How Much Do Business Taxes Cost? Key Factors Explained

Business taxes represent a significant component of operating costs for any enterprise. These are payments to various government levels, including federal, state, and local authorities. Understanding these taxes is essential for accurately assessing a business’s financial health and planning for its future. This article clarifies different types of business taxes and the factors influencing their cost.

Primary Federal Business Tax Types

Federal income tax is levied on a business’s profits. The specific entity responsible for paying this tax depends on the business’s legal structure. This tax operates on a “pay-as-you-go” system, requiring businesses to pay tax as income is earned throughout the year.

Payroll taxes are a federal obligation for businesses with employees, including Social Security and Medicare (FICA) taxes, and Federal Unemployment Tax (FUTA). FICA taxes fund Social Security and Medicare. The Social Security tax rate is 6.2% for both employer and employee on wages up to $176,100.

The Medicare tax rate is 1.45% for both, with no wage limit. An additional 0.9% Medicare tax applies to employee wages over $200,000. Employers withhold and remit contributions to the IRS.

FUTA tax contributes to state unemployment insurance programs. The standard FUTA tax rate is 6% on the first $7,000 of wages paid to each employee annually. Employers can receive a credit of up to 5.4% for timely payment of state unemployment taxes, reducing the effective FUTA rate to as low as 0.6%. This means the maximum FUTA tax per employee is $42 ($7,000 x 0.006).

Federal excise taxes are imposed on the sale or use of specific goods, services, or activities. Common examples include taxes on fuel, airline tickets, tobacco, and alcohol. Businesses subject to excise tax file Form 720 to report and pay these taxes.

How Business Structure Influences Your Tax Bill

A business’s legal structure significantly impacts its federal tax obligations. This choice determines how income is reported, who pays the tax, and which tax rates apply.

A sole proprietorship is a simple business structure where the owner and the business are a single entity for tax purposes. Business income and expenses are reported on the owner’s personal tax return, on Schedule C. Net profit is subject to individual income tax rates and self-employment taxes. Self-employment tax covers Social Security and Medicare contributions for self-employed individuals, effectively combining the employer and employee portions of FICA. For 2025, this combined rate is 15.3%.

Partnerships operate as “pass-through” entities, meaning the business itself does not pay federal income tax. The partnership files an informational return, Form 1065, reporting its income, deductions, and credits. Each partner receives a Schedule K-1. Partners report this income on their individual tax returns, subject to personal income tax rates. General partners are subject to self-employment tax on their share of the business’s earnings.

A Limited Liability Company (LLC) offers flexibility in taxation. A single-member LLC is taxed as a sole proprietorship, with income reported on Schedule C. An LLC with two or more members is taxed as a partnership. An LLC can elect to be taxed as an S corporation or a C corporation by filing specific forms with the IRS.

S corporations are pass-through entities where profits and losses pass directly to the owners’ personal income without corporate-level taxation. This structure avoids the double taxation of C corporations. S corporation shareholders receive a Schedule K-1. A key tax advantage for S corporation owners is that distributions of profit are not subject to self-employment taxes, though owners who work for the business must pay themselves a “reasonable salary” subject to FICA and Medicare taxes.

C corporations are legal entities separate from their owners. They are subject to corporate income tax at the entity level. The federal corporate tax rate is a flat 21% on taxable income. This structure can lead to “double taxation” because the corporation pays tax on its profits, and then shareholders pay personal income tax on dividends received from those after-tax profits. C corporations file Form 1120 for their federal income tax return.

Key Factors Affecting Your Business’s Taxable Income

Taxable income is calculated by starting with a business’s gross revenue and then subtracting allowable deductions and credits. Higher deductions and credits result in lower taxable income and a reduced tax liability.

Gross revenue represents the total income from a business’s primary operations before expenses. Businesses can deduct ordinary and necessary expenses incurred during operations. These include salaries, rent, utility costs, advertising, and professional fees.

For businesses that sell products, the Cost of Goods Sold (COGS) is a significant deduction. COGS includes direct costs associated with producing goods, such as materials, direct labor, and manufacturing overhead.

Depreciation and amortization allow businesses to recover the cost of certain assets over their useful life. Depreciation applies to tangible assets like machinery, equipment, and buildings. Amortization applies to intangible assets such as patents and copyrights. These methods spread the deduction over several years, rather than deducting the entire cost in one year.

Specific tax deductions can further reduce a business’s taxable income. Section 179 of the IRC allows businesses to deduct the full purchase price of qualifying equipment and software placed into service during the tax year, up to certain limits. The Qualified Business Income (QBI) deduction, also known as the Section 199A deduction, allows eligible self-employed individuals and owners of pass-through entities to deduct up to 20% of their qualified business income, subject to income limitations.

Tax credits offer a direct dollar-for-dollar reduction in tax liability, which is more beneficial than a deduction. Various federal tax credits are available for businesses, designed to encourage activities like research and development, hiring certain employees, or investing in renewable energy.

Overview of State and Local Business Taxes

Business tax obligations extend beyond the federal level, encompassing taxes imposed by state and local governments. These taxes vary significantly by location and operations.

Many states levy their own income or franchise taxes on businesses. Some states also impose a franchise tax, based on a business’s net worth or capital, rather than its income. These taxes apply to C corporations and other entity types operating within the state.

Sales taxes are collected by businesses from customers at the point of sale and then remitted to state and local tax authorities. Property taxes are imposed by local governments on real estate and business personal property, such as equipment and inventory. The amount of property tax is based on the assessed value of the property.

State unemployment insurance (SUI) taxes, also known as State Unemployment Tax Act (SUTA) taxes, are paid by employers to fund unemployment benefits for eligible former employees. Like FUTA, SUI tax rates and wage bases vary by state, and rates adjust based on an employer’s claims history. Businesses may also encounter local excise taxes, business license fees, and permitting costs imposed by cities or counties.

Meeting Your Tax Obligations and Deadlines

Understanding payment and filing procedures is essential for compliance and avoiding penalties. The federal tax system operates on a “pay-as-you-go” basis, requiring regular payments throughout the year.

Most businesses, including sole proprietors, partnerships, S corporations, and C corporations with expected tax liabilities, must make estimated tax payments. These payments are made in four quarterly installments. Estimated taxes ensure businesses pay income and self-employment taxes as they earn income, rather than waiting until the annual tax return is filed. Failing to pay enough estimated tax can result in penalties.

Federal tax filing deadlines vary by business structure. Partnerships and S corporations file Form 1065 and Form 1120-S, respectively, by March 15. Sole proprietors and single-member LLCs file Schedule C with their personal Form 1040 by April 15. C corporations file Form 1120 by April 15. Businesses can request an extension for filing, but not for payment.

Filing tax returns can be done electronically or by mail; the IRS encourages electronic filing. Businesses must maintain accurate records of all income, expenses, and financial transactions to support information reported on tax returns. Proper record-keeping is fundamental for calculating tax obligations and substantiating claims during an IRS inquiry.