How Much Tax Will Your Small Business Pay in 2026? A Comprehensive Guide

Navigating the complex world of small business taxes can feel overwhelming, especially as tax laws evolve and new regulations come into play. For small business owners planning for 2026, understanding the tax obligations tied to your business structure, income, deductions, and other factors is critical to financial success. Taxes for small businesses are influenced by federal, state, and local laws, as well as the specific structure of your business—whether it’s a sole proprietorship, partnership, LLC, or corporation.

This extensive guide will break down the types of taxes small businesses face, how they’re calculated, and what you can expect in 2026, incorporating projections based on current trends and regulations. From income taxes to payroll taxes, self-employment taxes, and state-specific taxes, we’ll cover it all with practical examples, detailed explanations, and actionable insights to help you prepare.

Understanding Small Business Taxes in 2026

Small businesses are the backbone of the economy, but they come with a unique set of tax responsibilities. The amount a small business pays in taxes depends on several factors, including its business structure, net income, deductible expenses, and tax credits. Unlike large corporations, most small businesses operate as pass-through entities, meaning the business itself doesn’t pay taxes directly—instead, the income “passes through” to the owners, who report it on their personal tax returns. However, other taxes, such as payroll taxes, self-employment taxes, and state taxes, add layers of complexity.

In 2026, small business owners can expect tax policies to reflect ongoing economic adjustments, potential changes in federal tax rates, and updates to deductions like the Qualified Business Income (QBI) deduction. While specific tax rates for 2026 are not yet finalized, we’ll base our projections on 2025 data and trends, assuming continuity unless otherwise noted. Let’s dive into the key components of small business taxes and how they’ll impact your business next year.

Types of Small Business Taxes

Small businesses face a variety of taxes, each tied to different aspects of operations. Below is a detailed breakdown of the primary taxes you’ll encounter in 2026.

1. Federal Income Taxes

Federal income taxes are the cornerstone of small business taxation. The tax rate and filing process depend heavily on your business structure.

• Sole Proprietorships and Single-Member LLCs: These businesses are considered pass-through entities, meaning the business’s net income is reported on the owner’s personal tax return using Schedule C. For example, if your freelance graphic design business earns $80,000 in revenue and has $20,000 in deductible expenses in 2026, your net income of $60,000 is added to your personal income. The tax rate depends on your total taxable income, which could range from 10% to 37% based on 2025 brackets (e.g., 37% for single filers earning over $609,350).
• Partnerships and Multi-Member LLCs: In a partnership, each partner reports their share of the business’s net income on their personal tax return using Schedule K-1. For instance, if a two-partner consulting firm earns $200,000 in 2026 with $50,000 in expenses, each partner reports $75,000 of net income (assuming equal shares) on their personal tax return.
• Corporations: C corporations are taxed separately from their owners at a flat corporate tax rate of 21% on net earnings. Owners who work as employees also pay personal income tax on their salaries, and shareholders pay taxes on dividends, leading to the issue of double taxation. For example, if a corporation earns $500,000 in net earnings in 2026, it pays $105,000 in corporate taxes. If the remaining profits are distributed as dividends, shareholders pay additional taxes at the qualified dividend rate (typically 15% or 20%, depending on income).
• S Corporations: These entities avoid double taxation by passing income to shareholders, who report it on their personal tax returns. However, S corporations must file Form 1120-S, and shareholders receive Schedule K-1 for their share of income.

2. Payroll Taxes

If your small business has employees, payroll taxes are a significant expense. These taxes fund Social Security and Medicare (collectively known as FICA taxes) and are split between the employer and employee.

• Employer’s Share: As an employer, you’re responsible for 7.65% of each employee’s gross wages (6.2% for Social Security and 1.45% for Medicare). For an employee earning $50,000 annually in 2026, you’d pay $3,825 in FICA taxes.
• Additional Medicare Tax: For high-earning employees (over $200,000 for single filers), an additional 0.9% Medicare tax applies, though this is typically withheld from the employee’s wages.
• Unemployment Taxes: You’ll also pay Federal Unemployment Tax (FUTA) at 6% on the first $7,000 of each employee’s wages, though credits can reduce this to 0.6%. State unemployment taxes (SUTA) vary by state and are based on your business’s experience rating.
• Workers’ Compensation: This mandatory insurance, required in most states, is considered a payroll-related tax and varies based on industry and risk. For example, a construction business might pay $5–$20 per $100 of payroll, while an office-based business might pay $0.50–$2 per $100.

