Tax brackets 2024-2025: how much business tax you owe

The U.S. tax system has evolved significantly, especially for small businesses. This guide covers tax rates and calculations for different business structures for 2024-2025, helping you stay compliant with the IRS.

Before the introduction of S corporations, small business owners in the US had limited choices: they could either form a C corporation and face double taxation or opt for a partnership or sole proprietorship and forego liability protection.

The creation of S corporations in 1958 was a game-changer, merging liability protection with a single layer of federal tax. This shift aimed to support small businesses and family-owned enterprises, fostering a competitive environment in the American economy.

Running a small business in the United States means juggling numerous responsibilities, one of which is managing your tax obligations. The IRS mandates quarterly tax calculations and filings, making it crucial to understand the tax brackets and rates applicable to your business. Misjudging your tax obligations can result in hefty fines from the IRS and disrupt your business operations—and guess what? Poor bookkeeping practices are often the culprit.

Here is a small (but very important lesson): up-to-date bookkeeping lays the foundation for a smooth tax season.

Unlike large corporations, many small businesses pay taxes at the owner’s personal rate. This makes understanding the tax brackets and rates applicable to your business even more critical.

In this blog, we will break down the tax brackets for 2024-2025, helping you understand exactly how much tax your small business will owe.

How much tax do you owe (2024-2025)?

Calculating your small business taxes can be challenging, given the lack of a single tax form or a universal tax rate applicable to all businesses. The taxes you owe are influenced by several critical factors, and understanding these can make the process more manageable. 

Key elements that affect your business tax liability:

1- Federal tax brackets

For the tax year 2024-2025, your business’s taxable income will fall into specific federal tax brackets. These brackets determine the rate at which your income is taxed. The IRS^[1]updates these brackets annually, so it’s essential to check the latest rates.

2- State tax rates

The location of your business can make a significant difference when paying your taxes. Some states are super business-friendly with no income tax at all! 

For example, if you’re in Wyoming, South Dakota, Alaska, Florida, Montana, New Hampshire, Nevada, or Indiana, you’re in luck—these states have no or very low taxes on individuals. Plus, Wyoming and South Dakota don’t even have a corporate income tax or a gross receipts tax, which is a big win for your bottom line.

On the flip side, there are states where taxes can take a bigger chunk out of your earnings. States like Louisiana, Iowa, Maryland, Vermont, Minnesota, California, and New York have higher taxes across the board, including sales, property, and individual income taxes. Knowing your state’s tax rates is crucial for planning and making sure you’re not caught off guard come tax time.

3- Tax rules based on your business structure

Knowing your business structure is crucial for determining your taxes. Whether you run a coffee shop or an online firm, the IRS will classify your business as one of these: sole proprietorship, partnership, LLC, C corporation, or S corporation.

• If your business is structured as a C corporation, estimating the amount of tax you’ll owe on your business profits is pretty simple. Thanks to the Tax Cuts and Jobs Act of 2017, C corporations pay tax at a flat rate of 21%.
• If you’re not a C corp, that means your business is a pass-through entity, such as a sole proprietorship, partnership, limited liability company (LLC), or S corporation. Pass-through businesses don’t pay federal income taxes. Instead, the business owner pays personal income taxes on the income made from the business.
• If you’re not sure about your classification, you’re probably a sole proprietor (Sole proprietorship is the simplest and most common form of business ownership, often used by individuals who haven’t formally established another type of business entity).

Calculating your tax

Suppose you run a family-owned coffee shop in Virginia, operating as a sole proprietorship or a single-member LLC. We’ll help you understand how to calculate your tax liability following these steps:

1. Determine your taxable income

First, calculate your total revenue for the year. Let’s say your café made $200,000 in revenue. Next, subtract your business expenses, tax deductions, and credits. If your expenses (rent, salaries, supplies, etc.) amount to $120,000, your taxable income is:

Taxable income=$200,000-$120,000=$80,000

2. Apply federal tax brackets

Using the IRS tax brackets for the current year, determine the federal tax rate that applies to your taxable income. For example, if your taxable income falls into the 22% bracket:

Federalt tax=$80,000×0.22=$17,600

3. Factor in state taxes

For this example, let’s assume the coffee shop is located in Virginia, which has a state tax rate of approximately 5% for small businesses.

State tax=$80,000×0.05=$4,000

4. Include self-employment tax

As a sole proprietor or a single-member LLC owner, you need to pay self-employment tax, which is 15.3% of your net earnings:

Self-employment tax=$80,000×0.153=$12,240

5. Add other taxes

Finally, include any additional applicable taxes:

• Payroll tax: If you have employees, calculate and set aside payroll taxes.
• Property tax: If you own the coffee shop, calculate the property tax.
• Capital gains tax: If you sold any business assets for a profit.
• Dividend tax: If your business pays dividends to shareholders.

