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Small Business Tax Rates for 2022 Explained

The I.R.S. recently announced a new tax rule for small business owners related to the 2021 American Rescue Plan Act. And as a result, any payment your business receives from a digital service or third party that accepts credit cards will appear on your income tax return if it exceeds $600. Between this rule and the coronavirus-related tax changes, you might wonder what the small business tax rate will look like in 2022.

Here’s everything you need to know.

Business Tax Changes Related to the COVID-19 Crisis

The U.S government brought in tax breaks and made specific changes to help businesses hold out during the pandemic.

  • Coronavirus Aid, Relief, and Economic Security (CARES) Act. This act encompasses the Paycheck Protection Program (P.P.P.), a loan meant for utility, employee payrolls, and mortgage payments. Your business may apply for loan forgiveness. If granted, this P.P.P. loan will not appear on your taxable income.
  • Economic Injury Disaster Loan (EIDL). The S.B.A. increased the borrowing limit for this low-interest loan.
  • Employee Retention Tax Credit (ERTC). Small businesses whose gross receipts decreased by at least 50% due to the pandemic qualify. If eligible, companies receive a tax credit, that is 50% of staff wages.
  • Families First Coronavirus Response Act (FFCRA). This act mandated particular businesses to offer sick pay and family leave arising from COVID-19. These companies would then receive 100% tax credits.

Small Business Tax Rates for 2022

Small business tax rates aren’t straightforward. This complexity is because of the non-existence of a uniform tax rate for all of them. Below are the small business tax rates by business structure.

C corporations

C corporations’ small business tax rate is perhaps the simplest form, courtesy of the 2017 Tax Cuts and Jobs Act. If you qualify, you will pay a flat tax rate of 21%. Moreover, there’s no need to worry about the alternative minimum tax (A.M.T.) as the TCJA got rid of this requirement. Note that C-corporations comprise approximately 5% of small businesses.

As for dividends, your business must pay shareholder dividends. Your shareholders must then include the dividends tax on their individual income tax returns, hence the term “double taxation.” The shareholders’ tax rate varies based on whether it’s a qualified or ordinary dividend. While C-corp experiences double taxation, their corporate tax rate is less than several personal tax bracket returns.

Pass-through entities

Pass-through businesses include partnerships, S corporations, sole proprietorships, and Limited Liability Companies(L.L.C.s).

These entity types make up about 95% of small businesses in the U.S. and don’t pay federal income tax. Instead, an employer includes business income on their individual income tax returns. Therefore, your income in a tax year will determine your federal income tax rate.

Therefore:

  • If you are a business owner and receive secondary income from a different job or investment, your tax rate will reflect the total income.
  • Also, the more your taxable income is, the steeper your tax rate.

The 2022 income tax brackets are as shown.

Two primary factors determine your small business tax rates.

1. Tax credits

Tax credits are precise reductions. For businesses, these may include work opportunities and alternative car credit. Individuals also receive federal tax credits such as the adoption credit and the earned income tax credit.

2. Deductions

Deductions reduce your taxable income. Examples of business deductions include rent expenses and legal fees. Individual deductions include medical expenses and charity donations.

Other Small Business Taxes

Small businesses must pay other taxes besides federal income taxes.

These include:

  • State income tax. Tax rules differ by state. The only states without a state tax are Florida, Wyoming, Alaska, South Dakota, Washington, Nevada, and Texas. As for the other states, businesses are subject to a corporate income tax within the 2.5 and 11.5 percent range.
  • Gross receipts tax. This tax typically applies to states that don’t levy a state income tax.
  • Payroll tax. Payroll taxes are a requirement for any business that has employees. These taxes include federal and state unemployment taxes and Federal Insurance Contributions Act taxes ( Social Security and Medicaid).
  • Self-employment tax.
  • Excise tax. Businesses that sell specific goods and services like gasoline and indoor tanning must pay the excise tax.
  • Sales tax. Sales tax is a requirement in 45 states. Rules differ for each state. And in some cases, you may need to remit taxes for more than one local jurisdiction.
  • We, therefore, recommend working with a C.P.A. firm to help you navigate these tax rules.
  • Property tax. You must pay property tax if you own vehicles and real estate.

Tax-Saving Tips

Here are several ways to make tax filing more successful in the 2022 tax year.

  • Make use of accountable plans
  • Monitor your adjusted gross income as it affects your deductions
  • Track all business transactions
  • Avoid late payments
  • Consider business restructuring
  • Take advantage of technology by installing a tax preparation software

Knowing which entity type will offer better tax rates can be confusing. For instance, L.L.C.s have several options available and may pay taxes as S corps or sole proprietors. A business advisor can break down the rates to help you choose the most beneficial option.

F.M.A. C.P.A. is a C.P.A. firm in Clearwater with a team of professionals who understand state tax rules. Our business advisory services include tax planning and accounting. Tax season doesn’t need to be stressful. Contact us at 727-530-0036 to learn how our team can make your small business tax planning stress-free.