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How do you calculate business income tax?
How you calculate business income tax depends first and foremost on your business entity.
Once you figure out your tax bracket, you might be tempted to multiply your entire income by its rate. Don’t. The IRS follows an incremental tax system. In other words, each rate only applies to the portion of income that falls within that bracket.
For example, let’s say you’re a sole proprietor who makes $55,000 in taxable income.
You’d pay 10% on the first $12,400 of your income.
Then you’d apply the next highest bracket (12%) from $12,401 to $50,400.
Finally, you’d pay 22% on the remaining amount.
Income tax for C corporations is more straightforward. To calculate it, simply multiply the business’s taxable income by 21%. This rate stays the same no matter what.
How do you calculate self-employment tax?
The rate is a constant 15.3%, and it applies to 92.35% of your self-employment income.
Again, let’s say you’re a sole proprietor with $55,000 in taxable income. You’d pay self-employment tax on $50,792.50 of it (55,000 x 0.9235). That comes to $7,771.25 (50,792.50 x 0.153) owed in taxes.
If you’re a single filer and make more than $200,000, you’ll owe an additional 0.9% in Medicare taxes. That cap is $250,000 for business owners who are married and filing jointly.
What other taxes do you owe?
The calculator above doesn’t cover every type of tax your business needs to pay. Those vary from one business to the next.
Here are some other types of taxes and which businesses might be responsible for them:
- Sales tax: Retail businesses that sell physical products. See our list of sales tax by state for more details.
- Excise tax: Businesses that sell products like alcohol, fuel or tobacco. Our excise tax explainer includes more examples.
Employment tax: Businesses with employees besides themselves.
Local tax: Businesses in certain states that allow cities and/or counties to levy some form of local income tax. Those states include Alabama, Delaware, Indiana, Iowa, Kansas, Kentucky, Maryland, Michigan, Missouri, New Jersey, New York, Ohio, Oregon, Pennsylvania and West Virginia.
Do you pay taxes in one lump sum?
No. That would be too easy. The IRS follows a pay-as-you-go system. That means most businesses need to make multiple federal income tax payments each year.
Most businesses follow a quarterly payment schedule when it comes to federal income tax. For sole proprietorships, partnerships, single-member LLCs, multi-member LLCs and S corporations, payments are due on the following days:
April 15.
June 15.
Sept. 15.
Jan. 15.
Quarterly self-employment tax payments are due on the same days.
C corporations also follow a quarterly payment schedule for federal income tax. Due dates are slightly different though:
April 15.
June 15.
Sept. 15.
Dec. 15.
How do you estimate quarterly tax payments?
You could also try to estimate what you owe based on what your business made the previous quarter. Most accountants should be able to assist you with this.
How can you reduce your tax liability?
Most businesses should deduct expenses to minimize their taxable income. This is one of the most impactful things you can do to save money.
Just make sure to discuss your deductions strategy with your accountant ahead of time. That way, you can ensure you’re collecting the correct documents to back up your write-offs.