For simplicity, let’s assume additional taxes (payroll and property) amount to $5,000.

6. Total tax liability

Add up all the taxes to determine your total tax liability:

Total tax liability=federal tax+state tax+self-employment tax+other taxes

So, total tax liability=$17,600+$4,000+$12,240+$5,000=$38,840

By following these steps, you can calculate how much tax the coffee shop owes for the year. This process helps ensure you’re setting aside the right amount of money and staying compliant with tax regulations. If you’re unsure about any step, consulting with a tax professional can provide clarity and ensure compliance.

A quick look at how each business structure is taxed:

Sole proprietorship

A sole proprietorship is owned by one person who runs an unincorporated business and usually faces a 13.3% tax rate^[2]. If you’re a sole proprietor or an independent contractor, the IRS requires you to file an income tax return if your net earnings from self-employment are $400 or more in a year.

Partnership

In a partnership, the business is owned by two or more individuals who share the profits. Each partner is taxed on their share of the business’s net income, which means the business itself doesn’t pay taxes directly. The tax percentage varies depending on the business, but small partnerships are usually taxed at 23.6%^[3].

Limited Liability Company (LLC)

An LLC is a popular choice for small businesses because it offers personal liability protection, meaning your personal assets are safe if your business faces legal trouble or bankruptcy.

LLCs are also flexible when it comes to taxes. For single-member LLCs, taxes work like a sole proprietorship, with the owner paying taxes on business income.

For multi-member LLCs, the business is treated like a partnership, and each member pays taxes on their share of the income. Keep in mind, LLC members are considered self-employed, so they need to pay self-employment taxes, including Medicare and Social Security contributions.

Corporation

A corporation, also known as a C corporation or C corp, is a legal entity that separates the business from its owner(s) for legal and tax purposes. This structure can be ideal if you have a higher-risk business or plan to eventually go public or sell your company.

Corporations pay federal taxes on their net earnings as separate entities. The current corporate tax rate is a flat 21%. This is different from other business structures where the income is passed through to the owners and taxed at their personal rates. Additionally, corporations must pay taxes on profits and again when dividends are paid to shareholders, so it’s important to account for this double taxation.

S Corp

An S corporation, or S corp, is a great option for small businesses looking to avoid the double taxation faced by C corporations. With an S corp, profits and some losses are passed directly to the owners’ personal income, bypassing corporate tax rates. This structure helps you keep more of your earnings and simplifies tax filing.

How to pay small business taxes by business type

• C-corporations and LLCs taxed as C-corporations report their income and expenses on Form 1120.
• S-corporations and LLCs taxed as S-corporations use Form 1120-S to report income and expenses, and then issue a Schedule K-1 to each shareholder, showing their share of profits or losses.
• Partnerships and multi-member LLCs file Form 1065 to report their income and expenses. This form includes a Schedule K-1 for each member, which they use to report their share of profits or losses on their personal tax returns.
• Sole proprietorships and single-member LLCs report their income and expenses on Schedule C, which is filed with the owner’s individual tax return, Form 1040.

What’s the tax rate for C corporations?

C corporations are taxed twice. Yes, twice. Once at the corporate level and again at the shareholders’ personal rates if they receive dividends.

For example, let’s say you own a company called Bright Future Inc., an educational consultancy in California.

Suppose your company made $200,000 in profit. After business expenses and deductions, you’re left with $175,000 of taxable income.

First, Bright Future Inc. has to pay taxes at the corporate level at a flat rate of 21%. This means:

$175,000 x 21% = $36,750

So, Bright Future Inc. pays $36,750 in corporate income taxes. Now, let’s say you’re one of two shareholders, and you receive a dividend of $25,000.

If you owned the stock for more than 60 days, this is a qualified dividend. The IRS taxes it on a sliding scale. For 2024, if you’re single and your qualified dividend is $44,625 or lower (like in this example), you wouldn’t pay additional taxes.

But if your dividend exceeds $44,625, you start paying tax on it, with the rate maxing out at 20% for earnings over $492,300.

If you haven’t owned the stock for more than 60 days, it’s an unqualified dividend. You’ll pay taxes on unqualified dividends at your personal tax rate according to your tax bracket.

What’s the tax rate if you’re not a C corp?

Suppose Bright Future is a pass-through entity and it made $75,000 in annual profit. After business expenses, deductions, and employment taxes, you’re left with $50,000 of taxable income.

If this is your only income and you’re filing single, based on the 2024 tax brackets, you would pay $6,307 in taxes.

Here’s the breakdown:

• The first $11,000 is taxed at 10%, which is $1,100.
• The next $33,725 ($44,725 – $11,000) is taxed at 12%, which is $4,047.
• The remaining $5,275 ($50,000 – $44,725) is taxed at 22%, which is $1,160.
• So, $1,100 + $4,047 + $1,160 = $6,307

Other types of taxes for small businesses

Small business owners need to be prepared for various types of taxes; they pay both income tax and self-employment tax, so it’s wise to set aside about 30% of your income after deductions to cover federal and state taxes. This helps ensure you have enough funds available to meet your tax obligations without any surprises.

