Commercial tax is the umbrella term for the taxes a government imposes on business activity, covering corporate income tax, sales and use tax, payroll and self-employment tax, unemployment tax, and excise levies. At the federal level, C-corporations pay a flat 21% income tax on profits, while S-corporations, partnerships, and most LLCs pass income through to their owners’ personal returns. State and local governments add their own layers, with corporate income tax rates running from zero to above 11% depending on where the business operates. What your business actually owes depends on its entity type, where it has a taxable connection, and what it sells.
What Counts as Commercial Tax
There is no single “commercial tax.” The label groups together every levy that flows from doing business: taxes on profit, on transactions, on wages, on specific goods, and on the privilege of operating in a given place. Some are paid by the business itself. Others are collected from customers or withheld from employees, with the business responsible for handing the money over.
A few states use the phrase more narrowly. Ohio’s Commercial Activity Tax (CAT) is a tax on the privilege of doing business, measured by gross receipts rather than net profit. Starting in 2025, only businesses with more than $6 million in Ohio taxable gross receipts owe the CAT, up from a $150,000 threshold that applied before 2024.1Ohio Department of Taxation. Commercial Activity Tax (CAT)
Nexus: Where You Owe
A business only owes taxes to a jurisdiction where it has “nexus,” meaning a sufficient connection. Nexus once required a physical presence like an office, warehouse, or employee. The Supreme Court’s 2018 decision in South Dakota v. Wayfair changed that for sales tax, holding that states can require out-of-state sellers to collect based on economic activity alone, such as sales volume or transaction count.2Supreme Court of the United States. South Dakota v. Wayfair, Inc., et al. Many states have since applied similar economic nexus rules to corporate income tax. If you sell into multiple states, you may owe tax in places where you have never set foot.
The Main Taxes a Business Owes
Corporate Income Tax
The federal corporate income tax rate is a flat 21%, set permanently by the Tax Cuts and Jobs Act of 2017.3Legal Information Institute. Tax Cuts and Jobs Act of 2017 (TCJA) It applies to a C-corporation’s taxable income after allowable deductions. Most states layer their own corporate income tax on top, with top rates from zero in states like Wyoming and South Dakota to above 11% in a handful of others. About half the states that impose the tax set their top rate at or near 6.5%.
Sales and Use Tax
Sales tax is collected at the point of sale and sent to the state, and often to a city or county on top of that. Five states have no state-level sales tax. The rest charge base rates that run from under 3% up to 7.25%, with local surcharges pushing combined rates higher. Under Wayfair, this collection duty reaches remote sellers who cross a state’s economic nexus threshold, commonly set around $100,000 in sales or 200 transactions per year.2Supreme Court of the United States. South Dakota v. Wayfair, Inc., et al.
Payroll Tax
Every employer owes payroll taxes under the Federal Insurance Contributions Act. The employer’s share is 6.2% for Social Security and 1.45% for Medicare, matched by the employee.4Internal Revenue Service. Topic no. 751, Social Security and Medicare Withholding Rates Social Security applies only up to the annual wage base, $184,500 for 2026.5Social Security Administration. Contribution and Benefit Base Medicare has no cap, and employees earning above $200,000 owe an additional 0.9% Medicare tax that the employer must withhold, though the employer does not match it.6Internal Revenue Service. Topic no. 560, Additional Medicare Tax
Withheld payroll amounts are considered held in trust for the government. Failing to send them in is one of the most dangerous mistakes a business owner can make, because the IRS can hold individual officers and owners personally liable for the full unpaid amount under the trust fund recovery penalty.7Office of the Law Revision Counsel. 26 USC 6672 – Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax The corporate veil does not protect you.
Self-Employment Tax
Sole proprietors, independent contractors, and partners have no employer withholding FICA for them, so they pay both halves through the self-employment tax. The combined rate is 15.3%: 12.4% for Social Security up to the $184,500 wage base, and 2.9% for Medicare with no cap. Taxpayers can deduct the employer-equivalent half when calculating adjusted gross income.
Unemployment Tax
The Federal Unemployment Tax Act (FUTA) imposes a gross rate of 6.0% on the first $7,000 of each employee’s annual wages. Employers who pay state unemployment tax on time get a credit of up to 5.4%, dropping the effective federal rate to 0.6%.8Employment & Training Administration – U.S. Department of Labor. FUTA Credit Reductions State unemployment insurance rates vary widely. Taxable wage bases range from $7,000 to over $78,000, and each employer’s rate rises or falls based on the company’s history of layoffs and claims.
