How Much Are Taxes for a Small Business?

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Income tax

A small business that is set up as a sole proprietorship or a partnership does not pay taxes in its own right. Instead it files a tax return, but the profits are then "passed through" to the individual or individuals (in line with each partner's share of the business). The money is then classed as individual income and liable to income tax. A limited liability partnership has the option of being taxed in the same way as a corporation, or to work on a "pass through" basis.

The federal income tax payable depends on the filing status of the taxpayer (single; married filing jointly, or qualified widow/er; married filing separately; or head of household). The rate increases as the income goes above six set levels, though each rate only applies to the portion of income that falls between one level and the next. The level thresholds vary depending on tax status. The six different rates are: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent.

Corporate Tax

If a business is incorporated, or is a limited liability partnership that has opted to be taxed as a corporation, its profits are subject to corporation tax rather than income tax. In 2010, there were eight tax

brackets, taxed at 15 percent ($0-$50,000), 25 percent ($50,000 to $75,000), 34 percent ($75,000 to $100,000), 39 percent ($100,000 to $225,000), 34 percent ($335,000 to $10 million), 35 percent ($10 million to $15 million), 38 percent ($15 million to $18,333,333) and 35 percent ($18,333,333 and above).

One big difference between this and income tax is there are two points where the tax rate falls as the business passes a new threshold. As with income tax, each rate only applies to the portion of income that falls between one level and the next.

FICA Taxes

Businesses with employees must pay federal taxes for each employee. This money goes towards the funding of Social Security and Medicare. The employer pays an amount equivalent to 1.45 percent of the employee's salary towards Medicare and 6.2 percent towards Social Security. There is no limit on the Medicare share of the tax, but the Social Security payment is capped to the first $108,000 of the employee's salary, meaning a maximum payment of $6,696.

State Taxes

In 43 states, individuals must also pay a state income tax. Rates vary between states.

State corporate tax rates vary greatly. Some states have no corporate taxes, some have a single rate and others have multiple tax brackets, each with a different rate.


Category: Personal Finance

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