3. Self-Employment Taxes

If you’re a sole proprietor or LLC owner, you’re responsible for self-employment taxes, which cover both the employer and employee portions of FICA—a total of 15.3% (12.4% for Social Security and 2.9% for Medicare). For example, if your net income is $100,000 in 2026, you’d owe $15,300 in self-employment taxes, though you can deduct half ($7,650) as a business expense on your personal tax return.

To manage this, you’ll file Schedule SE alongside your Form 1040. High earners (over $200,000 single or $250,000 married filing jointly) may also owe the Additional Medicare Tax of 0.9%.

4. Quarterly Estimated Taxes

Small business owners often don’t have taxes withheld like traditional employees, so you’re required to make quarterly estimated tax payments to the IRS to cover income taxes and self-employment taxes. These payments are due on April 15, June 15, September 15 of 2026, and January 15 of 2027. Failing to pay enough can result in underpayment penalties.

For example, if you project a net income of $80,000 for 2026, you’d estimate your total tax liability (including self-employment taxes) and divide it into four payments. Tax software or an accountant can help calculate these amounts accurately.

5. State and Local Taxes

In 2026, state taxes will vary widely based on your location and business structure. Most states impose income taxes on pass-through entities, with rates ranging from 0% (in states like Texas and Florida) to over 8% (in states like California). Some states, like Washington, impose unique taxes such as the Business and Occupation (B&O) Tax, a gross receipts tax that applies regardless of profitability.

Local taxes, such as property taxes on business-owned real estate or sales taxes on goods and services, also apply. For instance, a retail business in Chicago might face a combined state and local sales tax rate of 10.25%, while a service-based business in a rural area might face none.

6. Capital Gains and Dividend Taxes

If your business invests in stocks, real estate, or other assets, you may face capital gains taxes upon selling them. The tax rate depends on how long you held the asset:

• Short-term capital gains (assets held less than one year) are taxed at your ordinary income tax rate (10%–37%).
• Long-term capital gains (assets held over one year) are taxed at 0%, 15%, or 20%, depending on your income.

For example, if your business sells a piece of equipment held for two years for a $50,000 profit in 2026, you might pay 15% ($7,500) in long-term capital gains tax, assuming your income falls in the middle bracket.

Dividend taxes apply if your business receives dividends from investments or if you, as a C corporation owner, receive dividends. Qualified dividends are taxed at 15% or 20%, while non-qualified dividends are taxed at your ordinary income rate.

7. Qualified Business Income (QBI) Deduction

The QBI deduction, introduced under the Tax Cuts and Jobs Act, allows eligible small business owners to deduct up to 20% of their qualified business income on their personal tax returns. This deduction is available for sole proprietorships, partnerships, LLCs, and S corporations, but not C corporations.

For 2026, the deduction is subject to income limits and phase-outs. For example, single filers with taxable income above $191,950 (projected for 2026) may face restrictions, especially if their business is a specified service trade or business (e.g., law, consulting). A bakery owner with $100,000 in net income might deduct $20,000, reducing their taxable income to $80,000, assuming they meet eligibility criteria.

How to Calculate Your Small Business Taxes

Calculating your small business taxes involves several steps, but tax preparation software or a professional can streamline the process. Here’s a simplified approach for 2026:

