The amount of business taxes that you’ll have to pay at the end of each year largely depends on the business entity you operate under.
If you’re a corporation, you’ll have to pay the corporate tax rate, which is 21% for 2023. Businesses that are not incorporated (also known as pass through entities) are taxed at the owner’s individual tax rate, which can range between 10% to 37%.
Tax rates by business entity
Sole proprietorship
Sole proprietorships pay tax at individual tax rates, which range between 10% to 37% depending on income levels. You’ll have to self-employment taxes, which covers your Social Security and Medicare taxes, and then pay ordinary income tax based on the profits or losses of your business.
Partnership
With a partnership, the owners of the business also pay taxes at the individual level, which is between 10% to 37%. The partnership itself files their annual income tax using Form 1065. And, each partner in the business receives a Schedule K-1, which reports their share of the partnership’s income, deductions, and other tax items. The partnership agreement determines how the partnership’s profits and losses are allocated among the partners. Each partner’s share of the partnership’s income and deductions is reported on their Schedule K-1.
LLC
LLC’s have a lot of flexibility in how they get taxed. They can elect to get taxed as a pass through business and pay taxes at the individual rate of 10% to 37%, or they can elect to get taxed as a corporation and pay taxes at the corporate level, which is 21%.
S corporation
As a corporation, an S corporations doesn’t directly pay federal income taxes since it’s actually a pass through business. The profits, losses, deductions, and credits all pass through to the shareholders. Each shareholder is provided a Schedule K-1, which reports their share of the corporation’s income, deductions, and credits. The shareholders must then report those figures in their individual tax returns, which get taxed at 10% to 37%.
C corporations
A C corporation is taxed as a corporation and pays a flat rate of 21%.
FEATURED COURSE
Lorilyn Wilson teaches Taxes & Accounting Foundations For Business Owners
Lorilyn Wilson, CPA, teaches you how to properly set-up your business (from choosing the right business entity to creating a financial forecast) and the must-dos ALL business owners need to understand when it comes to preparing your taxes (including expenses, write-offs, and how-to lower your risk of being audited).
Business tax rates for corporations
Corporate business entities include C corporations and S corporations. However, an S corporation actually gets taxed as a pass through business. LLCs can also elect to be taxed as C corporations or S corporations rather than as pass through entities.
Therefore, the only business structures that get taxed as a corporation are C corporations and LLCs taxed as a C corporation.
The tax rate for C corporations is 21%.
Business tax rates for pass through business entities
A pass through business is a business entity where the business does not pay federal income taxes directly. Instead, the income and losses are passed through to the owners and members, who pay taxes based on their individual tax rates.
Put simply, with a pass through business, business income is taxed the same as employment income you would earn from a job.
Sole proprietorships, partnerships, S corporations, and LLCs that elect to be taxed as a pass through business are all taxed at the individual tax rate, which can be anywhere from 10% to 37%, depending on income levels.
2023 individual tax rates
| Tax bracket | Taxes owed |
|---|---|
| Under $11,000 | 10% of taxable income |
| Over $11,000 but not over $44,725 | $1,100 plus 12% of the excess over $11,000 |
| Over $44,725 but not over $95,375 | $5,147 plus 22% of the excess over $44,725 |
| Over $95,375 but not over $182,100 | $16,290 plus 24% of the excess over $95,375 |
| Over $182,100 but not over $231,250 | $37,104 plus 32% of the excess over $182,100 |
| Over $231,250 but not over $578,125 | $52,832 plus 35% of the excess over $231,250 |
| Over $578,125 | $174,238.25 plus 37% of the excess over $578,125 |
How is an LLC taxed?
As mentioned briefly earlier, an LLC can choose how they want to be taxed. They can be taxed as a sole proprietorship, partnership, C corporation, or S corporation.
Tax rates for corporate dividends
Some corporations will choose to pay dividends to their shareholders. If they do, shareholders are responsible for paying taxes on the dividends received in their personal tax returns.
Ordinary vs qualified dividends
The tax rate that shareholders will have to pay on the dividends received depends on whether the dividends are considered ordinary or qualified.
Ordinary dividends are subject to ordinary income tax rates, which are the standard tax rates applicable to your overall income. These rates can range from 10% to the highest marginal tax rate, which is 37%. On the other hand, qualified dividends are eligible for a lower tax rate, typically the same rate as long-term capital gains tax rates, which ranges between 0% to 20%.
2023 long-term capital gains tax rates
| Filing status | 0% tax rate | 15% tax rate | 20% tax rate |
|---|---|---|---|
| Single | $0 to $44,625 | $44,626 to $492,300 | $492,301 or more |
| Married, filing jointly | $0 to $89,250 | $89,251 to $553,850 | $553,851 or more |
| Married, filing separately | $0 to $44,625 | $44,626 to $276,900 | $276,901 or more |
| Head of household | $0 to $59,750 | $59,751 to $523,050 | $523,051 or more |
What makes a dividend “qualified”?
To be considered qualified dividends, the underlying stock must be held for a specific period. In general, you must hold the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. This holding period requirement must be met for common stock dividends to be considered qualified.
Not all dividends are considered qualified dividends. Certain types of dividends, such as those from real estate investment trusts (REITs), mutual funds, and employee stock options, are generally not eligible for the qualified dividend tax rate.
FEATURED COURSE
Lorilyn Wilson teaches Taxes & Accounting Foundations For Business Owners
Lorilyn Wilson, CPA, teaches you how to properly set-up your business (from choosing the right business entity to creating a financial forecast) and the must-dos ALL business owners need to understand when it comes to preparing your taxes (including expenses, write-offs, and how-to lower your risk of being audited).