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Federal Taxes: A Guide For Small Businesses

Federal taxes are a lot, especially if you're a small business owner. There are business taxes to contend with, as well as personal taxes. In this guide, we'll break down the basics of different federal taxes– both at the business and individual level.

Table of contents

Key Takeaways:...Read more

Federal taxes for businesses...Read more

Federal taxes for business owners...Read more

Lowering business taxes...Read more

Non-federal taxes...Read more

Key Takeaways:

Business taxes can be levied on the federal and state level.
The US corporate income tax rate is 21%.
Your tax liability will depend on your business structure.

Federal taxes for businesses

When thinking about small business tax, there are quite a few types the IRS expects you to know. All of them have different rules, so it's important that you get professional help if you need it.

Income tax

Every small business, except partnerships, needs to handle federal business tax filing each year. Partnerships are a bit different. They file an information return (Form 1065) because their income passes through to the partners, who then report it on their personal tax returns. Here’s how small business tax filing works based on your business structure:

Sole proprietorships: Use Form 1040 along with Schedule C. This is part of the small business tax process where income is reported on your personal return.
Partnerships and S Corps: Partners and individual shareholders file Form 1040 with Schedule E. S Corporations also need to file Form 1120-S. S Corps don’t pay federal business taxes themselves; instead, shareholders report the income on their personal returns.
C Corporations: File Form 1120 and are subject to the US corporate tax rate, also known as the federal business tax rate, which is 21%

For LLCs, the filing requirements depend on their setup. They could be treated as partnerships, corporations or like a sole proprietorship, affecting how small business tax is handled. Sole proprietors and individual partners in a partnership need to pay self-employment tax for Social Security and Medicare. To report this, they should include Schedule SE with their Form 1040. The self-employment tax rate is 15.3%. This breaks down to 12.4% for Social Security and 2.9% for Medicare. Keep in mind that small business owners need to pay estimated taxes to avoid penalties. Since taxes aren’t withheld from your income like they are for regular employees, you must calculate and pay taxes every quarter. This covers both income tax and self-employment tax. You can use Form 1040-ES to figure out how much you owe and when to pay.

Employment tax

If you’re running a sole proprietorship, partnership, or C or S Corp with employees, you need to manage small business tax filing carefully. For tax on small business wages, you handle Social Security and Medicare taxes, which are split between you and your employees. You withhold a portion from each paycheck for these taxes and match it with your own contribution. Additionally, you need to withhold federal income taxes from employee paychecks, ensuring they’re prepaying their income taxes throughout the year. You’re also responsible for unemployment taxes (FUTA), which are fully paid by you as the employer, providing benefits to workers who lose their jobs. When it comes to the federal business tax rate, you’ll file different forms depending on the taxes you’re reporting. Use Form 941, 943 or 944 for Social Security, Medicare and income tax withholdings. FUTA taxes are reported with Form 940. Understanding these small business tax filing requirements helps you stay compliant with the corporate tax rate.

Excise tax

Excise tax is a specialized tax applied to specific goods, services, and activities, and it’s an important aspect of tax for small businesses. Unlike general sales tax, excise taxes are levied on items like gasoline, tobacco and alcohol. So if you run a small trucking business, you’ll encounter excise tax on the fuel you buy. This tax helps fund road maintenance and infrastructure, directly impacting your operating costs. Similarly, if you own a bar or brewery, you’ll pay excise tax on the alcohol you produce or sell. Understanding and managing excise tax is an important, but often overlooked part of small business tax filing. Even though excise taxes don’t directly affect the US corporate tax rate ( general corporate tax rate), they are essential for businesses dealing with goods or activities that are specifically taxed. Properly reporting these taxes and keeping meticulous records of your receipts ensures that you stay on top of federal regulations. This helps prevent issues with the IRS and keeps your business in their good books.

Federal taxes for business owners

Apart from taxes that affect the business, there are certain federal taxes that can affect the business owner's personal tax situation.

