Small business taxes catch people out in a specific way. It’s rarely the rate that hurts. The structure is what does it: the fact that nobody withholds anything for you, that you owe money four times a year rather than once, and that the business and the person behind it are often taxed as the same taxpayer even when they feel like separate things.
Once that structure is clear, the rest is arithmetic. This guide covers which taxes actually land on a small local business, how your entity type sets the rate, how quarterly estimated payments work, and how much of each dollar to put aside so April isn’t a crisis. If you’re weighing outside funding at the same time, the tax treatment of borrowed money is one input into which business capital option fits your situation.
The Bottom Line
- Small business owners pay an estimated effective tax rate of about 19.8% on average, but the spread by entity is wide: roughly 13.3% for sole proprietorships, 23.6% for small partnerships, and 26.9% for S corporations, according to an SBA report (Nationwide).
- Self-employment tax is 15.3% of net earnings and sits on top of income tax. It’s the line new owners miss most often.
- If you expect to owe $1,000 or more for the year, you’re generally in the quarterly estimated payment system. Corporations hit that threshold at $500.
- Setting aside 25% to 30% of profit is the standard working rule. Use your own prior-year return to sharpen it.
- If you drive for the business, the 2026 standard mileage rate was 72.5 cents per mile through June 30 and 76 cents from July 1 (Littler). Two rates in one tax year, so log your miles by date.
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Which taxes a small business actually pays
Most owners think of “business tax” as one bill. It’s really up to five, and which ones apply depends on your structure, your staff, and your state.
- Income tax on the business’s profit. For most small businesses this flows through to the owner’s personal return.
- Self-employment tax — Social Security and Medicare on your own earnings, since no employer is paying half for you.
- Payroll taxes if you have employees: withholding, plus the employer share of FICA and unemployment tax.
- Sales tax on what you sell, where your state and locality say it applies. Collected from customers, held, and remitted. Never really your money.
- Excise and local taxes in specific cases, plus state franchise or gross receipts taxes in some states.
Only the first two are unavoidable for every profitable business. The rest switch on as you hire, sell taxable goods, or operate somewhere with its own rules. Keeping these separated in your books is part of the broader job of getting the structure of your business finances right. Mixing collected sales tax into operating cash is one of the most common ways a profitable business ends up short.
How much do small businesses pay in taxes?
On average, around a fifth of profit, but the average hides the thing you need. An SBA report puts the overall effective rate for small business owners at about 19.8%, broken out as roughly 13.3% for sole proprietorships, 23.6% for small partnerships, and 26.9% for S corporations (Nationwide).
Why would an S corporation owner pay a higher effective rate than a sole proprietor? Mostly income level. Higher-earning businesses tend to adopt more formal structures, and higher income means higher brackets. It is not evidence that one entity is inherently cheaper than another.
What your own rate will be comes down to four things: your entity type, your total household income, your state, and how much of your spending qualifies as a deductible business expense. The last one is where owners have the most room to act.
State tax deserves a mention of its own, because the same business can face a materially different bill depending on where it operates. A few states levy no personal income tax at all. An owner running deliveries in Sioux Falls, South Dakota pays no state income tax on pass-through profit, while the same operation in a high-tax state might owe several more points. Others substitute a franchise or gross receipts tax that applies whether or not you made a profit.
How your business structure sets your tax rate
Entity choice is the single biggest lever on what you pay, and it’s worth revisiting as the business grows.
Sole proprietorship or single-member LLC. Profit lands on your personal return. You pay income tax at your personal rate plus self-employment tax on all net earnings. Simple to run, and the structure most local shops start in.
Partnership or multi-member LLC. Profit is divided between partners and taxed on each partner’s personal return. The business files an information return; the partners pay the tax.
S corporation. Still pass-through, but with one important difference: you pay yourself a reasonable wage, pay payroll taxes on that wage, and the remaining profit passes through without self-employment tax. For a business earning well above what the owner’s wage would be, that split can lower the bill, which is why owners often elect S corp status as profit grows.
C corporation. The business pays a flat 21% federal corporate rate on its profit, and shareholders pay again on dividends. The double layer is why it’s uncommon for local businesses, though it has uses, most often when outside shareholders are involved, since it’s the structure equity investors are used to. If that’s a road you might go down, the entity question is worth settling before you start looking for investors to back the business, not after.
