- What is the small business tax rate?
- Small business tax by structure
- Federal income tax brackets for pass-through entities
- Corporate tax rate for C corporations
- State income taxes for small businesses
- What other taxes do small businesses pay?
- How to calculate your small business taxes
- How to reduce your small business tax rate
- Automate tax compliance and deductions with Ramp's real-time categorization and reporting
Small business tax rates vary based on your business structure, income level, and location. In 2024, 88% of small business owners relied on external tax preparers due to the complexity of the US tax code, according to the National Federation of Independent Business (NFIB).
Whether you operate as a sole proprietorship, partnership, LLC, S corporation, or C corporation, your structure determines how your income is taxed. Understanding how federal brackets, state taxes, and deductions apply to your business can help you plan ahead and avoid overpaying.
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 2026, 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 | Schedule C, Form 1065, Form 1120, or Form 1120-S (depending on election) | 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 US residents |
C corporations
C corporations pay a flat 21% federal tax on all corporate profits. If you distribute those after-tax profits as dividends, shareholders pay tax again at their individual dividend rate (0–20%), creating double taxation.
This structure can make sense if you plan to reinvest most profits back into the business. Retained earnings aren’t subject to the second layer of tax until you distribute them, which can support long-term growth.
Sole proprietorships
Sole proprietors don’t file a separate business tax return. Instead, your business profit flows directly to your personal tax return via Schedule C, which attaches to Form 1040. You pay federal income tax at your individual rate on net business income, plus self-employment tax of 15.3% for Social Security and Medicare.
Partnerships
A partnership doesn’t pay income tax at the entity level. Instead, it files Form 1065 and issues a Schedule K-1 to each partner, outlining their share of income, deductions, and credits.
You report that income on your personal return and pay tax at your individual rate on your allocated share.
Limited liability companies
By default, a single-member LLC is taxed like a sole proprietorship, and a multi-member LLC is taxed like a partnership. However, LLCs can elect C corp or S corp tax treatment by filing the appropriate IRS forms.
Many LLC owners elect S corp status to reduce self-employment tax exposure. As an S corp, you pay yourself a reasonable salary subject to payroll taxes and take remaining profits as distributions, which aren’t subject to self-employment tax.
S corporations
S corporations pass income through to shareholders, who report it on their personal returns and pay tax at their individual rates. This avoids the double taxation that applies to C corps.
However, the IRS requires owner-employees to pay themselves a reasonable salary for the work they perform. You can’t take all profits as distributions to avoid payroll taxes. S corps are also limited to 100 shareholders, all of whom must be US citizens or residents.
Federal income tax brackets for pass-through entities
Most small businesses are pass-through entities, meaning business income is taxed at your individual income tax rates. These rates are marginal, so your income is taxed in tiers rather than at a single flat rate.
Here are the official 2026 federal income tax brackets for single filers and married couples filing jointly, according to the IRS:
| Tax bracket | 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% | $626,351 or more | $751,601 or more |
Source: IRS news release on 2026 inflation adjustments
How marginal tax rates work
Landing in a higher tax bracket doesn’t mean all your income is taxed at that rate. Only the portion of income within each bracket is taxed at that bracket’s percentage.
For example, if you’re a single filer earning $60,000, you pay:
- 10% on the first $11,925
- 12% on the next $36,550
- 22% only on the remaining $11,525
Your top bracket is 22%, but your effective tax rate is lower because not all income is taxed at 22%.
Corporate tax rate for C corporations
C corporations pay a flat 21% federal income tax rate on all taxable corporate income. Unlike individual income tax, there are no graduated brackets—a C corp earning $50,000 pays the same rate as one earning $5 million.
This rate has been in place since the Tax Cuts and Jobs Act (TCJA) was enacted in 2017. For very large corporations with average annual adjusted financial statement income exceeding $1 billion, a 15% corporate alternative minimum tax (CAMT) may also apply. Most small businesses won’t meet this threshold.
