- What is the small business tax rate?
- Small business tax by structure
- Federal business tax rates and brackets
- Federal vs. state business tax rates
- How to calculate your small business tax
- Tips for managing and reducing small business taxes
- Common small business tax mistakes to avoid
- Additional small business taxes to note
- Tax considerations for e-commerce and foreign businesses
- Tax considerations for e-commerce and foreign businesses
- Reduce the stress of tax season with Ramp
Navigating small business taxes can be challenging, but understanding how rates, brackets, and deductions work can help you save money and stay compliant. In fact, 88% of small business owners relied on external tax preparers in 2024 because of the complex U.S. tax code, according to the National Federation of Independent Business (NFIB).
Whether you operate as a sole proprietorship, partnership, or corporation, knowing how taxes apply to your structure can make a big difference. That includes understanding how small business tax rates vary by entity, how federal and state taxes affect your bottom line, and strategies to reduce your overall tax burden.
What is the small business tax rate?
The small business tax rate, sometimes called the small company tax, refers to the percentage of your business income that you pay in taxes. This rate depends on your business structure and where your company operates.
C corporations are taxed at a flat 21% corporate tax rate. Pass-through entities, such as sole proprietorships, LLCs, and S corporations, are generally 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, your federal income tax will be calculated based on your personal tax bracket. This could range from 10% to 37% in 2025, depending on your taxable income.
Small business tax by structure
Your business structure determines how much you pay in taxes and how you file. The IRS treats each entity type differently, so understanding these distinctions helps you plan effectively and avoid overpaying.
| Business structure | Tax rate | Filing forms | Additional notes |
|---|---|---|---|
| C corporations | Flat tax rate of 21% | Form 1120 | Profits taxed at 21% corporate rate; dividends taxed again at 0%–20% (“double taxation”). |
| Sole proprietorships | Income taxed at owner’s personal rate | Schedule C (Form 1040) | Also subject to self-employment tax (15.3%) for Social Security and Medicare. |
| Partnerships | Pass-through taxation at partners’ personal rates | Form 1065; Schedule K-1s to partners | Each partner reports income on their personal return. |
| Limited liability companies (LLCs) | Default pass-through taxation; may elect C-corp or S-corp | Depends on election: Schedule C, Form 1065, Form 1120, or Form 1120-S | Single-member LLCs taxed like sole proprietorships; multi-member LLCs taxed like partnerships. |
| S corporations | Pass-through taxation at shareholder level | Form 1120-S; Schedule K-1s to shareholders | Avoids double taxation but limited to 100 shareholders who must be U.S. residents. |
Federal business tax rates and brackets
At the federal level, how your business is taxed depends on whether it’s a C corporation or a pass-through entity.
C corporations pay a flat 21% tax on profits, with any dividends distributed to shareholders taxed again at individual dividend rates. This results in “double taxation.”
Pass-through entities, such as sole proprietorships, partnerships, LLCs, and S corporations, report business income on the owner’s personal return and pay taxes at individual income tax rates. Most small businesses fall into this category, so understanding individual brackets is essential for accurate tax planning.
2025 federal income tax brackets (for individuals)
Here are the 2025 tax brackets for single filers and married couples filing jointly:
| Rate | Single filers | Married filing jointly |
|---|---|---|
| 10% | $0–$11,925 | $0–$23,850 |
| 12% | $11,926–$48,475 | $23,851–$96,950 |
| 22% | $48,476–$103,350 | $96,951–$206,700 |
| 24% | $103,351–$197,300 | $206,701–$394,600 |
| 32% | $197,301–$250,525 | $394,601–$501,050 |
| 35% | $250,526–$626,350 | $501,051–$751,600 |
| 37% | Over $626,350 | Over $751,600 |
Source: IRS news release
Upcoming changes
Under current law, the individual tax brackets introduced by the Tax Cuts and Jobs Act (TCJA) are scheduled to expire after 2025, reverting to pre-2018 rates unless Congress acts. This potential change could significantly affect pass-through business owners.
Federal vs. state business tax rates
Federal taxes make up only part of your total business tax rate. State and local taxes can significantly change what you owe, depending on where your business operates.
For instance, California applies a progressive tax on income, ranging from 1% to 13.3%, while Florida has no state income tax. However, Florida businesses may still owe franchise taxes. The result is that two businesses with identical income can have very different tax bills based solely on location.
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, can offer advantages depending on your business model. Others may charge franchise or gross receipts taxes instead, which can offset those benefits.
How to calculate your small business tax
To estimate your small business tax, start by identifying your structure and taxable income. From there, apply the right federal, state, and self-employment rates to get a realistic sense of your total liability.
