Kitchen Table Economics

Small Business Taxes Explained

Federal lawmakers have proposed tax reform legislation that provides long-overdue relief to small business job creators, which create two-thirds of new jobs in the country.

But how are small businesses taxed in the first place?

The vast majority of small businesses are taxed as “pass-through entities,” meaning owners consider their business profits as individual income and are taxed at the individual rate structure. These rates begin at 10 percent in the first $9,075 of taxable income for a single filer ($18,150 if married) and can reach 39.6 percent on taxable income over $406,751 ($457,601 if married).

These high rates are uncompetitive, and put small businesses at a disadvantage with their big business and international competitors. This is evidenced by the sorry state of Main Streets across the country.

But relief is finally on the way. Final legislation will either create a separate small business tax rate structure or create a sizable small business tax deduction. Either way, the importance of small businesses will finally be reflected in the tax code. That’s something all small business owners, their employees, and the communities where they locate can celebrate.

Watch a video about how small businesses pay taxes here.