1. Determine Your Business Structure: Identify whether you’re a sole proprietorship, partnership, LLC, S corporation, or C corporation, as this dictates your tax forms and rates.
2. Calculate Net Income: Subtract deductible business expenses (e.g., rent, supplies, marketing) from your gross revenue. For example, a coffee shop with $300,000 in revenue and $150,000 in expenses has a net income of $150,000.
3. Apply the Appropriate Tax Rate:
   • For pass-through entities, add net income to your personal income and use the 2026 individual tax brackets (projected to be similar to 2025: 10%–37%).
   • For C corporations, apply the 21% flat rate to net earnings.
4. Factor in Self-Employment Taxes: If applicable, calculate 15.3% of your net income for self-employment taxes, and deduct half as a business expense.
5. Include Payroll Taxes: For businesses with employees, add 7.65% of gross payroll for FICA, plus FUTA and state unemployment taxes.
6. Account for Deductions and Credits: Apply the QBI deduction, business expense deductions, and any tax credits (e.g., Work Opportunity Tax Credit for hiring certain employees).
7. Estimate Quarterly Payments: Divide your total tax liability by four to determine quarterly estimated tax payments.

For example, consider a freelance web developer in 2026 with $120,000 in revenue and $30,000 in expenses. Their net income is $90,000. They owe 15.3% ($13,770) in self-employment taxes, deduct $6,885 as a business expense, and apply the QBI deduction ($18,000). Their taxable income becomes $65,115, taxed at individual rates (approximately $12,000 in federal income tax, assuming a 22% bracket). Total federal taxes: $13,770 + $12,000 = $25,770, paid quarterly.

Strategies to Minimize Taxes in 2026

Reducing your tax burden legally is a priority for small business owners. Here are actionable strategies for 2026:

• Maximize Deductions: Deduct expenses like office supplies, travel, utilities, and home office costs (if eligible). Keep detailed records using software like QuickBooks.
• Leverage the QBI Deduction: Ensure your business qualifies and work with a tax professional to optimize this deduction.
• Contribute to Retirement Plans: Contributions to plans like a SEP-IRA or Solo 401(k) reduce taxable income. For example, a SEP-IRA allows contributions up to 25% of net income or $69,000 (projected for 2026).
• Hire Family Members: Paying family members for legitimate work can shift income to lower tax brackets, reducing your overall liability.
• Invest in Equipment: The Section 179 deduction allows you to deduct the full cost of qualifying equipment (e.g., computers, vehicles) up to a limit (projected at $1.2 million for 2026).
• Stay Compliant with Quarterly Payments: Avoid penalties by accurately estimating and paying quarterly taxes.

Potential Changes in 2026

While 2025 tax laws provide a baseline, 2026 could bring changes due to expiring provisions in the Tax Cuts and Jobs Act. For instance, the QBI deduction is set to expire after 2025 unless Congress extends it. If it lapses, pass-through entities could face higher tax burdens. Additionally, proposed increases to the corporate tax rate (potentially to 25% or higher) could affect C corporations. Stay informed by monitoring IRS updates and consulting a tax professional.

Real-World Examples

• Small Business (Sole Proprietorship): A freelance photographer earns $75,000 in 2026, with $15,000 in expenses. Their net income is $60,000, subject to self-employment taxes ($9,180) and federal income taxes (approximately $8,000 after deductions). They pay $4,295 quarterly and claim a $12,000 QBI deduction.
• Medium Business (Partnership): A two-partner marketing firm earns $400,000 with $100,000 in expenses. Each partner reports $150,000 on their personal return, pays self-employment taxes ($22,950 each), and applies the QBI deduction ($30,000 each), reducing their taxable income.
• Large Business (C Corporation): A tech startup earns $2 million in net earnings. They pay $420,000 in corporate taxes (21%) and distribute $500,000 in dividends, taxed at 15% ($75,000) for shareholders.

Conclusion

In 2026, small business taxes will remain a complex but manageable aspect of operations. By understanding your business structure, leveraging deductions and credits, and staying compliant with quarterly estimated taxes, you can minimize your tax burden and focus on growth. Whether you’re a sole proprietor or running a corporation, working with tax software or a professional ensures accuracy and maximizes savings. Keep an eye on potential legislative changes, such as the expiration of the QBI deduction, and plan proactively to navigate the evolving tax landscape. With the right strategies, your small business can thrive while meeting its tax obligations.

