Tax time can be stressful for small business owners. If your company hasn’t made any money yet, do you even need to file this year? Or, if you’re already turning profits, you may wonder how much you can make before you have to start paying business taxes.
The answers to these (and many other) tax questions will depend on how your business is structured, how much it has earned, and what deductions and credits you’re able to take.
Below, we break it all down to help you figure out how much you may owe in taxes for business income earned in 2023.
How to Calculate Your Small Business’ Taxable Income
Whether or not you need to file business income tax returns and how much you need to earn before you pay taxes will depend on your business structure.
Small Corporate Businesses
C corporations in the United States are subject to a flat 21% corporate tax rate under the Tax Cuts and Jobs Act. There is no minimum income you have to meet before your small corporation is taxed. Every dollar it earns (after deductions and credits are factored in) will be taxed at 21%.
Corporate tax rates also apply to LLCs who have elected to be taxed as corporations.
Unincorporated Businesses
If your business is structured as a sole proprietorship, partnership, LLC, or S corporation, it will likely be considered a “pass-through” business. That means the income it makes is “passed through” to you and is reported on your personal tax return.
This business income will be combined with any other income (such as wages from a part- or full-time job, rental income, or investment income) on your tax return.
Your filing status, potential itemized deductions, and other allowable deductions will all serve to determine your taxable income and resulting tax bracket.
A tax professional can help you consider all of these factors to estimate what your tax liability might be based upon your estimated business profit. But the following table can help you get a sense of your pass-through income tax rate in 2024:
How Much Can a Small Business Make Before Paying Taxes?
If you operate your business as a pass-through, meaning the income is taxed as part of your personal income, then the tax-free threshold (also called the standard deduction) for 2023 income is $13,850 for individuals and $27,700 for married couples filing jointly.
There is no tax-free threshold for corporations — you need to pay tax on every dollar the company earns. Note that small business loans are not taxable income.
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Zero Taxable Income
If your annual income and business expenses were equal — or, if your business didn’t generate any revenues at all — you may have no income tax liability.
Here’s an example. Let’s say you started a small enterprise in 2023 that earned $5,000 in annual sales revenue. However, you also had $5,000 in annual expenses, which included buying a new computer, advertising, and office supplies. Because these two cancel each other out, no income taxes are owed.
Net Income Formula
Net income (also sometimes referred to as net earnings or net profit) is your company’s total profits after deducting all business expenses. To find your net income, which is what’s considered taxable, you can use a simple formula:
Gross Income – Expenses = Net Income
Let’s say you made $65,000 in annual sales and total expenses were $17,000 for the year. Your net income would be:
65,000 – 17,000 = $48,000
To lower your net income (which will lower how much you pay in taxes), it’s a good idea to keep track of and categorize business expenses throughout the year. Your business expenses might include expenses related to a home office or work space, the cost of tools or supplies, car or truck expenses, advertising costs, as well legal and accounting costs.
Net income can be positive or negative. When your company has more revenues than expenses, you have a positive net income. If your self-employed tax deductions are more than your revenues, you have a negative net income, also known as a net loss. You won’t have to pay taxes on your business income if you arrive at a negative number representing a net loss.
Self-Employment Tax
If your business is not incorporated, you may need to file a tax return and pay the self-employment tax if your net income is $400 or more.
Self-employment tax is the equivalent of the FICA payroll taxes (Medicare and Social Security) that you would normally share with your employer if you worked for someone else. Your employer would pay half and you would pay half, but you are the employer if you own a pass-through small business, so you must pay both halves.
Qualified Business Income (QBI) Deduction
In addition to small business tax deductions, the IRS has another little gift for owners of pass-through businesses: the qualified business income, or QBI, deduction. The QBI deduction allows you to remove (or deduct) another 20% off your small business income if you qualify to claim it. Note that sole proprietors, S corporations, and partnerships can’t claim the QBI deduction after 2025 unless Congress extends Section 199A of the federal tax code.
Tax Credit
Another tax tip for small businesses is to look for tax credits you might qualify for. Tax credits are different from tax deductions. Tax credits directly reduce how much tax a business owes dollar for dollar. Tax deductions, on the other hand, are business expenses that decrease how much of a business’s income is taxable. Translation: Tax credits are worth more.
There are a variety of tax credits available for businesses to take advantage of, ranging from providing employees paid family and medical leave, to increasing access for people with disabilities. You can claim business tax credits by filling out the appropriate forms for the credits for which your business qualifies.
If you’re filing as a pass-through business, it’s also key to look into any and all personal tax credits you may qualify for, such as the Child Tax Credit.
How to File Income Tax With a “Doing Business As” (DBA) Name
When choosing a business structure, you may also decide to create a name for your business other than your legal name. If that’s the case, you may need to file a “doing business as” form with your city or state registering your DBA trade name, also known as a fictitious business name.