- Federal rate: Flat 21% on all taxable corporate income
- No graduated brackets: The rate does not increase as profits rise
- State taxes additional: State corporate income taxes apply on top of the 21% federal rate
State income taxes for small businesses
State income taxes can significantly change your total small business tax rate. Two businesses with identical income can owe very different amounts depending on where they operate.
Some states impose no income tax, while others apply flat or graduated rates on corporate or personal income. Understanding your state’s structure helps you estimate your true effective tax rate.
States with no business income tax
Several states impose no personal income tax, which directly benefits pass-through business owners. These include Alaska, Florida, Nevada, New Hampshire (on wages and business income), South Dakota, Tennessee, Texas, Washington, and Wyoming.
No income tax doesn’t mean no business taxes. Many of these states rely on franchise or gross receipts taxes instead. For example, Texas imposes a franchise (margin) tax on businesses above certain revenue thresholds.
States with flat corporate tax rates
Some states apply a single flat rate on corporate income, similar to the federal 21% approach. Rates vary widely—North Carolina’s corporate rate is 2.25%, while Illinois charges 9.5% when you include its replacement tax.
If you operate as a C corporation, your state’s corporate rate is added on top of the 21% federal rate.
States with graduated tax rates
Other states use graduated income tax brackets, similar to the federal system. Higher income is taxed at progressively higher rates.
California, for example, applies personal income tax rates ranging from 1% to 13.3%. This primarily affects pass-through business owners because their business income is taxed at their individual state rate.
What other taxes do small businesses pay?
Income tax is only part of your total tax obligation. Depending on your structure and operations, you may owe several additional federal and state taxes throughout the year.
Understanding these obligations helps you avoid penalties and better forecast cash flow.
Self-employment tax
Self-employment tax covers your Social Security and Medicare contributions if you work for yourself. If you're a sole proprietor, partner, or LLC member, you pay 15.3% on net earnings—12.4% for Social Security (up to the annual wage base) and 2.9% for Medicare.
An additional 0.9% Medicare surtax applies to income above $200,000 for single filers ($250,000 for married filing jointly). You can deduct half of your self-employment tax on your income tax return, which reduces your taxable income. These taxes are calculated using Schedule SE (Form 1040).
Payroll taxes
If you have employees, you must withhold federal income tax and pay the employer portion of FICA taxes (7.65% for Social Security and Medicare combined). You’re also responsible for federal unemployment tax (FUTA) and state unemployment tax (SUTA).
Missing payroll deposits can trigger steep penalties. Using tools like payroll automation can help reduce compliance risk and manual errors.
Sales and use taxes
If you sell taxable goods or services, you may need to collect and remit sales tax to state and local authorities. Rules vary widely by jurisdiction, and nexus laws can require collection even if you don’t have a physical presence in the state.
Use tax applies when you purchase business items without paying sales tax, such as equipment bought from an out-of-state vendor. You’re generally required to self-report and remit use tax to your state.
Estimated quarterly taxes
If taxes aren’t withheld from your income, you’re typically required to make estimated tax payments quarterly. Individuals use Form 1040-ES, and corporations use Form 1120-W.
The IRS generally expects you to pay at least 90% of your current-year tax liability or 100% of the prior year’s liability through withholding and estimated payments. Underpayment can result in penalties, even if you pay the full balance when filing.
How to calculate your small business taxes
To calculate your small business tax liability, you need to determine your structure, taxable income, and applicable rates. Once you know those inputs, you can estimate your federal, state, and self-employment obligations.
- Determine your business structure: Your entity type determines which tax rates and forms apply—C corporation, S corporation, LLC, sole proprietorship, or partnership
- Calculate gross income: Add up total revenue from all business activities before deductions
- Subtract business deductions: Reduce gross income by eligible business expenses such as wages, rent, software, and equipment
- Apply the appropriate tax rate: Use the 21% corporate rate for C corporations or your individual income tax brackets for pass-through income
- Add self-employment and other taxes: Include self-employment tax (15.3% for sole proprietors and many LLC members), state income tax, and any other applicable taxes
- Apply credits and additional deductions: Reduce your final tax bill with credits and deductions such as the QBI deduction or retirement contributions
Tax calculation example
For a sole proprietor with $100,000 in taxable income in 2026 (single filer), federal income 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 income tax = $16,914.00, plus self-employment tax and any applicable state taxes.
