Small businesses typically pay federal, state, and local taxes, including income tax on net earnings, self-employment tax (Social Security/Medicare), and estimated taxes. If they have employees, they are responsible for payroll taxes (FICA, FUTA), and may also owe sales tax, excise tax, and property taxes depending on their location and operations.
Small businesses are subject to numerous types of taxes and required to file an assortment of tax forms. Those taxes can include federal income tax, self-employment tax, employment tax, excise tax, and state and local taxes, including sales tax.
The small profits rate (19%) applies to single companies with Augmented profits of less than £50,000. The main rate (25%) applies to single companies with Augmented profits of more than £250,000.
Both you and your business will be subject to taxes, and you need to know what to expect. Understanding your numerous obligations to federal, state, and local tax agencies will help your business run smoothly.
Here are five approachable strategies every small-business owner should know.
Organizations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational, or other specified purposes and that meet certain other requirements are tax exempt under Internal Revenue Code Section 501(c)(3).
To avoid the UK's 60% tax trap (an effective 60% rate on income between £100k-£125k), the key is to reduce your adjusted net income back below £100,000 by making tax-efficient contributions, primarily via pension contributions, which reclaim your full £12,570 Personal Allowance, and also through salary sacrifice for benefits like childcare or cycle-to-work, and Gift Aid donations to charity.
One of the most common tax mistakes businesses make is failing to maintain a clear separation between personal and business expenses. Mixing personal and business finances can create confusion during tax time, making it difficult to accurately track deductions and file the right amount of taxes.
You usually get a tax-free Personal Allowance
For the 2025/26 tax year, the standard Personal Allowance is £12,570. Your Personal Allowance is reduced by £1 for every £2 of income you earn over £100,000. So you don't get any personal allowance if you earn over £125,140.
According to NerdWallet, because small business owners pay both income tax and self-employment tax, small businesses should set aside about 30% of their income after deductions to cover federal and state taxes.
LLCs can be a good choice for medium- or higher-risk businesses, owners with significant personal assets they want protected, and owners who want to pay a lower tax rate than they would with a corporation.
If you don't file your taxes for three consecutive years, the IRS may consider it willful neglect and impose harsher penalties. These penalties can include levies on your wages or bank account. You may also be subject to a federal tax lien that limits your access to loans or credit.
To file your annual income tax return, you will need to use Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship), to report any income or loss from a business you operated or profession you practiced as a sole proprietor, or gig work performed.
If you return to the UK within 5 years
You may have to pay tax on certain income or gains made while you were non-resident. This doesn't include wages or other employment income.
Meet size standards
Most manufacturing companies with 500 employees or fewer, and most non-manufacturing businesses with average annual receipts under $7.5 million, will qualify as a small business.
Here are a few mistakes small business owners should avoid:
As nice as it is to work with lots of other people, working alone eliminates 'office dramas', making your work space less stressful. Financial success: Although there is financial risk involved in setting up your own business, being your own boss increases your financial potential as you're not restricted by a salary.