Here are some additional taxes you need to be aware of:

Payroll tax

Employers are responsible for calculating and withholding federal income tax and FICA (Federal Insurance Contributions Act)^[4] taxes from their employees’ paychecks.

Here’s what you need to do:

• Calculate and set aside FICA taxes: Employers must also pay a matching amount for Social Security and Medicare taxes.
• Make regular payments: Depending on your total employee payroll, you’ll need to make payments to the IRS either monthly or semi-weekly.
• Quarterly reporting: Report your payroll taxes quarterly using Form 941^[5] or through e-file.

Self-employment tax

If you’re self-employed, you’ll need to pay self-employment tax, which covers Social Security and Medicare. This tax is 15.3%^[6] of your net earnings and is in addition to your income tax. Unlike salaried employees, who split these costs with their employers, self-employed individuals are responsible for the entire amount. It’s crucial to account for this tax when planning your finances to ensure you’re not caught off guard.

Income tax

For non-corporate small businesses, income tax rates are tied to the owner’s personal income tax rate. This means business owners need to pay both their income tax and self-employment tax.

Capital gains tax

If your business investments increase in value or you make a profit from selling business assets, you’ll owe capital gains tax. The rate depends on whether your gain is long-term or short-term.

Property tax

Property tax is paid on any land or buildings your business owns. These taxes are assessed by local entities and fund local services and infrastructure.

Dividend tax

If your business pays dividends to shareholders, those dividends are taxed based on how and when the investment was held. This tax can impact both the business and its investors.

Excise tax

Businesses pay excise taxes if they engage in specific activities or sell certain products. This includes manufacturing or selling alcohol, tobacco, and firearms, operating businesses like sports betting companies, using equipment like aircraft or heavy-duty trucks, or providing services like indoor tanning or telecommunications. Although businesses pay these taxes, the cost is usually included in the price of the products or services, effectively passing it on to consumers.

Property tax

If your business owns land, buildings, vehicles, or maintains inventory, you’ll likely pay property taxes. These taxes are collected by state and local jurisdictions on real estate and personal property, impacting businesses with physical assets.

The bottom line

When you’re juggling multiple roles as a small business owner, you’re far more likely to miss crucial deductions or under- (or over-) pay your taxes—both of which disrupt your bottom line. Moreover, when your financial data is inaccurate, you are bound to misjudge your tax obligations.

At CoCountant, we ensure your bookkeeping is always up-to-date and audit-ready, translating into accurate and timely tax filings and making tax season far less stressful. Our approach ties accurate financial tracking directly to your tax prep, so you’re never caught off guard by unexpected liabilities or missed filings.

With bookkeeping services and comprehensive tax advisory and filing services, we’re here to keep your numbers in check so you can focus on moving your business forward.

FAQs

How much is business tax in the USA?

Business tax rates in the USA vary depending on the type of business structure. Corporations are taxed at a flat rate of 21% on their profits. However, small businesses structured as sole proprietorships, partnerships, or S-corporations typically pass their income through to the owners’ personal tax returns, where it is taxed at individual income tax rates, which can range from 10% to 37% depending on the owner’s income bracket.

How are small businesses taxed in the US?

Small businesses in the US are generally taxed based on their business structure. Sole proprietorships and partnerships report their income on the owners’ personal tax returns, where it is subject to individual income tax rates. S-corporations also pass income through to shareholders’ personal tax returns. Additionally, small businesses might need to pay self-employment taxes, which cover Social Security and Medicare contributions.

What taxes do US companies pay?

US companies are subject to various types of taxes, including:

Federal Corporate Income Tax: Corporations pay a flat rate of 21% on their profits.
State Corporate Income Tax: Varies by state, with rates ranging from 0% to over 10%.
Payroll Taxes: Companies must withhold Social Security and Medicare taxes from employees’ wages and pay a matching amount.
Sales Tax: Collected on sales of goods and services in states that impose sales tax.
Property Tax: Levied by local governments on property owned by the business.

What is the tax rate on LLC in the USA?

The tax rate for a Limited Liability Company (LLC) in the USA depends on how the LLC elects to be taxed. By default, a single-member LLC is treated as a sole proprietorship, and a multi-member LLC is treated as a partnership for tax purposes, meaning income passes through to the owners’ personal tax returns and is taxed at individual income tax rates (10% to 37%). However, LLCs can also elect to be taxed as a corporation. If taxed as a C-corporation, the LLC pays a flat 21% corporate tax rate. If taxed as an S-corporation, income passes through to owners’ personal returns.