Business Tax Rates – What You Will Pay

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What You will pay in Corporate or Business Tax Rates is calculated on your company’s profits.

Depending on your business entity type your business taxes are due at different times and can be charged at different rates.  Partnerships and S-corporations are due annually on March 15th  while individual taxes and C-corps are due a month later on April 15.  In both cases quarterly business tax payments can be made April – December. Many businesses, however, are considered pass through entities, an are taxes not at the business tax rate but at the personal rate of the owner or sole proprietor.   Some estimates put the number of businesses that pay taxes at the personal tax rate as high as 75%*(source: the balancesmb.com). These pass through entities pay taxes at the individual IRS and State tax rates because their tax rate is dependent on the income of the business owner.

Business Tax Rates Vary.  Since 2017 the highest corporate tax rates have been set at 21%. This may seem dramatically lower than the personal tax rate for higher income individuals which hovers around 43%.  Business tax rates are not as simple as the flat rate, the largest tax bill small businesses pay on top of that flat rate is for their W-2 employee payroll taxes at 7.65%/ employee gross payroll. Additionally, W-2 employees come with unemployment taxes and workers comp.taxes making the business tax burden of corporate entities significantly higher than the flat 21% would suggest.   

Many businesses who were using contractors to avoid these increased tax burdens are finding that the passage of AB-5 has reduced margins and increased their tax liability dramatically [Download our EBOOK] 

Tax Rate Vary:

  • Sole proprietorships pay a 13.3% tax rate
  • Small partnerships pay a 23.6% tax rate
  • S corps pay a 26.9% tax rate
  • C corps pay a 17.5% tax rate
  • LLCs, both partnerships and sole members are taxed at the individual’s federal income tax rate

Tax Rates are Largely Dependent on Income

Since higher income equates to higher tax rates it is worthy of note that “Nearly 60% of sole proprietorships have a net income of less than $10,000, while only 3.1% have a net income of at least $100,000. 

More than 18% of S corporations have a net income of at least $100,000.” Which explains why the S corp rate, is nearly double that of the sole proprietor rate *source https://www.thebalancesmb.com/

Californians who want to start a business should be aware of the many requirements for hiring workers and how that will affect their choices around corporate business structure, margins and scalability. https://www.caltaxadviser.com/blog/2019/11/want-to-start-a-business-in-california-heres-a-checklist-for-your-first-year/

Small Business Tax Rates can be positively impacted by the QBID

While the tax cuts that went into effect in 2017 were a boon for large corporations, they did not positively impact the majority of small businesses.  To offset that, the the Qualified Business Income Deduction (QBID) of 20% was enacted. A business with a taxable income of $100,000 only pays taxes on $80,000 of that amount.  Since personal income is the standard by which those tax rates are set that 20% reduction in taxable income can help with the tax bracket of the small business owner.

For more information on business tax, IRS audit representation and EDD investigations, call the office and speak to one of our dedicated tax attorneys.