11 Things to Know About U.S. Business Taxes
Key Facts for Companies in 2025
Starting and running a business in the United States requires an understanding of how taxes work at the federal, state, and sometimes local levels. From filing requirements to the different forms of taxation, business owners are expected to comply with a range of rules that impact their day-to-day operations and long-term planning.
Knowing the essentials about business taxes helps individuals and organizations avoid penalties and make informed decisions. This article provides a straightforward overview of key points every business owner should be aware of before managing their company’s tax responsibilities.
1) Federal income tax rates vary based on business structure
Federal income tax rules are not the same for every business. The rates and how taxes are collected depend on the type of business entity chosen.
Sole proprietorships and partnerships usually pass business income directly to the owners. This means the profits are taxed at the personal income tax rates of each owner.
Corporations are taxed differently. They face corporate tax rates, and then shareholders may also pay taxes on dividends. The current flat federal corporate tax rate is 21%.
S corporations are a special case. They pass income through to shareholders, similar to partnerships, which can help owners avoid double taxation.
Limited Liability Companies (LLCs) offer flexibility. An LLC can choose how to be taxed—either as a sole proprietorship, partnership, or corporation.
The business structure influences not only the tax rates but also the forms filed and how profits are distributed. Choosing the right structure can make a substantial difference in a company's total tax burden each year.
2) Small businesses must pay self-employment tax if they operate as sole proprietors or partners
Small business owners who operate as sole proprietors or partners are generally considered self-employed. This means they do not have an employer withholding Social Security and Medicare taxes from their pay. Instead, they are responsible for paying self-employment tax themselves.
The self-employment tax covers both Social Security and Medicare contributions. According to IRS guidelines, anyone with net earnings of $400 or more from self-employment must file an income tax return and pay this tax.
Both sole proprietors and partners in a partnership must calculate self-employment tax based on their business profits. This tax is separate from regular income tax and is reported annually, most often using Schedule SE with their tax return.
Members of multi-member LLCs taxed as partnerships are also subject to self-employment tax on their share of the business income. The rate for self-employment tax is set by the IRS and can change, so business owners should check the current rate each year.
Paying self-employment tax ensures that sole proprietors and partners receive credits toward Social Security benefits and Medicare. Keeping accurate records of profits and tax payments is essential for compliance.
3) Employment taxes include Social Security, Medicare, and federal unemployment tax
Employment taxes are a key requirement for most U.S. businesses with employees. These taxes include Social Security, Medicare, and the federal unemployment tax, often referred to as FUTA.
Both Social Security and Medicare taxes are collected under the Federal Insurance Contributions Act (FICA). Employers are responsible for withholding these taxes from employees’ paychecks and also pay a matching share.
The federal unemployment tax, or FUTA, is a separate payroll obligation. This tax supports unemployment benefits for workers who lose their jobs. Only employers pay FUTA tax; it is not withheld from employee wages.
Employment tax deposits are generally made on a regular schedule determined by business size and payroll. Employers must submit these deposits using IRS-approved methods such as the Electronic Federal Tax Payment System (EFTPS).
Businesses should track and report all withheld and deposited taxes accurately. Filing errors or late payments can result in penalties or interest charges.
4) Excise taxes apply to specific goods like fuel, tobacco, and alcohol
Excise taxes are applied to certain products or activities instead of general sales or income. In the U.S., businesses encounter these taxes most often with goods like fuel, tobacco, and alcoholic beverages.
These taxes are usually included in the price at the point of sale. Business owners may collect the tax from customers but are responsible for sending payments to the government.
Excise taxes can be set as a specific dollar amount per unit or as a percentage of the product’s price. The rates and rules can vary by state and by product, depending on local and federal regulations.
Besides fuel, tobacco, and alcohol, other items such as airline tickets, indoor tanning services, and wagering may also face excise taxes. Businesses selling these goods or services need to understand their payment obligations and filing requirements.
Maintaining accurate records is essential for compliance with excise tax rules. Penalties for non-compliance can be significant, so businesses should verify the applicable excise taxes when dealing with regulated products.
