What Percentage Does a Small Business Pay in Taxes?


In 2016, the IRS estimated that $458 billion in taxes go unpaid every year.

True, paying business taxes is a chore--and it eats into your profits. But the penalties for not paying your taxes correctly can be devastating.

One company owner was sentenced to 33 months in prison and ordered to pay nearly a million dollars for failing to pay employment taxes.

Don't let this happen to you! The most sensible course of action is to save enough to cover your tax liabilities. That way, you are never left with a large bill that you can't pay.

But what percentage does a small business pay in taxes? In this post, we'll take a look at the different taxes you may need to cover and how much you should put aside to cover them.

Income Tax

Everyone must pay income tax, but how you pay income tax depends on your business.

For the majority of small businesses, they are considered to be pass-through entities. This means that rather being taxed on the income of the business itself, the obligation is passed through to the business owner or partners. They must include the company profits in their own personal income tax returns.

It is usually only larger businesses that pay corporate tax on their income.

The rate of tax paid will then depend on both the income from the business as well as any other sources that are taxable. These rates range from 10% to 39.6% depending on your taxable income.

Employment Taxes

If you have employees, you are also liable to pay employment taxes.

For instance, employers must withhold federal income tax for their employees and pass this on. In addition, social security and Medicare taxes must be withheld, along with a matching amount paid by the employer.

Federal unemployment tax (FUTA) is paid separately from the other taxes and is collected solely from the employer. Employees do not have to pay this tax.

Self-Employment Tax

If you are self-employed, the situation is slightly different.

Self-employment tax is levied on anyone who is self-employed and earning more than $400. It is primarily covering social security and Medicare taxes.

When you are self-employed, it means that the full contribution has to be covered by you. There are no contributions from an employer since you don't have one.

What Percentage Does a Small Business Pay in Taxes Overall?

With so many different structures, taxes and thresholds to take into account, there really is no one-size-fits-all answer to this question.

The total percentage that a small business will pay depends on the circumstances of that business, the amount of profit they earn and a whole host of other things.

As a basic rule of thumb, setting aside 30% of earnings to cover your tax liabilities is a sensible option for most small businesses.

Finding Tax Too Taxing? Talk to a Professional

If you're asking the question of what percentage does a small business pay in taxes, you're probably new to paying small business taxes.

While it is possible to do your own tax returns, we strongly recommend speaking to a professional to help guide you through the maze. We offer a range of great services to help you plan for and submit your business taxes.

If you would like to know more about what we can offer, please get in touch for a free consultation.