You can identify your legal name and DBA in the appropriate fields when filing tax returns. A sole proprietorship on Schedule C, for example, may need to include the name of the proprietor, the proprietor’s Social Security number, the business trade name (if applicable), and the employer identification number.
Penalties for Failing to File Corporate Tax Return
No matter how your small business is structured, if you do not file your tax return by the date it’s due, the IRS may enforce a penalty fee. This fee is typically 5% of the taxes you did not pay on time for each month or partial month that your return is late. Generally, this fee will not exceed 25% of your unpaid taxes.
The IRS may also charge interest on penalties, which increases the amount you owe until you pay your balance in full.
5 Tax Breaks for Small Businesses
Here are some small business tax breaks you can explore:
1. Business Loan Interest Tax Deduction
When filing taxes, you can check whether your business qualifies for a business loan interest tax deduction. If you’ve taken out loans for business purposes, including lines of credit and mortgages on business real estate, or if you’ve used business credit cards, the interest you pay on those liabilities may be tax-deductible.
2. Charitable Contribution Tax Deduction
Small business owners who donate money to a qualified charitable organization may qualify for a tax deduction. You may qualify if you’ve made charitable cash contributions to a qualifying organization.
3. Small Business Cell Phone Deduction
If you use a cell phone for business purposes, you may qualify for a deduction of your cell phone expenses when filing your tax returns. This can include expenses related to making domestic and international phone calls for business purposes.
4. Business Travel Tax Deduction
Small business owners who travel as part of their enterprise duties may deduct eligible travel expenses from their taxable income. This can include business-related transportation expenses, such as flights, rental cars, train fare, parking rates, and tolls.
5. Advertising and Marketing Tax Deduction
Ordinary advertising and marketing costs your business incurs may qualify for an income tax deduction. This can include expenses related to optimizing your company’s website or sponsoring an event.
The Takeaway
How much your small business can make before paying taxes will depend on whether your business is structured as a pass-through entity or a corporation. How much your business earned and spent during the year can also affect the equation. If you’re a small business owner, you may qualify for certain tax breaks that can minimize your tax burden.
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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8 tax new tax benefits that rolled out in 2023
The much-awaited SECURE 2.0 Act of 2022 was signed into law on Dec. 29, 2022. The Act creates more tax savings for employers and employees, alike, and expands access to a work-sponsored retirement program to many employees.
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The new Starter K provisions allow employers that have never sponsored a retirement plan to set up a simplified 401(k)—named the “Starter K.” Under this new plan, employers will not be required to contribute, and employees will be automatically enrolled at 3% of pay. However, contribution limits are much lower for employees than a traditional 401(k). Beginning in 2024, employees can contribute a maximum of $6,000, with a $1,000 catch-up for those 50 or over.¹ In exchange for lowering the deferral limit, employers do not have to worry about annual ADP, ACP, or top-heavy testing.
The Starter K becomes a great option for a small business that cannot afford the administrative complexities and heavier price tag of a regular 401(k), but still want to give workers an opportunity to save for retirement. And especially in states that require an employer-sponsored retirement plan, the Starter K could be a great private alternative to the potentially somewhat clunky State-IRA options. The American Retirement Association estimates that 19 million additional workers will gain access to a workplace retirement plan with this provision enacted. Moreover, the plan will reduce racial inequity in the retirement space, as Black and Hispanic workers would see a a 22% increase in access to workplace retirement plans.
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Another of the more exciting provisions is the creation of Pension-Linked Emergency Savings Accounts (PLESAs), which are employer-sponsored accounts linked to a retirement plan, where non-highly compensated employees can withdraw more regularly and without penalty.
The account is to be set up as a designated Roth account and invested in highly liquid assets, such as a money market fund. Contributions must cease after the account balance reaches $2,500, and any additional savings goes to the Roth 401(k) account instead.
Participants can be auto-enrolled at 3% of gross income as an after-tax elective deferral. Employers need to match the funds with whatever 401(k) matching formula is used, and the match would be contributed to the 401(k) account. Participants can withdraw funds at least once monthly. They will also be able to replenish funds back up to the $2,500 cap at any time.
Not only do PLESAs have the potential to help alleviate the nationwide problem of households not having enough liquid emergency funds; they will also encourage retirement plan participation, since one of the main reasons for not participating is the fear of needing liquidity if an emergency were to occur.
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While not a new plan option, the new rules will now require all newly established 401(k) and 403(b) plans to include automatic enrollment, along with auto-escalation, as default features beginning Jan. 1, 2025. The initial auto-enrollment default must be between 3% and 10%, and the rate must increase every year by 1%, until the participant hits at least a 10%, and no more than 15%, contribution.