5) State income tax requirements differ; nearly all states impose some form of business income tax
U.S. businesses must pay attention to state income tax rules, as they vary significantly from state to state. Some states follow federal tax classifications, while others set unique regulations and rates.
Almost all states levy a corporate or business income tax. According to recent data, only a handful of states do not impose a corporate income tax, with South Dakota and Wyoming as prominent examples.
Many states also tax passthrough entities such as partnerships and S-corporations, either through entity-level taxes or by taxing income at the owner level. Businesses operating in multiple states may face tax obligations in each state where they have sufficient economic presence or "nexus."
State tax conformity with federal rules differs, so a deduction or exemption at the federal level may not apply in every state. It is standard practice for businesses to review state-specific requirements annually to ensure compliance and avoid penalties.
6) Local taxes may include sales tax and property tax obligations
Businesses in the United States often face local tax requirements in addition to federal and state taxes. The most common local taxes are sales tax and property tax. These taxes can vary widely depending on the city or county.
Sales tax is a tax on the sale of goods and certain services, and rates are set by local governments in many cases. For example, Texas has a state-level sales tax, but local municipalities can add their own rates on top.
Property tax is usually assessed on real estate owned by a business. This tax is based on the appraised value of the property. Local governments rely heavily on property taxes for funding public services.
Some localities also collect business-specific taxes beyond sales or property taxes. It is important for businesses to understand and comply with their specific local obligations. Requirements can change if the business has locations in different cities or counties.
7) An Employer Identification Number (EIN) is often required for business tax filings
An Employer Identification Number, or EIN, is a unique nine-digit number issued by the IRS. It serves as a federal tax ID number for businesses, nonprofits, and other entities.
Many businesses must have an EIN to file federal and state taxes. It is also often needed to open business bank accounts and apply for business licenses.
The IRS requires an EIN if a business has employees, operates as a corporation or partnership, or files certain tax returns. Sole proprietors may also need an EIN in some situations.
Applying for an EIN is free and can be done directly through the IRS website. Once issued, the EIN is used to identify the business in all federal tax matters.
Having an EIN helps separate a business’s finances from personal finances. This number is critical for tracking payroll taxes and meeting tax filing requirements.
8) Keeping detailed records of all revenues and expenses is essential for accurate tax reporting
Accurate tax reporting relies on maintaining thorough and organized records of all business revenues and expenses. The IRS and state tax agencies require businesses to keep supporting documentation for the figures reported in tax returns.
Clear records allow businesses to track income, deductible expenses, and the overall financial health of the operation. This helps them monitor the progress of their business, identify which products or services are performing well, and support any items claimed on returns if audited.
Proper recordkeeping should include receipts, invoices, bank statements, and other relevant documents. Both paper and digital records are acceptable, as long as they are complete and can be easily accessed when needed.
Most tax authorities recommend keeping records for at least three years after filing a return. Maintaining these records reduces the risk of reporting errors, missed deductions, and compliance issues.
9) Many small businesses file taxes electronically through IRS-approved platforms
Many small businesses in the U.S. now choose to file taxes electronically. The IRS offers a variety of e-file options that allow business owners to submit tax forms over the internet.
Using IRS-approved electronic platforms can make the filing process faster and more efficient. These platforms are designed to handle different types of business tax returns, including those for corporations, partnerships, and sole proprietors.
Electronic filing helps reduce paperwork and minimizes the risks of common errors. It also allows business owners to receive confirmations when returns are successfully submitted.
Most tax professionals are familiar with these electronic systems and can help business owners choose the right option. The IRS regularly updates its list of approved e-file providers.
Business owners who use electronic filing may also benefit from quicker processing times. For many, these platforms provide a reliable way to stay compliant with tax regulations.
10) Corporate tax rate is a flat 21% for C corporations
C corporations in the United States are subject to a flat federal corporate income tax rate of 21%. This rate applies to all taxable income earned by the corporation, regardless of its size or industry.
The 21% flat rate took effect in 2018, replacing a previous system that used graduated rates with a top rate of 35%. This change aimed to simplify corporate taxation and provide greater predictability for business planning.