Disclaimer

The information provided in “How Much Tax Will Your Small Business Pay in 2026? A Comprehensive Guide” is intended for general informational purposes only and is based on tax laws and projections as of May 2025. Tax regulations are subject to change, and specific tax obligations vary based on individual circumstances, business structure, location, and other factors. This article does not constitute professional tax, legal, or financial advice. For accurate and personalized guidance, consult a qualified tax professional or accountant to ensure compliance with federal, state, and local tax requirements. The author and publisher of this website (Manishchanda.net) are not responsible for any actions taken based on the information in this article.

Acknowledgements

The creation of the article “How Much Tax Will Your Small Business Pay in 2026? A Comprehensive Guide” was made possible through the wealth of information provided by numerous reputable sources. These sources offered valuable insights into tax regulations, business structures, and financial strategies, ensuring the article’s accuracy and depth. I sincerely express my gratitude to the following organizations and platforms for their comprehensive resources, which helped shape this guide. Their expertise in tax policy, small business operations, and financial planning was instrumental in providing a well-rounded perspective for small business owners preparing for 2026.

• IRS for detailed federal tax guidelines, forms, and schedules, including information on income taxes, self-employment taxes, and the Qualified Business Income deduction.
• SBA for resources on small business tax obligations and operational guidance.
• NFIB for insights into small business tax rates and pass-through entities.
• Tax Foundation for analysis of federal and state tax policies affecting small businesses.
• Nolo for legal and tax explanations tailored to small business owners.
• Forbes for articles on tax strategies and corporate tax rates.
• Investopedia for clear definitions of tax terms like FICA, capital gains, and dividends.
• QuickBooks for practical advice on tracking expenses and calculating quarterly estimated taxes.
• TurboTax for guidance on tax preparation software and small business deductions.
• H&R Block for insights into payroll taxes and self-employment tax calculations.
• CPA Practice Advisor for updates on tax law changes and their impact on small businesses.
• Entrepreneur for tips on minimizing tax liabilities for small businesses.
• The Balance for detailed breakdowns of business tax structures.
• Wolters Kluwer for professional insights into corporate taxation and LLCs.
• Accounting Today for trends in small business accounting and tax compliance.
• Bench for simplified explanations of bookkeeping and tax obligations.
• LegalZoom for information on business structures and their tax implications.
• Avalara for resources on state and local sales taxes.
• Tax Policy Center for data on federal and state tax policies.
• Bloomberg Tax for in-depth analysis of potential tax law changes, including the Tax Cuts and Jobs Act.
• Inc. for practical tax-saving strategies for small business owners.
• U.S. Chamber of Commerce for advocacy and resources on small business taxation.
• State Tax Websites (e.g., ca.gov for California) for state-specific tax information, such as franchise taxes and B&O taxes.

Frequently Asked Questions (FAQs)

FAQ 1: What Types of Taxes Do Small Businesses Need to Pay in 2026?

Small businesses in 2026 face a variety of tax obligations, each tied to different aspects of their operations. Understanding these taxes is crucial for budgeting and compliance. The primary taxes include federal income taxes, payroll taxes, self-employment taxes, state and local taxes, and potentially capital gains or dividend taxes. The specific taxes depend on the business structure—whether it’s a sole proprietorship, partnership, LLC, S corporation, or C corporation—as well as the business’s revenue, expenses, and location.

For sole proprietorships and single-member LLCs, income is reported on the owner’s personal tax return using Schedule C, making it a pass-through entity.

For example, a freelance writer earning $70,000 with $15,000 in expenses would report a net income of $55,000, taxed at individual rates (projected 10%–37% for 2026). Partnerships and multi-member LLCs pass income to partners via Schedule K-1, while C corporations pay a flat 21% tax on net earnings. Payroll taxes, including FICA (7.65% employer portion for Social Security and Medicare), apply to businesses with employees. A small retail business with two employees earning $40,000 each would pay $6,120 annually in FICA taxes. Self-employment taxes (15.3%) apply to sole proprietors and LLC owners, covering both employer and employee FICA portions. State taxes vary—California’s franchise tax is 8.84%, while Texas has no state income tax. Capital gains taxes may apply on asset sales, and dividend taxes affect C corporation shareholders.

