How is small business income taxed?

Taxes are something everyone can look forward to coming their way. Every year people spend countless hours preparing to pay their taxes. Yet, few of us ever think about how small businesses are taxed. While large corporations are paying federal and state-mandated taxes, the vast bulk of small businesses are generally not considered corporations. Consequently, they do not tend to pay the corporate business rate of taxes. But instead, small businesses are classified as “pass-through entities”. So, instead of paying the business tax rate, the income of small businesses gets passed through to be picked up by the owner at the rate worked out in their individual tax returns.

Aside from taxing things like income, small businesses can be taxed at a rate of 7.65-percent on gross payroll as determined by what employees have been paid. This rate of taxation will inevitably change due to other factors like unemployment and worker’s compensation. The payroll tax tends to be one of the largest tax obligations that a small business must pay.

When your business sells assets or earns a profit off an investment opportunity, any income or profit made on such efforts leads to a capital gains tax. How much this form of taxation costs depends heavily on how long the asset or investment being made has been held by the company. This implies that everything from dividends to real estate is all part of the total taxation incurred by a small business.

Small business Taxation is generally governed by the numbers. If you were to divide a business’s total tax paid by the taxable amount earned, the value you would acquire is the effective tax rate. Most small businesses appear to achieve an effective rate of right around 19-percent. The average for sole proprietorships turns out to be around 13-percent. For partnerships, this value increases to 23-percent. So, while a small business may not directly pay income tax, it does tend to get the opportunity to pay its fair share of other types of taxes.