How Much Are Small Business Taxes? Rates, Deductions, and Penalties

How much are small business taxes? There is no single rate. Your total bill is a stack: federal income tax at a flat 21% for C-corporations or between 10% and 37% for owners of pass-through businesses, plus 15.3% self-employment tax if you work for yourself, plus payroll taxes once you hire employees, plus whatever your state and locality add on top. What you actually owe depends on your business structure, your profit, where you operate, and how effectively you use the deductions available to you.

Federal Income Tax by Business Structure

The single biggest factor in your federal income tax bill is your entity type. The tax code splits businesses into two camps: entities that pay tax themselves, and entities that pass profits through to the owner’s personal return.

C-Corporations Pay a Flat 21%

A C-corporation pays federal income tax at a flat 21% on all taxable income, no matter the amount.¹ That rate has held since the 2018 tax year. Because the corporation is a separate taxpayer, any profit paid out to shareholders as dividends is taxed again on their personal returns. This is the double taxation that C-corp owners have to plan around.

Pass-Through Owners Pay Individual Rates

Sole proprietorships, partnerships, S-corporations, and most LLCs do not pay federal income tax at the business level. Profits flow through to each owner and get taxed at ordinary individual rates. For the 2026 tax year, those rates run from 10% on the first $12,400 of taxable income for single filers up to 37% on income above $640,600 for singles or $768,700 for married couples filing jointly.²

The 2026 brackets for single filers:

10% up to $12,400
12% from $12,401 to $50,400
22% from $50,401 to $105,700
24% from $105,701 to $201,775
32% from $201,776 to $256,225
35% from $256,226 to $640,600
37% above $640,600

Married-joint thresholds are roughly double the single figures.² These are marginal rates, so only the income inside each bracket is taxed at that bracket’s rate. A sole proprietor with $100,000 of net business income does not pay 22% on the whole thing; the first $12,400 is taxed at 10%, the next slice at 12%, and so on.

S-corporation owners who work in the business have to pay themselves a reasonable salary that is subject to payroll taxes. Remaining profit taken as a shareholder distribution avoids payroll taxes but is still taxed at the owner’s marginal income tax rate.

The 20% Qualified Business Income Deduction

Pass-through owners may be able to deduct up to 20% of their qualified business income under Section 199A.³ This deduction was set to sunset after 2025 but has been extended. C-corporation income and W-2 wages do not qualify.

The full 20% is available when taxable income falls below certain thresholds. Above those thresholds, the deduction phases out based on the type of business, the W-2 wages the business pays, and the cost basis of qualified property. Specified service businesses such as law, medicine, accounting, and consulting run into stricter limits that can wipe out the deduction at higher income levels. The overall cap is the lesser of 20% of your qualified business income or 20% of your taxable income minus net capital gains.³

Self-Employment Tax: The 15.3% on Top

If you run a sole proprietorship or partnership, you owe self-employment tax on your net earnings in addition to income tax. It funds Social Security and Medicare and combines both the employer and employee halves of the payroll tax:

Social Security at 12.4% on net self-employment income up to $184,500 in 2026⁴
Medicare at 2.9% on all net self-employment income, with no cap⁵

Combined, that is 15.3% on earnings up to the Social Security wage base and 2.9% above it. High earners owe an additional 0.9% Medicare surtax on self-employment income above $200,000 for singles or $250,000 for married-joint filers.⁵

The tax is calculated on net profit, not gross revenue. You can also deduct half of your self-employment tax when figuring your adjusted gross income, which reduces your income tax.⁶ Self-employed owners generally have to make quarterly estimated payments to avoid underpayment penalties.

Payroll Taxes If You Have Employees

Hiring employees adds a new layer of tax on top of wages. Under FICA, you match each employee’s contribution to Social Security and Medicare: 6.2% for Social Security and 1.45% for Medicare on every dollar of wages, matching the identical amounts you withhold from the employee’s paycheck.⁷

You also have to withhold an extra 0.9% Medicare tax on any single employee’s wages above $200,000 in a year. There is no employer match on that additional Medicare tax; it comes entirely from the employee.⁷

Federal unemployment tax adds 6% on the first $7,000 of wages paid to each employee per year.⁸ Employers who pay state unemployment taxes on time usually get a credit that drops the effective FUTA rate to 0.6%, or about $42 per employee per year. State unemployment insurance sits on top of that, with rates that vary by industry and claims history.