- Identify your business structure: Determine whether you’re a C corp, S corp, LLC, or sole proprietorship
- Calculate your taxable income: Subtract deductions for business expenses such as office supplies, equipment, and employee wages from your gross income
- 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 taxable income.
- Account for self-employment taxes: Sole proprietors and LLC owners typically owe 15.3% of net income for Social Security and Medicare
- Include state taxes: After calculating your federal taxes, factor in any state income or franchise taxes
Tax calculation example
For a sole proprietor with $100,000 in taxable income in 2025, federal tax would be calculated as follows:
- 10% on the first $11,925 = $1,192.50
- 12% on the next $36,550 ($48,475 − $11,925) = $4,386.00
- 22% on the remaining $51,525 ($100,000 − $48,475) = $11,335.50
Total federal tax = $16,914.00, plus state taxes.
Tips for managing and reducing small business taxes
You can reduce your small business tax bill through smart deductions, credits, and planning. The more organized your records, the easier it is to spot savings opportunities.
Common deductions and credits
You may be able to deduct common business expenses such as:
- Home office expenses: Deduct a portion of your rent or mortgage if you use part of your home exclusively for business
- Business travel and mileage: Claim expenses for travel, lodging, and mileage that are properly documented
- Equipment and supplies: Deduct purchases directly related to business operations, such as computers or office furniture
- Health insurance premiums: Self-employed individuals can often deduct their health insurance costs
- Qualified business income (QBI) deduction: Allows eligible pass-through entities like LLCs and S corps to deduct up to 20% of qualified business income
Recordkeeping and accounting best practices
Accurate records are the foundation of any tax strategy. Automated expense tracking and accounting software make it easier to log receipts, categorize spending, and stay audit-ready year-round. The more organized your books are, the easier it is to identify deductions and file accurately at tax time.
Planning strategies
Proactive planning can lower your overall tax burden:
- Make estimated quarterly tax payments to avoid penalties
- Contribute to retirement plans such as a SEP IRA, SIMPLE IRA, or Solo 401(k)
- Time income and expenses strategically—for instance, delay income to the next year or accelerate deductible purchases into the current year
Common small business tax mistakes to avoid
Avoiding common tax mistakes can save you time, money, and penalties at filing time. Here are some of the most frequent errors small business owners make:
- Misclassifying employees as contractors, which can trigger IRS penalties
- Missing filing or payment deadlines
- Failing to keep detailed records or receipts
- Overlooking deductible expenses that could reduce your tax bill
- Using outdated or manual systems instead of payroll software
- Not consulting a tax professional when your situation becomes complex
Avoiding these pitfalls helps you stay compliant and focus on running your business instead of fixing avoidable issues later.
Additional small business taxes to note
Beyond income tax, small business owners often owe other taxes depending on how they operate. Understanding these can help you avoid unexpected liabilities.
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. Employers are responsible for both withholding the employee’s share and paying their own.
The total FICA tax rate for employees is 15.3%, split evenly between employer and employee:
- 12.4% for Social Security on income up to $176,100 for 2025
- 2.9% for Medicare on all income
- An additional 0.9% Medicare tax on income above $200,000 for single filers and $250,000 for joint filers
Missing these payments can lead to costly penalties, so it’s essential to stay current on reporting and deposits. Payroll automation can simplify compliance and recordkeeping.
Self-employment taxes
If you’re self-employed, you owe both the employer and employee portions of FICA, known as the self-employment tax. The total rate is 15.3% on net earnings, covering the same Social Security and Medicare contributions listed above.
You can deduct half of your self-employment tax on your income tax return to reduce taxable income. These taxes apply whether or not you draw a salary, and they’re reported using Schedule SE (Form 1040).
Excise taxes
Excise taxes apply to certain goods and services such as alcohol, gasoline, or airline tickets. If your business sells or uses these, you may owe federal or state excise taxes.
For example, businesses selling gasoline must pay a federal excise tax of 18.4 cents per gallon. Some states also impose industry-specific excise taxes on products like tobacco or telecommunications.
The IRS requires regular excise tax filings depending on the type of business activity. Consult a tax professional if you’re unsure which apply to your operations.
Other taxes for small businesses
You may also face other obligations depending on your business model:
- Sales tax: If you sell taxable products or services, you may need to collect and remit sales tax to state or local authorities
- Property tax: Businesses that own real estate or equipment often owe local property tax based on assessed value
- State and local taxes: These can include license fees, gross receipts taxes, or local business levies
Staying aware of these additional taxes helps you plan ahead and avoid surprises at year-end.