How to reduce your small business tax rate
You can’t change federal tax brackets, but you can lower your taxable income and claim credits to reduce what you actually owe. Strong recordkeeping makes it easier to identify savings opportunities and avoid leaving money on the table.
Qualified business income deduction
The qualified business income (QBI) deduction allows eligible pass-through entities—sole proprietorships, S corporations, partnerships, and many LLCs—to deduct up to 20% of qualified business income. This can significantly reduce your effective federal tax rate.
Income limits and phaseouts apply, especially for specified service trades or businesses such as law, accounting, consulting, and healthcare. If your taxable income exceeds IRS thresholds, the deduction may be reduced or eliminated.
Common business tax deductions
Deductions reduce your taxable income, lowering the amount of tax you owe. Common deductions include:
- Home office deduction: Deduct a portion of housing expenses if you use part of your home exclusively for business
- Vehicle expenses: Deduct business mileage or actual vehicle expenses with proper documentation
- Equipment and supplies: Deduct qualifying purchases such as computers, software, and office furniture
- Professional services: Deduct fees paid to accountants, attorneys, and consultants
- Health insurance premiums: Self-employed individuals can often deduct health insurance costs
- Retirement contributions: Contributions to a SEP-IRA, SIMPLE IRA, or solo 401(k) may be deductible
Tracking expenses consistently throughout the year helps you maximize deductions and stay prepared in case of an IRS audit.
Tax credits for small businesses
Tax credits reduce your tax bill dollar-for-dollar, making them more valuable than deductions. A $1,000 credit lowers your tax liability by the full $1,000.
Common small business credits include the research and development (R&D) credit, the work opportunity tax credit (WOTC) for hiring from targeted groups, and the small employer health insurance credit. Each credit has specific eligibility rules, so consult a tax professional to determine what applies to your business.
Automate tax compliance and deductions with Ramp's real-time categorization and reporting
Accurate categorization and documentation are essential if you want to reduce your small business tax rate and stay compliant. Manual processes make it easy to miss deductions or introduce errors that create risk during an audit.
Ramp’s accounting automation software helps you categorize expenses in real time, collect receipts automatically, and generate audit-ready reports year-round. Instead of scrambling at tax time, you’ll have clean, organized records from day one.
Ramp’s AI learns your spending patterns and codes transactions across required accounting fields as they occur. Receipts are automatically matched to transactions and stored in one place, so your documentation stays complete and accessible.
Here’s how Ramp simplifies tax compliance:
- AI-powered categorization: Transactions are coded in real time based on your historical data and feedback
- Automatic receipt collection: Capture receipts via email forwarding, mobile upload, and merchant integrations
- Policy enforcement: Set spending rules that flag non-compliant purchases before they post
- Audit-ready reporting: Generate detailed reports by category, department, or time period to support filings and respond to auditor requests
Try a demo to see how Ramp helps you maximize deductions while maintaining full tax compliance.
FAQs
There’s no minimum income threshold that automatically exempts you from federal taxes. However, sole proprietors and partners generally owe self-employment tax once net earnings exceed $400, even if income tax owed is minimal after deductions.
No. Self-employment tax covers Social Security and Medicare contributions and is separate from income tax. If you’re self-employed, you typically pay 15.3% in self-employment tax plus federal income tax at your individual rate.
There isn’t a single average rate that applies to all small businesses. Your effective tax rate depends on your structure, income level, state location, and deductions, though many pass-through owners see effective federal rates between 15% and 25% after deductions.
Yes, in some cases. Electing S corporation status, for example, may reduce self-employment tax exposure by allowing part of your income to be treated as distributions instead of wages. The actual savings depend on your specific income and expenses.
If structured as C corporations, small and large companies pay the same flat 21% federal corporate tax rate. The key difference is that most small businesses are pass-through entities, meaning profits are taxed at the owner’s personal income tax rates instead of the corporate rate.
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