Employees can opt out or set their own contribution rate at any time, but this will ensure those who don’t take any action will automatically begin to save for retirement. There is an exception for small businesses with 10 or fewer employees, new businesses, church plans, and governmental plans. Plans established as of Dec. 23, 2022 are also grandfathered.
The Senate noted that auto-enrollment increases participation among younger, lower-paid employees and the racial gap in participation rates is nearly eliminated. No doubt that participation should significantly increase—however, given that auto-enrollment will be a requirement, there’s a chance the current $500 auto-enrollment tax credit for new plans will disappear as that incentive will no longer be needed. At Guideline, we believe that auto enrollment provides many benefits to employers and employees, which is why all eligible participants are automatically enrolled in their employer-sponsored 401(k) plan if they don’t either self-enroll or opt-out by the prescribed deadline.
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Increase in tax credits
Though auto-enrollment credit might eventually go away, SECURE 2.0 provides a wealth of additional tax incentives over the current ones.
The original SECURE Act, passed in 2019, increased the Retirement Plans Startup Cost Tax Credit to the greater of $500 or the lesser of either $250 for each eligible non-highly compensated employee (NHCE) or $5,000. The credit applies for up to three years and is limited to 50% of eligible startup costs, which include ordinary and necessary costs to set up and administer the plan, as well as educate employees about the plan.
Employers qualify for this credit if they have 100 or fewer employees, have at least one plan participant that is an NHCE, and have not sponsored a plan in the last three years.
SECURE 2.0 removes the 50% cap for qualifying businesses with up to 50 employees so that 100% of startup costs could potentially be covered. The maximum credit is still $15,000 over three years.
SECURE 2.0 also provides an additional credit for employer contributions, up to $1,000 per employee. Employers with up to 50 employees are eligible for the full credit, which is phased out for employers with 51-100 employees.
The new tax credit provisions, effective as of Jan. 1, 2023, significantly increase the benefits of starting a 401(k) plan for the smallest businesses and also provide monetary incentive for small businesses to start a safe harbor plan, which can make plan administration less of a burden in the long run.
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SECURE 2.0 turns the current Saver’s Credit into a saver’s match. Currently, individuals under a certain income threshold who save into their retirement account are eligible to receive a non-refundable tax credit of 50%, 20%, or 10% of their retirement contributions up to $2,000.
The new provisions require that this credit be deposited directly into a retirement account. The amount of the credit will remain the same based on prior requirements and again is phased out depending on income.
This provision is a clever way of ensuring that the saver’s retirement tax benefit is actually contributed towards their retirement and helps to boost retirement savings for those in a lower income tax bracket. However, it won’t be effective until after 2026—likely to figure out administrative challenges in how to deposit those funds.
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There is also good news for those paying off student debt. Starting in 2024, employers will be able to match payments employees make toward qualified student loans. The match must follow the same formula and vesting schedule as whatever is tied to the retirement plan, and the contribution will be deposited into the employee’s retirement account.
Employers will be able to rely on the employee’s certification that loan payments are being made. The student loan participants may also be tested separately from the rest of the plan for ADP purposes.
The new rules will allow employees with large student debt to still capitalize on any matching contributions offered by their company to help them keep on track for retirement.
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Catch-up contributions
The Act includes some nice adjustments for later-stage participants, beginning with an increase in catch-up contributions.
Starting in 2025, the catch-up contribution limit will increase to $10,000 for employees aged 60 to 63. The limit will be indexed for inflation every year, and—here’s the catch—all catch-up contributions will now be required to be Roth, unless the employee earns $145,000 or less annually.
Some have mixed feelings about this provision. On the one hand, employees nearer to retirement are allowed to save even more in a tax-advantaged way, but on the other hand, the immediate tax benefit gets taken away from them. Older participants generally prefer to save money on a pre-tax basis if possible, as the tax advantage of Roth contributions increases exponentially the longer you hold money in your account.
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Another favorable provision for later-stage savers is the required minimum distribution (RMD) age increase to 73, beginning on Jan. 1, 2023. The current RMD age is 72. The RMD age will also increase to age 75 in 2033. And starting in 2024 designated Roth contributions will no longer be included when calculating the RMD amount.
The late withdrawal penalty is also decreased to either 10 or 25% (down from 50%), depending on how soon the error is corrected. The provisions provide a logical adjustment to required distributions as life expectancy increases, allowing individuals more time to determine their best withdrawal strategy for tax purposes.
On the whole, we are excited about the new SECURE provisions and believe there will be an overall positive impact on the retirement readiness of American workers. Guideline looks forward to supporting the required immediate changes and adjusting our offerings in the future to accommodate the rest.
This article originally appeared on the Quickbooks Resource Center and was syndicated by MediaFeed.org.
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Featured Image Credit: JLco – Julia Amaral/istockphoto.