• Federal Income Taxes: Based on net income and business structure, with rates varying from 10%–37% for pass-through entities or 21% for corporations.
• Payroll Taxes: Include FICA (7.65%), FUTA (0.6%–6%), and state unemployment taxes.
• Self-Employment Taxes: 15.3% on net income for sole proprietors and LLC owners.
• State Taxes: Vary by state, including income, sales, or gross receipts taxes like Washington’s B&O tax.
• Capital Gains/Dividends: Taxed at 0%–20% (long-term) or ordinary rates (short-term/dividends).

By understanding these taxes, small business owners can plan for 2026 obligations and avoid surprises during tax season.

FAQ 2: How Does Business Structure Affect Small Business Taxes in 2026?

The business structure significantly impacts how small businesses are taxed in 2026. The main structures—sole proprietorship, partnership, LLC, S corporation, and C corporation—each have unique tax implications, affecting both the tax rate and filing process. Choosing the right structure can optimize tax liabilities, so understanding these differences is essential.

Sole proprietorships and single-member LLCs are pass-through entities, meaning business income is reported on the owner’s personal tax return via Schedule C. For instance, a home-based bakery earning $90,000 with $25,000 in expenses reports $65,000 as personal income, taxed at individual rates (projected 10%–37%). Partnerships and multi-member LLCs also pass income to owners, who report their share on Schedule K-1. A two-partner consulting firm with $200,000 in net income splits this equally, with each partner reporting $100,000. S corporations pass income to shareholders, avoiding corporate taxes but requiring Form 1120-S. In contrast, C corporations face a flat 21% tax on net earnings, and shareholders pay taxes on dividends, leading to double taxation.For example, a C corporation with $500,000 in net earnings pays $105,000 in taxes, and shareholders pay 15%–20% on dividends received.

• Sole Proprietorship/Single-Member LLC: Simplest structure, taxed on personal return, but owners face self-employment taxes (15.3%).
• Partnership/Multi-Member LLC: Income splits among partners, reported on personal returns, with self-employment taxes applying.
• S Corporation: Avoids corporate tax, but requires precise payroll and Form 1120-S filing.
• C Corporation: Faces double taxation but offers benefits for large businesses reinvesting profits.

Selecting a structure involves balancing tax obligations with liability protection and operational needs. Consulting a tax professional for 2026 planning is recommended.

FAQ 3: What Is the Federal Income Tax Rate for Small Businesses in 2026?

The federal income tax rate for small businesses in 2026 depends on the business structure. Most small businesses (about 75%) are pass-through entities like sole proprietorships, partnerships, or LLCs, meaning they don’t pay a separate business tax. Instead, income is reported on the owners’ personal tax returns, subject to individual tax rates. C corporations, however, are taxed separately at a flat rate.

For pass-through entities, 2026 tax rates are projected to mirror 2025 individual rates, ranging from 10% to 37% based on taxable income. For example, a single-member LLC owner with $100,000 in net income (after $30,000 in deductions from $130,000 revenue) might fall into the 22% bracket, owing approximately $22,000 in federal income tax, adjusted for deductions like the QBI deduction. C corporations pay a flat 21% on net earnings. A tech startup with $1 million in net earnings would owe $210,000 in corporate taxes. If the owner receives $100,000 in dividends, they’d pay an additional 15%–20% dividend tax, depending on their income.

• Pass-Through Rates: 10% (up to $11,925 single), 12%, 22%, 24%, 32%, 35%, and 37% (over $609,350 single, projected).
• Corporate Rate: Flat 21%, with potential increases proposed for 2026.
• Dividend Taxes: 15%–20% for qualified dividends, or ordinary rates for non-qualified.

These rates highlight the importance of accurate income projections and deductions to minimize tax liability in 2026.

FAQ 4: How Do Payroll Taxes Work for Small Businesses in 2026?

Payroll taxes are a significant expense for small businesses with employees in 2026. These taxes fund Social Security, Medicare, unemployment programs, and workers’ compensation, and are calculated based on employee wages. Understanding these obligations ensures compliance and proper budgeting.

