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Tax time can be stressful for small business owners. If your company hasn’t made any money yet, do you even need to file this year? Or, if you’re already turning profits, you may wonder how much you can make before you have to start paying business taxes.The answers to these (and many other) tax questions will depend on how your business is structured, how much it has earned, and what deductions and credits you’re able to take.Below, we break it all down to help you figure out how much you may owe in taxes for business income earned in 2021.Recommended: 10 Steps for Starting a Small Business
How to Calculate Your Small Business' Taxable IncomeWhether or not you need to file your business income tax this year, and how much you need to earn before you pay taxes, will depend on your business structure.
Small Corporate BusinessesIf your business is set up as a C corporation, it is considered a separate tax entity and is subject to its own tax rates. In 2018, the corporate tax rate was changed from a tiered structure that staggered corporate tax rates based on company income to a flat rate of 21% for all companies.
There is no minimum income you have to meet before your small corporation is taxed. Every dollar it earns (after deductions and credits are factored in) will be taxed at 21 percent.Corporate tax rates also apply to LLCs who have elected to be taxed as corporations.Recommended: Proposed Tax Changes Could Affect Some Small Business Owners
Unincorporated BusinessesIf your business is structured as a sole proprietorship, partnership, LLC, or S corporation, it will likely be considered a ”pass-through“ business. That means the income it makes is “passed through” to you and is reported on your personal tax return. This business income will be combined with any other income (such as wages from a part- or full-time job, rental income, or investment income) on your tax return. Your filing status, potential itemized deductions, and other allowable deductions will all serve to determine your taxable income and resulting tax bracket. A tax professional can help you consider all of these factors to estimate what your tax liability might be based upon your estimated business profit. But the following table can help you get a sense of what you may owe on your 2021 business income.
|Tax Rate||Single Filers||Married Filing Jointly|
|10%||Up to $9,950||Up to $19,900|
|12%||$9,951 to $40,525||$19,901 to $81,050|
|22%||$40,526 to $86,375||$81,051 to $172,750|
|24%||$86,376 to $164,925||$172,751 to $329,850|
|32%||$164,926 to $209,425||$329,851 to $418,850|
|35%||$209,426 to $523,600||$418,851 to $628,300|
How Much Can a Small Business Make Before Paying Taxes?If you operate your business as a pass-through, meaning the income is taxed as part of your personal income, then the tax-free threshold (also called the standard itemized deduction) for 2021 income is $12,550 for individuals and $25,100 for married couples filing jointly.
There is no tax-free threshold for corporations--you need to pay tax on every dollar the company earns.
Zero Taxable IncomeIf your income and your business expenses were equal--or, if your business didn’t generate any revenues at all--you will not be charged taxes, as this is considered zero taxable income.
Here’s an example. Let’s say you started a small business in 2021 and brought in $5,000. However, you also had $5,000 in expenses, which included buying a new computer, advertising, and office supplies. Because these two cancel each other out, no taxes are owed.
Net Income FormulaNet income (also sometimes referred to as net earnings or net profit) is your company’s total profits after deducting all business expenses.
To find your net income, which is what’s considered taxable, you can use a simple formula:
Gross Income – Expenses = Net IncomeLet’s say you made $65,000 this year and total expenses were $17,000. Your net income would be:65,000 - 17,000 = $48,000To lower your net income (which will lower how much you pay in taxes), it’s a good idea to keep track of and categorize business expenses throughout the year. Your business expenses might include expenses related to a home office or work space, the cost of tools or supplies, car or truck expenses, advertising costs, as well legal and accounting costs.Net income can be positive or negative. When your company has more revenues than expenses, you have a positive net income. If your self-employed tax deductions are more than your revenues, you have a negative net income, also known as a net loss. You won't have to pay taxes on your business income if you arrive at a negative number – you had a business loss.
Self-Employment TaxIf your business is not incorporated, you will need to file a tax return and pay the self-employment tax if your business income (after deductions) is $400 or more.
Self-employment tax is the equivalent of the FICA taxes (Medicare and Social Security) that you would normally share with your employer if you worked for someone else. Your employer would pay half and you would pay half, but you are the employer if you own a pass-through small business, so you must pay both halves.
The requirement to pay self-employment tax doesn't necessarily mean that you'll owe income tax on your small business income, however.
Because this income passes through to you, you can claim the standard deduction (or itemize your personal deductions) when you file your tax return. If you’re a single filer taking the standard deduction, for example, you would only owe self-employment tax if your small business earned more than $12,550 after deductions were taken out.
Qualified Business Income (QBI) DeductionIn addition to small business tax deductions, the IRS has another little gift for owners of pass-through businesses: the qualified business income, or QBI, deduction. The QBI deduction allows you to remove (or deduct) another 20% off your small business income if you qualify to claim it.
C corporations don't qualify for the QBI deduction; your small business must be a pass-through tax entity. In addition, income limits apply and some service trades don't qualify.
Tax CreditAnother tax tip for small businesses is to look for tax credits you might qualify for. Tax credits are different from tax deductions. Tax credits directly reduce how much tax a business owes dollar for dollar. Tax deductions, on the other hand, are business expenses that decrease how much of a business’s income is taxable. Translation: Tax credits are worth more.
There are a variety of tax credits available for businesses to take advantage of, ranging from providing employees paid family and medical leave, to increasing access for people with disabilities. You can claim business tax credits by filling out the appropriate forms for the credits for which your business qualifies.
If you’re filing as a pass-through business, it’s also key to look into any and all personal tax credits you may qualify for, such as the Child Tax Credit or the Residential Energy Efficient Property Credit.
How to File Income Tax With a "Doing Business As" (DBA)When choosing a business structure, you may also decide to create a name for your business other than your name. If that’s the case, you’ll need to file a “Doing Business As,” also known as a “Fictitious Business Name” form with your city or state.
When filing taxes, there are specific places where you’ll need to include your DBA.
|Sole proprietor or single-member LLC||Line C of Schedule C|
|Partnership or multi-member LLC taxed as partnership||“Name of Partnership” line on Form 1065|
|S corp||“Name” line on Form 1120S|
Penalties for Failing to File Corporate Tax ReturnNo matter how your small business is structured, if you do not file your tax return by the date it’s due, the IRS may enforce a penalty fee. This fee is typically 5% of the taxes you did not pay on time for each month or partial month that your return is late. Generally, this fee will not exceed 25% of your unpaid taxes.
The IRS may also charge interest on penalties, which increases the amount you owe until you pay your balance in full.
The TakeawayHow much your business can make before paying tax will depend on whether your business is structured as a pass-through entity or a corporation. Two other key factors: How much your business earned during the year and how much you had in business expenses, which are tax deductible.
If you’re a small business owner, there are many opportunities to lower your tax bill each year. Understanding all the deductions and credits you’re entitled to can help you avoid overpaying come tax time, and also help guide your business decisions throughout the year.
Thinking about taking out a loan to grow your business? The interest on that loan may be tax-deductible as a business expense. Use Lantern by SoFi to explore options from multiple lenders without any type of commitment.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Photo credit: iStock/rez-art
About the Author
Susan GuillorySusan Guillory is the president of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books, and has been published on sites including Forbes, AllBusiness, and Cision. She enjoys writing about business and personal credit, financial strategies, loans, and credit cards. Follow her on Twitter @eggmarketing.