An LLC is a legal structure, not a tax one. By default a single-member LLC is taxed as a sole proprietorship, but it can elect to be taxed as an S corp. That election is one of the highest-value conversations to have with a CPA, and it’s worth having before the year you need it rather than after.
Self-employment tax: the 15.3% most new owners miss
Self-employment tax is 15.3% of net business earnings: 12.4% for Social Security and 2.9% for Medicare. When you were an employee, you paid half and your employer paid the other half. Working for yourself, you pay both halves.
This matters because it stacks. A sole proprietor in a 12% income tax bracket is not paying 12% on business profit. They’re paying 12% plus 15.3% on the self-employment portion, before state tax. That’s the gap between what owners expect and what the return says.
One partial offset: you can deduct half of your self-employment tax when calculating your adjusted gross income. It softens the number without changing the planning rule, which is to assume the full 15.3% is coming.
How quarterly estimated taxes work
Nobody withholds tax from business profit, so the IRS collects it as you earn it. If you expect to owe $1,000 or more in tax for the year after credits and withholding, you’re generally required to make quarterly estimated payments. For corporations the threshold is $500.
The payments are due roughly in mid-April, mid-June, mid-September, and mid-January for the final quarter of the prior year. Two ways to size them:
- Even quarters. Estimate your annual tax, divide by four. Works well if revenue is steady.
- Actual quarters. Calculate what you owe on each quarter’s real income and expenses. More accurate for a seasonal business, like a florist whose year is weighted to February and May, or a caterer whose Q4 dwarfs Q1. It does require books you keep up to date.
Safe harbor is the rule worth memorizing. Pay 100% of last year’s total tax (110% if your adjusted gross income was over $150,000), spread across four payments, and you’re protected from underpayment penalties even if this year turns out bigger. For a growing business that’s often the easiest way to stop worrying about the estimate being wrong.
Missing a quarter isn’t catastrophic, since the penalty is interest-like rather than punitive, but it compounds, and you can adjust later payments up or down if an early estimate was off.
How much should you set aside for taxes?
Start at 25% to 30% of profit. That range is the common recommendation because it covers federal income tax, the 15.3% self-employment tax, and most state tax for a typical small business.
Then make it yours:
- Take last year’s total tax from your return and divide it by last year’s profit. That percentage is your actual rate, and it beats any rule of thumb.
- Move the money weekly, not quarterly. A separate tax savings account that you transfer into every Friday is the single habit that most reliably prevents a shortfall.
- Re-check the percentage mid-year if profit has moved significantly, or if you’ve changed entity type.
- If you’re in a high-tax state, assume the upper end.
Setting a cash target like this works best as a standing number rather than a one-off calculation, which is why it sits naturally alongside the financial goals that keep a local business growing.
Vehicle and mileage deductions for owners who deliver
If your business drives for work, whether that’s your own deliveries, supply runs, or market pickups, vehicle costs are usually one of the larger deductions available, and there are two ways to claim them.
The standard mileage method multiplies business miles by the IRS rate. 2026 is unusual: the business rate was 72.5 cents per mile from January 1 through June 30, then rose to 76 cents from July 1 after fuel costs climbed (Littler). Two rates in one tax year means your mileage log needs dates, not just totals.
The actual expense method adds up the real costs (fuel, insurance, repairs, depreciation, registration) and claims the business-use percentage. It usually wins for a vehicle that’s expensive to run and used almost entirely for the business.
Either way the requirement is the same: contemporaneous records. A log kept as you drive, not reconstructed in March. Commuting from home to your own shop doesn’t count; driving from the shop to a customer does.
Beyond vehicles, the ordinary deductions for a local operation are packaging, ingredients and supplies, rent, utilities, insurance, software, professional fees, and equipment. Larger equipment purchases may be deductible in the year you buy them rather than depreciated over years, which can make the timing of a van or cooler purchase a tax decision as well as an operational one.
Business insurance premiums are deductible too, which is a small consolation for a cost that’s hard to avoid. Commercial auto, general liability, and property coverage are typically required rather than optional, and what insurance a small business actually needs depends on your state, your vehicles, and whether you have employees.
