Most businesses pay personal tax rates on their income. Those can range anywhere from 10% to 37%. C corporations, on the other hand, pay a flat 21% on business income.
Your small business’s specific tax rates depend on several key factors:
- Your business’s structure. Businesses that aren’t S or C corporations owe self-employment tax too. That comes out to an additional 15.3% of your income.
- Your business’s location. Most states levy their own income tax. Cities and municipalities in more than a dozen states do as well. Rates vary according to your location and income.
- Whether you have employees. If you do, you’ll owe employment taxes. You’ll pay the IRS 13.65% of your payroll. This comes out of your pocket, not your employees’ wages.
- What you sell. You might owe sales tax (if you run a retail business) and excise tax (if you sell items like fuel, tobacco or alcohol). These rates vary by state and product.
💻 How I wrote this article
I interviewed two certified public accountants in June 2026 about small-business tax rates and deduction strategies.
- Sherman Standberry (CPA), founder of My CPA Coach.
- Farah Saleh (CPA), Certified Tax Resolution Specialist (CTRS), founder of Lumen Tax Resolution.
Their expertise and experience with small-business owners helped to inform this article.
Read on for more information about business tax rates, pass-through entities, deductions and navigating tax brackets.
What tax rates apply to your business?
The tool below gives you an overview of what types of taxes you might owe, as well as their rates. Just select your business’s structure and taxable income.
For more details on tax payment deadlines, forms and state rates, take our business taxes quiz.
How are pass-through and corporate tax rates different?
Your federal income tax rate depends on whether your business is a pass-through entity or a C corporation. Pass-through entities pay personal tax rates on business income. Those rates range from 10% to 37%. C corporations pay a flat 21% tax on business income.
What businesses are pass-through entities?
Pass-through entities include the following:
They’re called this because you pass their income through to your individual tax forms. In other words, the corporate tax rate does not apply. Instead, you pay personal tax rates on your business income.
Does your tax bracket apply to all of your income?
This is a common point of confusion among taxpayers in general. Just because you fall into a particular tax bracket doesn’t mean that rate applies to your entire income. The IRS uses a progressive tax system.
“The incremental tax system basically taxes your income in buckets,” Standberry says. “In order to get taxed at the next rate you have to fill the first bucket up.”
That first bucket is the 10% bracket. That applies to the first $12,400 of your taxable income, which includes business income for pass-through entities. The second bucket is the 12% bracket. It applies to every dollar between $12,401 and $50,400 and so on per the brackets below.
| Federal income tax rate | Taxable income amount |
|---|---|
| 10% | Up to $12,400 |
| 12% | $12,401 to $50,400 |
| 22% | $50,401 to $105,700 |
| 24% | $105,701 to $201,775 |
| 32% | $201,776 to $256,225 |
| 35% | $256,226 to $640,600 |
| 37% | $640,601 and up |
Tax bracket example
Let’s say you’re a sole proprietor who pays taxes as a single filer. You make $150,000 after deductions.
The IRS taxes the first $12,400 of your income at the lowest rate: 10%. That comes out to $1,240 (0.10 x 12,400) in taxes.
It taxes the next $38,000 ($50,400 - $12,400) at 12%. That adds another $4,560 (0.12 x 38,000) to your tax bill.
The cap on the next tax bracket is $105,700. That means the IRS taxes $55,300 (105,700 - 50,400) at 22%. That comes out to an additional $12,166 (0.22 x 55,300) in taxes.
You’ll owe 24% on your remaining income: $44,300 (150,000 - 105,700). That equals an extra $10,632 (0.24 x 44,300) in taxes.
In this case, your total federal income tax payment would be the sum of those numbers. That makes for a total tax bill of $28,598 (1,240 + 4,560 + 12,166 + 10,632).
Can you reduce your tax rate?
Yes. Deductions are one way to decrease your taxable income amount. This could land you in a lower tax bracket.
Standberry says lots of business owners overlook common tax deductions. Some examples include expenses related to home offices, vehicles and travel, he adds. For more deduction options and details, explore our list of tax deductions for small-business owners.
Just make sure you can back up the expenses you deduct.
Saleh helps clients navigate IRS audits. She says your deductions should tell a story in case the IRS investigates them.
“You want it all to align,” she says. “You don't want to rely on bank statements and credit card statements.”
If you plan to take the standard mileage deduction, for example, she recommends getting an oil change at the beginning and the end of the year. That way, you have a record of your odometer readings and can prove how many miles you drove.
Some LLCs and sole proprietorships may also be able to reduce their tax liability by becoming an S corporation. This eliminates the 15.3% self-employment tax. But it adds complexity.
“A lot of times taxpayers don't follow the rules with S corporations,” Saleh says. “And that also gets them into trouble.”
For instance, you’ll need to pay yourself “reasonable compensation.” The IRS doesn’t define what’s “reasonable,” though. You need to figure that out, and you can face tax penalties for getting it wrong.
Regardless, don’t wait until tax season to think about ways to legally minimize your taxable income.
“If you want to reduce your taxes, you need to do something before December 31,” Standberry says. That way, you can come up with a strategy ahead of time.
Saleh also recommends making sure your risk tolerance aligns with your accountant’s strategy. Deciding what to deduct should be a team effort — not something you completely hand off.
What are marginal and effective tax rates?
Your marginal tax rate is essentially your tax bracket. It’s the highest tax rate that applies to your income. Your effective tax rate, on the other hand, is how much you pay in taxes overall.
CPAs like Standberry focus on marginal rates when they’re trying to reduce a business’s tax liability.
“If I'm in a 37% marginal tax bracket, I'm trying to take that 37% portion of income and see if I can reduce it,” he says. “Because that's going to save them [his clients] 37 cents on the dollar.”
But it’s important to know your effective tax rate because that represents “what you're forfeiting out of your income,” Standberry says.
Knowing this gives you a better idea of how much cash you should plan on setting aside for tax payments. From there, you can budget accordingly.
You might also multiply this quarter’s income by last year’s effective rate to calculate your quarterly estimated tax payments. Just make sure this year’s income is similar to the prior year’s. We also recommend using the IRS’ Form 1040-ES to double-check your calculations.
To find your effective rate, divide your total federal income tax bill by your taxable income.
Marginal vs. effective tax rate example
Let’s return to the situation above. You’re a sole proprietor who makes $150,000 per year after deductions. Your marginal tax rate for 2026 would be 24%. The IRS applies that rate to income between $105,701 and $201,775.
To find your effective tax rate, divide your tax bill ($28,598) by your taxable income ($150,000). That comes out to about 19% [(28,598 / 150,000) x 100].