State and Local Taxes

Federal is only part of the total. Where you operate can add anywhere from nothing to double digits.

Most states tax business profits. Corporate income tax rates run from 0% to roughly 11.5%, with a typical top rate around 6.5%. A few states have no corporate income tax but levy gross receipts taxes instead, which apply to total revenue rather than profit. Pass-through owners pay under the state’s personal income tax brackets, which range from 0% in no-income-tax states to above 13% in the highest-tax states.

If you sell taxable goods or services, you also collect sales tax and remit it to the state. Combined state and local rates run from 0% to over 10%. A physical or economic presence in a state, often called nexus, can require you to collect that state’s sales tax even if your business is based elsewhere.

Many local governments also charge property taxes on business real estate, equipment, and sometimes inventory. Some states impose franchise or capital stock taxes based on your business’s net worth or authorized shares rather than its profit. Two businesses with identical income can end up with very different effective tax rates depending on location alone.

Deductions That Reduce What You Owe

Deductions cut the income the rates apply to, so they matter as much as the rates themselves. The most useful ones for small businesses:

Ordinary business expenses like rent, utilities, office supplies, insurance premiums, advertising, and professional fees, provided they are ordinary and necessary.
Vehicle expenses, using either actual costs or the IRS standard mileage rate of 72.5 cents per mile for 2026.⁹
Half of your self-employment tax, deducted from adjusted gross income whether or not you itemize.⁶
The qualified business income deduction of up to 20% for eligible pass-through owners.
Retirement contributions to a SEP-IRA, SIMPLE IRA, or solo 401(k), which reduce taxable business income.
The home office deduction, either based on a portion of housing costs or the simplified method of $5 per square foot up to 300 square feet.

Every deduction depends on your records. Keep receipts, bank statements, mileage logs, and any documentation that supports the expense. Without them, a deduction can be disallowed if you are audited.

Penalties for Filing or Paying Late

The IRS charges separate penalties for filing late and paying late, and they can stack.

Miss a filing deadline without an extension and the penalty is 5% of unpaid tax per month or partial month, capped at 25%. For returns due after December 31, 2025, if the return is more than 60 days late, the minimum penalty is $525 or 100% of the unpaid tax, whichever is less. Partnerships and S-corporations get a different formula: $255 per partner or shareholder per month, for up to 12 months.¹⁰ A five-member partnership four months late owes $5,100 in penalties before any tax.

File on time but come up short on the payment and the penalty is 0.5% of the unpaid tax per month, capped at 25%.¹¹ An approved IRS payment plan drops that to 0.25% per month. Interest also runs on both the unpaid tax and any penalties.

Business owners who expect to owe $1,000 or more should also plan on quarterly estimated payments to avoid an underpayment penalty, which is calculated as interest on the shortfall for each quarter and applies even if you end up owed a refund at year end.¹²

If the IRS finds you significantly understated your income or took an unsupported position, an accuracy-related penalty of 20% of the underpayment applies. For certain reportable transactions, it climbs to 30%.¹³

1
Office of the Law Revision Counsel. 26 USC 11 Tax Imposed
2
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
3
Internal Revenue Service. Qualified Business Income Deduction
4
Social Security Administration. Contribution and Benefit Base
5
Office of the Law Revision Counsel. 26 USC 1401 Rate of Tax
6
Internal Revenue Service. Topic No. 554, Self-Employment Tax
7
Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates
8
Office of the Law Revision Counsel. 26 USC 3301 Rate of Tax
9
Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents Per Mile
10
Internal Revenue Service. Failure to File Penalty
11
Internal Revenue Service. Failure to Pay Penalty
12
Internal Revenue Service. Estimated Tax
13
Office of the Law Revision Counsel. 26 USC 6662A Imposition of Accuracy-Related Penalty on Understatements With Respect to Reportable Transactions