Estate tax

Estate tax is a federal tax on the transfer of a deceased person's estate to their heirs. It’s based on the total value of the estate, including cash, property, and other assets. For 2024, estates valued under $13.61 million do not pay estate tax. Estates over this amount are taxed. For example, if someone leaves behind an estate worth $15 million, estate tax applies to the $2.39 million above the exemption limit. To handle this, the estate must file an estate tax return using Form 706. Estate tax is different from inheritance tax. Estate tax is paid by the estate before the assets are passed on, while inheritance tax is charged to the heirs who receive the assets. Most states do not have inheritance tax, so it's important to check local rules.

Gift tax

The gift tax is a federal tax on transfers of money or property from one person to another without receiving something of equal value in return. For 2024, gifts exceeding the annual exclusion limit of $18,000 per recipient may be subject to gift tax. This tax is separate from inheritance tax, which applies to assets transferred after death. For example, if you give your child $27,000 to help with a down payment on a house, this amount exceeds the annual exclusion limit, so you’ll need to file a gift tax return using Form 709. Even though you’re required to report the gift, you won’t necessarily owe tax right away. The lifetime exemption amount of $13.61 million for 2024 can offset any gift tax due.

Lowering business taxes

Just like individual taxpayers, small businesses can also take advantage of various tax deductions when filing their taxes. This can be expenses like vehicle depreciation, startup costs, office rent, equipment and CPA fees. Tax credits like the R&D credit, General Business Credit and Work Opportunity Credit can also be useful to lower taxes.

Non-federal taxes

Most businesses forget about state and local taxes, but they are an important part of small business tax planning, too. This includes state income tax, sales tax, franchise tax, property tax and inheritance tax (if you've recently received some money from a deceased individual). FlyFin’s Ultimate Plan subscription is ideal for business owners looking for a comprehensive solution to managing business taxes. Expert CPAs provide unlimited tax support and tax planning advice while AI finds all your deductions and saves you the most possible.

LLC vs S Corp vs C Corp

When we look for an LLC Vs SCorp Vs CCorp comparison, we find a lot of differences between the three, and then there are similarities in taxes and business rules and regulations.

LEARN MORE →

NPO

Nonprofit status may be right for your business if you're ready to incorporate and your organization seeks to benefit society.

LEARN MORE →

C Corp

Everything you need to know about C Corp taxes in our comprehensive guide. Learn about Form 1120, understand corporate tax, and how to tax plan for a C Corporation.

LEARN MORE →

S Corp

Master S Corp taxes by learning how to fill out Form 1120-S. Get clear insights into S Corp taxation to simplify your filing and keep your business compliant.

LEARN MORE →

LLC

Learn how to file LLC for your small business, navigate LLC taxes and tackle single member LLC tax reporting. FlyFin can help file taxes as an LLC and save on taxes.

LEARN MORE →

Sole Proprietor

A sole proprietorship is a business that has only one employee, who is also the owner. Check how sole proprietors file their taxes.

LEARN MORE →

Partnership

Learn about Form 1065 and SChedule K-1 for your partnership taxes. Get guidance for your partnership tax return and make partnership LLC tax filing easy and accurate.

LEARN MORE →

LLC vs S Corp vs C Corp

When we look for an LLC Vs SCorp Vs CCorp comparison, we find a lot of differences between the three, and then there are similarities in taxes and business rules and regulations.

LEARN MORE →

NPO

Nonprofit status may be right for your business if you're ready to incorporate and your organization seeks to benefit society.

LEARN MORE →

C Corp

Everything you need to know about C Corp taxes in our comprehensive guide. Learn about Form 1120, understand corporate tax, and how to tax plan for a C Corporation.

LEARN MORE →

S Corp

Master S Corp taxes by learning how to fill out Form 1120-S. Get clear insights into S Corp taxation to simplify your filing and keep your business compliant.

LEARN MORE →

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