Small Business Tax Rates Explained

Small business tax rates are the rates of taxation for small businesses. Since corporate entities are, legally speaking, individuals, they are subject to taxation, just like real flesh-and-blood human beings. Small business owners must, therefore, pay small business taxes. They must pay taxes on all the profits they earned. They must also make Social Security and Medicare payments for all of their employees. They can diminish the tax burden through tax deductions and exemptions. Before they can decide how to decrease their tax burdens, however, they must understand what tax rates they have to deal with.

What Qualifies as a Small Business

A small business is any business that has no more than 100 employees. In addition to conventional small businesses, this category includes (for tax purposes) people who earn income through rents, royalties, partnerships and limited liability companies. However, unlike conventional small businesses, people who fall into this category can choose to be taxed as individuals. This has advantages and disadvantages over being taxed as a small business.

Corporate Income Tax

Small businesses are taxed in a number of ways. First and foremost, they are subject to the corporate income tax--the tax on the profits they earned as the result of day-to-day business activities during the course of each tax year.

The corporate income tax is levied at both state and federal levels. The state corporate income tax rates are different in every state. The federal corporate income tax rates are the same across the United States. They are based on the value of the profits the company earned. A company that earned up to $50,000 is taxed at 15 percent. A company that earned between $50,000 and $75,000 is taxed at 25 percent. A company that earned between $75,000 and $100,000 is taxed at 34 percent. The company that earned between $100,000 and $335,000 is taxed at 39 percent. Small business owners can offset their corporate income tax burden by using their state corporate income tax payments as deductions.

Capital Gains Tax

Capital gains tax is a tax on any profits earned when the company's assets are sold above their original value. The assets can include stocks, bonds, real estate and office equipment, among other things. Such profits, or gains, can be divided into two groups: short-term capital gains and long-term capital gains. The former includes gains made when the assets are sold less than a year after they were originally purchased, while the later includes gains made when the assets are sold after any period longer than a year. The short-term capital gains are taxed at 10 to 35 percent (depending on their value). The long-term capital gains are taxed at 15 percent.

Alternate Minimum Tax

Like individuals, small businesses can be taxed under the alternative minimum tax. This tax replaces the federal corporate income tax. Its biggest advantage is the fact that it imposes the same tax rate regardless of income--as of the 2009 tax year, it's 20 percent. However, it does not allow business owners most of the exemptions they are entitled to when they pay the federal corporate income tax. Depending on how many exemptions the business owner can make, the alternate minimum tax may actually wind up being a bigger tax burden than what he or she would face by paying a federal corporate income tax.

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