Tax credits are worth separating from deductions, because they cut the tax itself rather than the income it’s calculated on. Food producers are often surprised to qualify: reformulating a recipe for shelf stability or developing a new production process can count as qualifying research activity. The rules are technical enough that most owners work through them with a specialist, and there are consultants who focus specifically on R&D tax credits for smaller businesses if the question applies to you.
Payroll taxes once you hire
Hiring changes your tax life more than any other single event. As an employer you withhold income tax and the employee’s share of FICA from each paycheck, pay the matching employer share of Social Security and Medicare, and pay federal and state unemployment tax. You file payroll returns quarterly and issue W-2s in January.
Payroll also makes you the custodian of a lot of sensitive data: Social Security numbers, wage records, bank details for direct deposit. That obligation doesn’t disappear because you’re small, and the practical safeguards belong on the same list as the filing requirements, since what every business should know about data breaches applies squarely to payroll records.
Two practical notes. First, withheld payroll tax is not your money at any point, and the penalties for using it as working capital are among the harshest in the code. Second, correctly classifying who is an employee and who is an independent contractor is a legal determination with real consequences, driven by the facts of the working relationship rather than by preference or paperwork. It’s worth professional advice rather than a best guess.
Key tax dates for small business owners
Dates shift when they fall on a weekend or holiday, so confirm each year, but the shape of the calendar is stable:
- Mid-January — final quarterly estimated payment for the prior year.
- End of January — W-2s and 1099s to recipients.
- Mid-March — S corporation and partnership returns.
- Mid-April — personal and C corporation returns, plus the first quarterly estimate for the new year.
- Mid-June, mid-September — second and third quarterly estimates.
- Quarterly — payroll tax returns if you have employees; sales tax filings on whatever schedule your state sets.
An extension extends the time to file, not the time to pay. If you extend, you still need to pay your estimate by the original deadline.
Frequently asked questions
How much can a small business make before paying taxes?
There’s no profit floor that exempts a business from income tax, but the self-employment tax threshold is $400 of net earnings. Above that, you owe it. In practice the personal standard deduction means a very small profit may produce no income tax while still producing self-employment tax. Filing requirements also apply even in a loss year for most entity types.
Do I have to pay quarterly taxes in my first year?
If you expect to owe $1,000 or more for the year, generally yes. First-year owners often have no prior-year tax to safe-harbor against, so the practical approach is to estimate conservatively from actual quarterly profit and adjust as the year develops.
Does an LLC pay less tax than a sole proprietorship?
Not by itself. A single-member LLC is taxed the same as a sole proprietorship by default; the LLC gives you liability separation, not a lower rate. What can lower the bill is electing S corporation tax treatment, which is available to LLCs and changes how profit above your wage is taxed.
Can I deduct my delivery vehicle?
Yes, for the business-use portion, using either the standard mileage rate or actual expenses. A vehicle used for both business and personal driving is deductible only in proportion to business use, which is why the mileage log matters. Purchase costs for a vehicle used primarily for the business may be deductible under rules that differ from ordinary expenses, so confirm the treatment with your accountant before you buy.
What happens if I can’t pay my tax bill?
File anyway. The failure-to-file penalty is substantially larger than the failure-to-pay penalty, and the IRS offers installment agreements for businesses that file and then arrange to pay. Not filing is the expensive choice.
Get the structure right, then the arithmetic is easy
Three habits cover most of what goes wrong with small business taxes. Know your entity and revisit it as profit grows, because that choice drives the rate more than anything else. Move a fixed percentage of every week’s profit into a separate account so the quarterly payment is already sitting there. And keep records as you go: mileage with dates, receipts attached to transactions, sales tax held separately.
None of this replaces an accountant, and a good one usually costs less than the deductions and elections they find. Most owners do better with someone local who knows their state and city rules. A business in California, for instance, has filing obligations that a general preparer may not handle every day, which is why tax preparation services aimed at Los Angeles businesses and their equivalents elsewhere exist. But owners who understand the structure get far more out of that relationship, because they arrive with questions instead of a shoebox.
