and categorization, giving you an audit-ready log of every transaction. Direct integrations with popular accounting software like QuickBooks and Sage Intacct sync transactions to your GL in real time.

Whether you're tracking business expenses for deductions or preparing for year-end filing, Ramp’s intelligent platform ensures you're always ready for tax time. Customers who choose Ramp save an average of 5% a year. Try our savings calculator and see how much your business can save.