It’s no secret that preparing for and filing your taxes isn’t everyone’s cup of tea. Many founders would agree that finding product-market fit, shipping new features, and learning from customers feel much more productive — and exciting — than administrative work like tax preparation.
But ensuring that you stay compliant with tax codes is among your responsibilities, allowing you to continue to serve your customers. And even if your business or startup hasn’t turned profitable yet doesn’t mean you're off the hook.
The type of taxes you’re subject to, when you have to pay them, and how much you have to pay vary region to region and go beyond a simple calculation. In this article, we’ll break down what you need to know about business taxes so that you’re prepared to have the right conversations with your tax preparers this tax season.
Who pays business taxes?
All types of for-profit businesses in the United States are subject to taxes. How they’re taxed though, in part, depends on their tax election status. It’s important to note that a company’s tax election is not always the same as its incorporated entity. For example, while a single-member LLC is taxed as a sole proprietorship by default, it can elect to be taxed as a C corporation. You should talk to your tax professional to learn more about which taxation election makes sense for your business.
Businesses can either be taxed as a C corporation — which applies to most venture-backed technology companies and large corporations — or a number of different pass-through entities, which include limited liability companies, partnerships, sole proprietorships, and S corporations. These are common for small businesses and non-venture-backed companies.
The main distinction between these two types of tax elections is that C corporations face “double taxation,” first from corporate income taxes on the business's profits, followed by individual income taxes that each shareholder pays when they receive distributions. On the other hand, pass-through taxation entities are referred to as such because they “pass through” their business income to the owners who then pay taxes at their individual income rates.
While that part is pretty straightforward, the US tax code has blessed entrepreneurs with a myriad of other taxes such as state income tax, franchise tax, sales tax, payroll tax, and gross receipts tax. Depending on where your company operates or sells from you may need to talk to your tax professionals about your state nexus — the relationship your company has with each state, often characterized by either your physical or economic presence or your company’s net worth or capital that is apportioned to a state.
Tax Cuts and Jobs Act (TCJA) of 2017
To understand the amount of taxes that your business owes, it can be helpful to first take a look at the lay of the relevant land.
Federal tax code changes are passed in Congress, with participation from both the House of Representatives and the Senate. If both chambers of Congress approve the proposed tax legislation, the proposal goes to the President’s desk who can sign the legislation into law. If the President vetoes the tax bill, Congress can veto the President’s decision with a ⅔ vote in each house.
This is all to say that the tax code can change frequently, and you should work with a trusted tax advisor to stay up to date on changes.
As of writing, the last major overhaul of the U.S. tax code was the Tax Cuts and Jobs Act (TCJA) of 2017 which created many provisions that are set to expire at the end of 2025. While the incoming Trump administration has not shared formal guidance, it’s expected that some tax cuts may be extended and expanded prior to expiring at the end of 2025.
The TCJA signed into law business tax code changes, such as:
- Establishing a flat 21% federal income corporate tax rate. This is a permanent change barring future changes to the tax code.
- Creating Section 179 which allows businesses to deduct the full value of certain eligible depreciable business equipment in the current year, rather than depreciating the purchase over time. This is also a permanent change, however the deductible amounts are indexed to inflation.
- Enacting a 20% deduction on Qualified Business Income (QBI) for business owners of pass-through entities, like LLCs, partnerships, sole proprietorships, and S corporations.
- Increasing the number of small businesses eligible to use cash accounting from $5M to $25M in average annual gross receipts over the preceding three years.
Your business’s tax liability
Understanding your potential tax liability before you begin preparing your filings can help make the process much less intimidating — not to mention quicker for both you and the tax professional you work with.
Here, we’ll walk through how federal and state income taxes are calculated for each type of tax classification, along with additional tax liabilities you may face depending on the nature of your business.
Federal business income tax rate
Your federal income tax rate is calculated as a percentage of your business profits either using a flat rate (if you’ve elected to be taxed as a C corporation) or a progressive tax bracket system (if you classify as a pass-through entity).
C corporation taxation election
Most technology startups and large companies are taxed as C corporations and pay a flat 21% federal income tax rate on their profits.
It’s important to emphasize that tax is levied on business profits, which may be low or negative if you’re prioritizing growth over profitability. However, even if your company does not expect to generate a profit this year, you’re still required to file a Form 1120-C reporting your business’s income, expenses, and taxable income.
Pass-through entity taxation election
Pass-through entities — which are more commonly used for small businesses and non-venture-backed companies — are not taxed at the business level. Instead, the business's profits and losses are passed through to the owners’ personal tax returns.
This means that rather than facing the 21% flat income tax rate, owners of pass-through entities are subject to the same federal income tax brackets that individuals face.
Below are the 2024 federal income tax brackets.
State business income tax rate
Whether or not you’re required to pay state income taxes on your business profits can be a bit murky. That’s because, unlike federal income taxes, each state has its own state tax laws and regulations, and those can vary greatly from state to state.
C corporation taxation election
C corporations are taxed at the state level based on the portion of business income generated in a particular state. Calculating the amount of business income in each state can be complex for companies, particularly ones that do business online or physically across state lines. States use one of three tax apportionment formulas to determine the percentage of income subject to each state’s tax.