Excise Tax
Excise taxes hit specific goods and activities: fuel, tobacco, alcohol, heavy trucks, airline tickets, and certain environmental chemicals. Rates are usually set per unit rather than as a percentage of price. The legal duty to report and remit sits with the producer, importer, or distributor, who files Form 720 quarterly.
How Your Entity Changes the Bill
C-Corporations
A C-corporation is a separate taxpayer. It files Form 1120 and pays the 21% federal income tax from the corporate treasury.9Internal Revenue Service. About Form 1120, U.S. Corporation Income Tax Return When profits are paid out as dividends, shareholders pay tax again on that money at their individual rates. This double taxation is the defining trade-off, offset by liability protection and the ability to retain earnings at the flat corporate rate.
S-Corporations and Partnerships
S-corporations and partnerships are pass-through entities. The business itself pays no federal income tax; income flows through to the owners, who report their share on personal returns.10Internal Revenue Service. About Form 1065, U.S. Return of Partnership Income The business still files an information return (Form 1065 for partnerships, Form 1120-S for S-corporations). Pass-through owners actively involved in a qualifying trade or business may claim the qualified business income deduction, which allows a deduction of up to 20% of qualified business income. The QBI deduction was made permanent by the One Big Beautiful Bill Act.
LLCs
An LLC is not its own tax classification. A single-member LLC is taxed as a sole proprietorship by default; a multi-member LLC is taxed as a partnership. Either can elect to be taxed as a C-corporation or S-corporation. Whatever the classification, every business still owes applicable employment taxes, local property taxes, and any industry-specific fees.
How the Bill Is Calculated
Most federal and state income taxes use the net income method: total revenue minus allowable expenses, taxed on what remains. Federal law allows deductions for all ordinary and necessary expenses of running a business.11Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses A business with $2 million in sales and $1.8 million in expenses pays tax only on the $200,000 difference.
Some state-level commercial taxes, like Ohio’s CAT, use a gross receipts method instead. The rate is much lower, often a fraction of a percent, but it applies to total revenue before deductions. For a business on thin margins, gross receipts tax can hit harder than a traditional income tax, because it applies even in a losing year.
Deadlines and Estimated Payments
For calendar-year taxpayers filing for the 2025 tax year, the key deadlines in 2026 are:12Internal Revenue Service. Publication 509 (2026), Tax Calendars
- March 16, 2026: Form 1065 (partnerships) and Form 1120-S (S-corporations). The statutory date is the 15th day of the third month after the tax year ends; because March 15 is a Sunday in 2026, it moves to Monday.
- April 15, 2026: Form 1120 (C-corporations), due the 15th day of the fourth month after year-end.
Automatic six-month extensions are available for most business returns, but an extension to file is not an extension to pay. Any tax owed is still due by the original deadline.
Businesses that expect to owe $500 or more must make quarterly estimated payments. For the 2026 tax year, those payments are due April 15, June 15, September 15, and January 15 of 2027.13Taxpayer Advocate Service. Making Estimated Payments Underpayment triggers a penalty at the federal short-term rate plus three percentage points, which works out to 7% for early 2026, or 9% for large C-corporations with underpayments over $100,000.14Internal Revenue Service. Quarterly Interest Rates
Filing a return late costs 5% of the unpaid tax per month, capped at 25%. Paying late costs 0.5% per month, also capped at 25%. When both apply, the filing penalty is reduced by the payment penalty amount.15Internal Revenue Service. Failure to File Penalty If you cannot pay in full, file on time anyway to cut the penalty roughly in half.
Penalties That Can Reach You Personally
The civil penalty most likely to catch a business owner off guard is the trust fund recovery penalty. If your company withholds Social Security and Medicare from employee paychecks but fails to remit the money, the penalty equals 100% of the unpaid amount, and it can be assessed personally against any “responsible person” who had authority over the company’s finances.7Office of the Law Revision Counsel. 26 USC 6672 – Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax An officer, director, or bookkeeper with check-signing authority can be on the hook out of personal assets. It is one of the few tax debts that cannot be discharged in bankruptcy.
On the criminal side, tax evasion — willfully trying to dodge a tax you know you owe — is a felony carrying up to five years in prison and fines up to $100,000 for individuals or $500,000 for corporations.16Office of the Law Revision Counsel. 26 USC 7201 – Attempt to Evade or Defeat Tax Willful failure to file a return is a misdemeanor, punishable by up to one year in prison and fines up to $25,000, or $100,000 for corporations.17Office of the Law Revision Counsel. 26 USC 7203 – Willful Failure to File Return, Supply Information, or Pay Tax The word “willful” matters. Simple mistakes and honest oversights do not lead to criminal charges. Deliberately hiding income, filing false returns, or ignoring known obligations can.