Small Business Tax in United States

US small business taxation turns on a single early decision: what legal structure the business uses. That choice controls which federal return the business files, whether income lands on the owner's personal return or the entity's, and how self-employment and payroll taxes apply.

What federal tax forms do different business structures file?

Four structures dominate small business filings. Sole proprietors and single-member LLCs treated as disregarded entities attach Schedule C to Form 1040 and report net profit directly on the owner's return. Partnerships and multi-member LLCs file Form 1065 (US Return of Partnership Income) and issue a Schedule K-1 to each partner; income flows through to the partners' personal returns whether or not cash was distributed [1]. S-corporations file Form 1120-S and similarly issue K-1s to shareholders, with income passing to the shareholders' individual returns [2]. C-corporations file Form 1120 and pay corporate-level tax independently of their owners [3].

In every pass-through structure -- sole proprietor, partnership, S-corporation -- the business entity itself pays no federal income tax. Profits appear on the owner's return and are taxed at individual rates. The key difference between an S-corporation and the other pass-through forms is that S-corporation distributions are not subject to self-employment tax, whereas active partners and sole proprietors pay SE tax on their share of net earnings.

What is self-employment tax and how is it calculated?

Self-employment tax funds Social Security and Medicare for business owners who do not receive a W-2. The rate is 15.3% -- 12.4% for Social Security and 2.9% for Medicare. For 2025, the Social Security portion applies only to the first $176,100 of net self-employment income; all net earnings above that threshold are subject to the 2.9% Medicare portion with no ceiling [1]. An additional 0.9% Medicare surtax applies to earnings above $200,000 for single filers ($250,000 for married filing jointly) under IRC Section 3101.

SE tax is calculated on Schedule SE attached to Form 1040. The base for calculation is 92.35% of net self-employment income, which accounts for the fact that employees and employers normally split FICA contributions. One-half of the SE tax calculated is then deductible on Schedule 1 as an adjustment to gross income -- reducing the owner's federal income tax, though not the SE tax itself [1].

When and how do small businesses pay estimated taxes?

Because no employer withholds income tax or SE tax from self-employment income, business owners must generally pay taxes as they earn throughout the year. The IRS requires quarterly estimated tax payments using Form 1040-ES when a taxpayer expects to owe $1,000 or more in federal tax after subtracting any withholding and credits [4]. Underpayment typically triggers a penalty calculated on the shortfall.

The four standard payment periods for the 2025 tax year fall due on April 15, June 16, September 15, 2025, and January 15, 2026. Taxpayers can base their payments on 100% of the prior year's tax liability (110% if prior-year AGI exceeded $150,000) to avoid an underpayment penalty regardless of the current year's actual income -- the IRS calls this the safe-harbor method [4]. Payments are made online via IRS Direct Pay or EFTPS.

How does the Section 199A qualified business income deduction work?

Section 199A of the Internal Revenue Code allows eligible pass-through owners to deduct up to 20% of qualified business income (QBI) from their taxable income [5]. The deduction is taken on the personal return (Form 8995 or 8995-A) and is available regardless of whether the owner itemizes or takes the standard deduction.

For 2025, owners below the income phase-in thresholds of $197,300 (single) / $394,600 (married filing jointly) generally claim the full 20% without restriction. Above those thresholds, limitations based on W-2 wages paid and the unadjusted basis of qualified property begin to reduce the deduction, and owners of Specified Service Trades or Businesses (law, health, consulting, financial services, and similar fields) see additional phase-out.

The deduction, which was scheduled to expire at the end of 2025 under the Tax Cuts and Jobs Act, was made permanent by the One Big Beautiful Bill Act signed on July 4, 2025. Starting in tax year 2026, OBBBA also added a minimum $400 deduction for owners materially participating in a business generating at least $1,000 of QBI, and expanded the phase-in range for Specified Service Businesses from $50,000 to $75,000 (single) and $100,000 to $150,000 (married filing jointly) [5].

Do I need an Employer Identification Number?

A sole proprietor with no employees and no excise, pension, or special-purpose tax filings can use their Social Security Number as their business tax ID. However, a business must obtain an Employer Identification Number (EIN) via IRS Form SS-4 once it hires employees, elects to be taxed as a corporation or partnership, opens a business bank account requiring a federal tax ID, files excise tax returns, or establishes a qualified retirement plan [1]. Corporations and partnerships are required to have an EIN for all tax-related purposes, including filing Form 1120, 1120-S, or 1065. EINs are issued free of charge at IRS.gov immediately when applying online with a US-based principal business address.

State taxes add a separate layer: 44 states levy a corporate income or franchise tax; 41 states plus DC levy a personal income tax that captures pass-through income. State tax rates, apportionment rules, and filing thresholds differ significantly. A registered agent or qualified practitioner can confirm the state-specific obligations for a given business location.

For jurisdiction-specific guidance on filing obligations, consult a tax professional listed in the United States country overview or verified through a qualified professional before taking any filing position.