Once you know your taxable income for each state, you’ll have to follow each state’s unique taxation system. In 2024, forty-four states impose a corporate income tax, of which 29 states and D.C. have a flat-rate corporate tax system.
Pass-through taxation election
Owners of pass-through tax entities pay state income taxes according to their personal income tax rate, which varies from state to state. Similar to state corporate income taxes, individual income taxes can be subject to a flat tax rate, or progressive tax bracket system based on your state of residence. Seven states — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming — do not impose any state income tax on their residents.
Additional business taxes to be aware of
While income taxes may be the primary tax obligation we think of, there are a number of additional taxes that companies may be subject to based on their employees’ location, state of incorporation, and sales activities. Understanding your total tax liability, including these potentially less-thought-of taxes, is another reason why working with a professional business tax expert can be well worth it.
State franchise tax
State franchise tax is levied on businesses based on the company’s tax nexus.
Sales tax
Sales tax is determined by a combination of state and local taxes and is currently levied on businesses across 45 states and D.C. depending on what you are selling to your customers. The highest state-level sales tax is found in California at 7.25% while the lowest levied sales tax in a state is Colorado, at a rate of 2.9%.
Payroll tax
Payroll taxes are levied on employers of W-2 employees. Each time you pay a W-2 employee, you’re responsible for paying for half of the employee’s Social Security and Medicare (FICA) taxes, as well as 100% of an employee’s federal unemployment (FUTA) and state unemployment (SUTA) taxes.
Gross receipts tax
Lastly, a small handful of states — Delaware, Nevada, Ohio, Oregon, Tennessee, Texas, and Washington — levy a gross receipts tax, which is a tax applied to a business’s total gross receipts generated in a particular state. Gross receipts taxes are usually a very small percentage of a company’s total sales — typically ranging from 0–1%, though some jurisdictions may have higher rates — and have been broadly phased out over the years by most states due to the potential tax burden on companies.
When are business taxes due?
The IRS and state governments require many businesses to report or pay their estimated income taxes throughout the year, in quarterly installments.
For calendar year corporations, Federal business income taxes follow a quarterly estimated payment schedule of April 15, June 15, September 15, and January 15. If any due date falls on a weekend or legal holiday, the payment is due on the next business day. For corporations using a fiscal year, the due dates follow the same pattern but are based on their specific fiscal year start date.
Businesses must also pay payroll taxes, sales taxes, and gross receipts throughout the year. Social Security and Medicare taxes are typically paid semiweekly or monthly, while unemployment taxes are due quarterly. Other state taxes, including sales and gross receipts taxes, vary state by state.
Most state franchise taxes are due one time during the spring after each calendar year. For example, Delaware’s franchise tax due date is March 1, 2025, for the 2024 calendar year.
Important year-end dates this tax season include:
- January 15, 2025 - 4th Quarter 2024 estimated tax payment due
- March 15, 2025 - Tax returns are due for some pass-through business entities, like partnerships, multi-members LLCs, and S corporations. While these businesses do not pay corporate taxes on the entity itself, they must file an information return — Form 1065 for partnerships and multi-member LLCs, and Form 1120-S for S corporations — to report their gains, losses, deductions, and credits. The March 15, 2025 deadline is for calendar year businesses. Businesses that use a fiscal year calendar need to file their tax return by the 15th day of the third month following the close of their tax year.
- April 15, 2025 (Corporate) - Businesses elected as C corporations need to file Form 1120 by April 15, 2025, if they are a calendar year business. If your business uses a fiscal year, you need to file your tax return by the 15th day of the third month following the close of your tax year.
- April 15, 2025 (Individual) - Taxes are due for individual filers, including sole proprietors, single-member LLCs, and members of pass-through entities.
How to optimize your tax bill
Luckily for business owners, the US tax code was written to favor entrepreneurship and capital allocation. Businesses of all kinds have tax optimization opportunities to lower their tax bill at the end of the year. We can break these tax savings opportunities down between tax credits and tax deductions.
Credits
Tax credits are a dollar-for-dollar reduction in your tax bill. For example, a $1,000 tax credit reduces the amount of taxes you owe by $1,000. While there are many tax credits available — even unique credits for specific businesses who qualify — below are some of the most commonly used tax credits for businesses.
- Employer-provided childcare credit
- Credit for increasing research activities
- Retirement plans startups costs tax credit
- Small business health care tax credit
- Work opportunity tax credit
Deductions
Unlike tax credits, tax deductions are a dollar-for-dollar reduction in the income that’s subject to taxation. Tax deductions are worth less than tax credits but can still be powerful tools to use to lower your tax liability. Businesses may be able to deduct a wide range of business-related expenses from their taxable income. Below are some of the most common deductions businesses use.
- Advertising and promotion
- Business Insurance
- Eligible business travel and meals
- Contract Labour
- Depreciation
- Education
- Equipment purchases
- Interest
- Legal and professional fees
- Rent expenses
- Salaries and benefits
If you’re reading this and feeling overwhelmed, just know that you’re not alone. There are over 33 million businesses in the US — which means 33 million business owners that are in the same boat as you. Start early and connect with a trusted tax preparer who can help you gather the information you need to file and pay your taxes with time to spare. Working with a bookkeeper or paying for bookkeeping software can often be a great way to start.
This article is intended as knowledge-sharing, not financial or tax advice.
Tucker McKay