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 your business reaches a certain level of sales or transactions in a state, even if it doesn’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.
Sales tax rates and reporting requirements vary by state.
Some states impose local sales taxes in addition to state-level taxes. Staying up to date on these rules will prevent potential fines and help you properly collect tax on all applicable sales.
Tax considerations for e-commerce and foreign businesses
Businesses that sell online or operate internationally face additional tax rules. Understanding these obligations helps prevent compliance issues across different jurisdictions.
E-commerce tax law
As online sales grow, nexus laws have become increasingly important for e-commerce businesses. These laws determine whether a company has a taxable presence in a state. If your business sells across state lines, you may need to collect and remit sales tax where you have a physical or economic presence.
Economic nexus occurs when your business exceeds certain sales or transaction thresholds in a state, even without a physical location. The U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc. (2018) confirmed that states can require remote sellers to collect sales tax once those thresholds are met (often $100,000 in annual sales or 200 transactions).
Know the rates in your state.
Sales tax rates and reporting requirements vary by state. Some states also impose local sales taxes. Staying up to date on these rules helps ensure you collect and remit the correct amounts.
Taxes for foreign businesses
If your business earns income abroad, you may owe taxes both in the United States and in the country where the income was earned. The U.S. taxes citizens and residents on worldwide income, so international revenue must be reported on your tax return.
Many countries also impose their own corporate income taxes. To avoid double taxation, the U.S. has treaties with various countries that provide tax relief through the foreign tax credit. This allows you to offset taxes paid to foreign governments against your U.S. tax liability.
If your business has international operations or sells into foreign markets, a tax professional can help navigate the complexities of cross-border tax rules and ensure compliance in each country where 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 general ledger in real time.
Whether you're tracking business expenses for deductions or preparing for year-end filing, our 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.
FAQs
All businesses must report income, but whether you owe federal income tax depends on your structure and deductions. Sole proprietors and partners generally owe tax, including self-employment tax, on any net profit over $400. C corporations pay tax on all profits, while S corp owners pay income tax on their share of business profits and payroll taxes only on their salary.
Small businesses pay an average effective tax rate of about 20%, but the exact amount depends on your structure. C corporations pay a flat 21% corporate rate, while pass-through entities are taxed at their owners’ individual income rates.
The qualified business income (QBI) deduction lets eligible pass-through entities such as sole proprietorships, S corporations, and LLCs deduct up to 20% of qualified business income from taxable income.
You can lower your tax bill by claiming deductions for qualified expenses like home office costs, travel, and supplies. Credits such as the QBI deduction can also reduce your overall taxable income. Accurate recordkeeping and timely payments help you stay compliant and avoid penalties.
“Ramp is the only vendor that can service all of our employees across the globe in one unified system. They handle multiple currencies seamlessly, integrate with all of our accounting systems, and thanks to their customizable card and policy controls, we're compliant worldwide.” ”
Brandon Zell
Chief Accounting Officer, Notion
“When our teams need something, they usually need it right away. The more time we can save doing all those tedious tasks, the more time we can dedicate to supporting our student-athletes.”
Sarah Harris
Secretary, The University of Tennessee Athletics Foundation, Inc.
“Ramp had everything we were looking for, and even things we weren't looking for. The policy aspects, that's something I never even dreamed of that a purchasing card program could handle.”
Doug Volesky
Director of Finance, City of Mount Vernon
“Switching from Brex to Ramp wasn’t just a platform swap—it was a strategic upgrade that aligned with our mission to be agile, efficient, and financially savvy.”
Lily Liu
CEO, Piñata
“With Ramp, everything lives in one place. You can click into a vendor and see every transaction, invoice, and contract. That didn’t exist in Zip. It’s made approvals much faster because decision-makers aren’t chasing down information—they have it all at their fingertips.”
Ryan Williams
Manager, Contract and Vendor Management, Advisor360°
“The ability to create flexible parameters, such as allowing bookings up to 25% above market rate, has been really good for us. Plus, having all the information within the same platform is really valuable.”
Caroline Hill
Assistant Controller, Sana Benefits
“More vendors are allowing for discounts now, because they’re seeing the quick payment. That started with Ramp—getting everyone paid on time. We’ll get a 1-2% discount for paying early. That doesn’t sound like a lot, but when you’re dealing with hundreds of millions of dollars, it does add up.”
James Hardy
CFO, SAM Construction Group
“We’ve simplified our workflows while improving accuracy, and we are faster in closing with the help of automation. We could not have achieved this without the solutions Ramp brought to the table.”
Kaustubh Khandelwal
VP of Finance, Poshmark
