Quick Answer
Small businesses must pay federal income tax, self-employment tax (15.3%), state taxes, and potentially sales tax and payroll taxes. Sole proprietors report on Schedule C, LLCs can choose pass-through or corporate taxation, and corporations pay 21% federal tax. Quarterly estimated tax payments are required if you expect to owe $1,000+ annually. Proper planning and deductions can significantly reduce your tax burden.
Key Takeaways
- Self-employment tax is 15.3% (Social Security 12.4% + Medicare 2.9%) on net earnings
- Quarterly estimated taxes are due April 15, June 15, September 15, January 15
- Sales tax collection is required in most states if selling taxable goods
- Payroll taxes include withholding, Social Security, Medicare, and unemployment
- Common deductions: home office, equipment, travel, professional services
Types of Business Taxes
Federal Income Tax
| Business Structure | Tax Rate | Form |
|---|
| Sole Proprietorship | Personal rate (10-37%) | Schedule C |
| LLC (pass-through) | Personal rate (10-37%) | Schedule C or K-1 |
| S-Corporation | Personal rate (10-37%) | K-1 |
| C-Corporation | 21% flat rate | Form 1120 |
| Partnership | Personal rate (10-37%) | K-1 |
Self-Employment Tax
Rate: 15.3% on net earnings
- Social Security: 12.4% (up to $168,600 in 2026)
- Medicare: 2.9% (no limit)
Who pays: Sole proprietors, LLC members, partners
Exception: S-Corp distributions not subject to self-employment tax
State Income Tax
Varies by state:
- No state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming
- Flat rate: Colorado (4.4%), Illinois (4.95%)
- Progressive: California (1-13.3%), New York (4-10.9%)
Sales Tax
Rate: 0-10.25% (state + local)
Registration: Required before collecting sales tax
Filing frequency: Monthly, quarterly, or annually based on volume
Economic nexus: Triggered by $100K+ sales or 200+ transactions in most states
Payroll Taxes (If You Have Employees)
Employer responsibilities:
- Federal withholding (based on W-4)
- Social Security (6.2%)
- Medicare (1.45%)
- FUTA (0.6% on first $7,000)
- SUTA (varies by state, 0-5%+)
Employee responsibilities (withheld from paychecks):
- Federal income tax
- Social Security (6.2%)
- Medicare (1.45%)
- State income tax (if applicable)
Quarterly Estimated Taxes
Who Must Pay
If you expect to owe $1,000+ in taxes for the year, you must make quarterly payments.
Due Dates
| Quarter | Period | Due Date |
|---|
| Q1 | Jan 1 - Mar 31 | April 15 |
| Q2 | Apr 1 - May 31 | June 15 |
| Q3 | Jun 1 - Aug 31 | September 15 |
| Q4 | Sep 1 - Dec 31 | January 15 (next year) |
How to Calculate
Safe harbor method: Pay 100% of last year’s tax (110% if AGI > $150K)
Actual method: Estimate current year income and calculate tax
How to Pay
- IRS Direct Pay: Free, immediate
- EFTPS: Federal tax payment system
- Credit card: Processing fee applies
- Mail: Check with Form 1040-ES
Common Tax Deductions
Home Office
Simplified method: $5/sq ft (max 300 sq ft = $1,500)
Regular method: Actual expenses × (office sq ft / home sq ft)
Vehicle
Standard mileage: 67 cents/mile (2026)
Actual expenses: Gas, insurance, repairs, depreciation × business use %
Equipment and Supplies
- Section 179: Deduct up to $1.16M in equipment
- Bonus depreciation: 60% first-year deduction (2026)
- Regular depreciation: Spread over 5-7 years
Professional Services
- Accountant fees
- Legal fees
- Consulting fees
- Bookkeeping
Marketing and Advertising
- Website costs
- Online ads
- Business cards
- Sponsorships
Travel and Meals
- Travel: 100% deductible (flights, hotels, transportation)
- Meals: 50% deductible (business-related)
Insurance
- General liability
- Professional liability
- Workers compensation
- Health insurance (self-employed)
Retirement Contributions
- SEP-IRA: Up to 25% of compensation ($69,000 max)
- Solo 401(k): Up to $69,000 ($76,500 if 50+)
- SIMPLE IRA: Up to $16,000 ($19,500 if 50+)
FAQ Section
1. What percentage of income should I set aside for taxes?
Answer: Recommended:
- Sole proprietorship: 25-30% of net income
- LLC/S-Corp: 20-25% of distributions
- C-Corp: 21% federal + state tax
Adjust based on your state and income level.
2. What happens if I don’t pay quarterly taxes?
Answer: Penalties apply:
- Underpayment penalty: ~3-5% annually on unpaid amount
- Interest on unpaid taxes
- Lump sum payment at tax time (cash flow issue)
3. Can I deduct business losses?
Answer: Yes. Net operating losses (NOLs) can:
- Offset other income (pass-through entities)
- Carry forward 20 years (corporations)
- Limited to 80% of taxable income (C-Corps)
4. Do I need to collect sales tax for online sales?
Answer: Yes, if you have nexus in a state. Nexus triggers:
- Physical presence (office, warehouse, employees)
- Economic nexus ($100K+ sales or 200+ transactions in most states)
5. How do I pay myself as a business owner?
Answer:
- Sole proprietorship: Owner’s draw (not taxed as salary)
- LLC (taxed as partnership): Member distribution
- S-Corporation: Salary + distributions
- C-Corporation: Salary (subject to payroll taxes)
6. What’s the difference between tax deduction and tax credit?
Answer:
- Deduction: Reduces taxable income (saves at marginal rate)
- Credit: Reduces tax dollar-for-dollar (more valuable)
Example: $1,000 deduction in 24% bracket saves $240; $1,000 credit saves $1,000.
7. Do I need an accountant for business taxes?
Answer: Recommended if:
- Revenue > $100K
- Multiple revenue streams
- Employees
- Complex deductions
- C-Corporation
DIY is fine for simple sole proprietorships with good software.
8. How long should I keep tax records?
Answer:
- General rule: 3-7 years
- Employment taxes: 4 years
- Bad debts/failed assets: 7 years
- Property records: Keep until disposed + 7 years
9. Can I deduct health insurance as a business expense?
Answer:
- Self-employed: Yes, 100% of premiums (adjustment to income)
- LLC/S-Corp owners: Yes, if on payroll
- C-Corp: Yes, as business expense
10. What’s the penalty for late tax filing?
Answer:
- Failure to file: 5% per month (max 25%)
- Failure to pay: 0.5% per month (max 25%)
- Combined: 5% per month (not 5.5%)
- Minimum penalty: $485 (2026) if 60+ days late
Conclusion
Understanding tax obligations is crucial for business success. Set aside 25-30% of income for taxes, make quarterly payments, and take advantage of all legitimate deductions. Consider working with a CPA to optimize your tax strategy and avoid costly mistakes.
Next step: Use our free checklist tool to track tax registration and compliance steps.