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One of the primary obligations of small business owners and self-employed professionals is paying taxes. If you’re based in the U.S., then you must pay estimated taxes every quarter, like clockwoek, to avoid a hefty tax bill and penalties come April 15.
In December 2017, Congress passed a tax bill that resulted in tax changes for many American small business owners. If you’re unsure of how the small business tax rate affects you, read on for more information.
As far as small business owners are concerned, one of the most important parts of Congress’s tax legislation is the 20 percent deduction on taxable business income for pass-through entities.
If your business is structured as a pass-through entity, you can benefit from this deduction. Pass-through entities have a legal structure — either as a limited liability company (LLC) or an S corporation — that passes profits from a business to its owner. This money is taxed as personal income instead of business earnings. For a summary of what LLCs and S corporations are, and to determine whether you should become one, check out this article from The Balance.
Let’s say that your pass-through business earned $100,000 in 2018. Under the new 20 percent deduction, only $80,000 of that income is taxable.
Although 95 percent of businesses in America are pass-throughs, according to Brookings, not all will qualify for this deduction. Single filers who earn $157,500 or more and married filers who earn $315,000 or more cannot get the deduction. Certain professional service-based businesses, like law and consulting firms and medical practices, are also excluded. Another wrinkle is that the deduction isn’t permanent — it expires after December 31, 2025.
Still, there are nearly 30 million small businesses in the U.S., according to The Small Business Administration, that might benefit from this deduction. Small business owners that do benefit can reinvest back into their businesses to either hire more employees, buy new equipment, improve their websites, or just save for a rainy day.
Every person’s tax situation is different, so not every small business owner will get the same tax breaks or reap the same tax savings.
Still, it’s wise for every small business owner to consult a tax professional or accountant to learn how the small business tax rate will affect them, find out what other business deductions they can write off, and ask whether they qualify for the 20 percent deduction. In the end, You might save enough money to further support and grow your business.
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