Personal service corporations, which include certain professionals like lawyers and accountants, are also taxed at this flat 21% rate. The same rate applies to both domestic and qualified personal service corporations.
This federal rate does not include state or local corporate income taxes, which vary by jurisdiction. Businesses need to account for those additional taxes when estimating total tax liability.
11) Sole proprietors report business income on Schedule C attached to their personal tax return
Sole proprietors must report their business income and expenses using Schedule C, which is attached to their individual Form 1040 tax return. This form is required whether they operate a traditional business or work as an independent contractor.
Schedule C is used to determine profit or loss from a sole proprietorship. Income and allowable deductions, such as supplies and operating expenses, are listed to calculate the net business result.
The net profit or loss from Schedule C is then included on the taxpayer’s main tax return. This income is considered personal income for the owner, as there is no separation between the business and the individual's finances.
Single-member LLCs that are not treated as corporations also use Schedule C. Filing this form is necessary even for small side businesses or freelance work.
No separate business tax return is needed for sole proprietors. All tax obligations flow through to the owner and are reported annually using this combined tax filing method.
U.S. Business Tax Structure
Business taxes in the United States depend on both the type of business entity and the location where it operates. Federal and state requirements differ, and business structures have distinct tax rules.
Federal vs. State Business Taxes
The federal government imposes taxes on all businesses operating in the U.S. These commonly include income tax, employment taxes, and sometimes excise taxes.
Each state has its own taxation rules. Some states impose additional income taxes, franchise taxes, or sales taxes, while others do not tax certain business entities at all. Local governments may also have their own tax requirements, such as property or local sales taxes.
Businesses must file separate returns for federal and applicable state taxes. Tax rates and filing rules can vary widely, so companies need to understand all jurisdictions where they conduct business. It’s important to routinely review the tax rules relevant to each location to remain compliant.
Types of Business Entities and Tax Implications
The IRS recognizes several business structures, each with unique tax rules:
Sole Proprietorship: Profits and losses are taxed on the owner's personal return.
Partnership: Income passes through to partners, who report individually.
Limited Liability Company (LLC): Taxed by default as sole proprietorships or partnerships but can elect to be taxed as a corporation.
Corporation (C Corporation): Pays income tax on profits. Shareholders pay tax again on dividends, leading to "double taxation."
S Corporation: Passes income and some losses to shareholders, avoiding double taxation.
Different business structures affect liability, tax reporting, and eligibility for deductions and credits. Choosing the proper entity impacts how much tax is owed and what forms must be filed. Business owners should select an entity based on their financial and operational goals.
Compliance and Filing Essentials
Business owners must navigate a range of IRS requirements to stay compliant. Specific forms and filing deadlines matter for every type of company structure.
Key IRS Forms for Businesses
Businesses in the U.S. must use different tax forms depending on their structure and operations. For corporations, Form 1120 is standard for reporting income, deductions, and tax liability. Partnerships file Form 1065, while S corporations use Form 1120-S.
Sole proprietors typically complete Schedule C with their personal Form 1040. Any business with employees must also handle Form 941 for quarterly payroll taxes and Form W-2 at year’s end. Additionally, Form 1099-NEC is used to report nonemployee compensation.
The correct forms ensure timely and accurate tax calculation. Misfiling can delay refunds or trigger audits. Staying aware of which forms apply to a business’s activities is a basic compliance step.
Important Tax Deadlines
Each business type has specific IRS tax deadlines. Most corporations and LLCs filing as corporations must submit federal tax returns by April 15 (or the next business day if it falls on a weekend/holiday). Partnerships and S corporations typically face a March 15 deadline.
Quarterly estimated tax payments for corporations often fall on the 15th of April, June, September, and December. Payroll taxes, including Form 941, are due at the end of each quarter. Businesses issuing Forms W-2 or 1099 must send them to recipients and the IRS by January 31.
Missing deadlines can result in interest and penalties, even if no tax is due. Businesses should keep a compliance calendar and enable reminders for every tax obligation.