The primary component is FICA taxes, split equally between employer and employee at 7.65% each (6.2% for Social Security, 1.45% for Medicare). For an employee earning $60,000 annually, the business pays $4,590 in FICA taxes, with the employee contributing the same. High earners (over $200,000 single) incur an additional 0.9% Medicare tax, typically withheld from wages. Federal Unemployment Tax (FUTA) is 6% on the first $7,000 of wages per employee, often reduced to 0.6% with state credits. A business with five employees might pay $210–$2,100 annually in FUTA. State Unemployment Taxes (SUTA) vary by state and depend on the business’s experience rating. Workers’ compensation taxes, mandatory in most states, range from $0.50–$20 per $100 of payroll, depending on industry risk. A construction company might pay $10,000 annually for workers’ comp on a $100,000 payroll, while an office-based business pays less.

• FICA: 7.65% employer portion, matched by employee.
• FUTA: 0.6%–6% on first $7,000 per employee.
• SUTA: Varies by state, often 1%–5% of payroll.
• Workers’ Compensation: Industry-specific, based on payroll size.

Proper payroll management, using tools like QuickBooks, ensures accurate calculations and timely payments in 2026.

FAQ 5: What Are Self-Employment Taxes, and Who Pays Them in 2026?

Self-employment taxes apply to small business owners who don’t have taxes withheld like traditional employees, primarily sole proprietors and LLC owners. In 2026, these taxes cover Social Security and Medicare, totaling 15.3% of net income (12.4% for Social Security, 2.9% for Medicare). This rate reflects both the employer and employee portions of FICA taxes.

For example, a freelance graphic designer with $80,000 in net income (after $20,000 in expenses) owes $12,240 in self-employment taxes. Half of this ($6,120) is deductible as a business expense on their personal tax return, reducing taxable income. High earners (over $200,000 single or $250,000 married filing jointly) may also owe an Additional Medicare Tax of 0.9%. These taxes are calculated using Schedule SE and added to the owner’s Form 1040. To avoid penalties, owners must make quarterly estimated tax payments (due April 15, June 15, September 15, 2026, and January 15, 2027). For the designer, quarterly payments might be around $3,060, assuming consistent income.

• Rate: 15.3% on net income, with 0.9% additional for high earners.
• Deduction: Half of self-employment taxes is deductible.
• Filing: Use Schedule SE and pay via quarterly estimates.

Proper planning and record-keeping are essential to manage self-employment taxes effectively in 2026.

FAQ 6: What Is the Qualified Business Income (QBI) Deduction, and Will It Apply in 2026?

The Qualified Business Income (QBI) deduction allows eligible small business owners to deduct up to 20% of their net business income, reducing taxable income. Available to sole proprietorships, partnerships, LLCs, and S corporations, it’s a significant tax-saving opportunity, but its status in 2026 is uncertain due to the Tax Cuts and Jobs Act expiration in 2025.

In 2025, a sole proprietor with $100,000 in net income could deduct $20,000, lowering taxable income to $80,000, assuming they meet income and business type criteria. However, the deduction phases out for high earners (projected above $191,950 single in 2026) and specified service trades or businesses (e.g., law, consulting). If Congress extends the QBI deduction into 2026, it will remain a valuable tool. For example, a retail store owner with $150,000 in net income could save $30,000 in taxable income. If the deduction expires, owners will face higher tax bills, making proactive planning critical.

• Eligibility: Non-C corporations with income below phase-out thresholds.
• Calculation: Up to 20% of qualified business income, subject to limits.
• Uncertainty: Monitor legislative updates for 2026 status.

Consult a tax professional to maximize this deduction or prepare for its potential absence in 2026.

FAQ 7: How Do Quarterly Estimated Taxes Work for Small Businesses in 2026?

Quarterly estimated taxes are required for small business owners whose taxes aren’t withheld, such as sole proprietors, partners, and LLC owners, to cover income taxes and self-employment taxes. In 2026, payments are due April 15, June 15, September 15, and January 15, 2027, to avoid underpayment penalties.

To calculate, estimate your annual net income, apply the projected tax rate (e.g., 22% for $100,000 income), and add self-employment taxes (15.3%). Divide the total by four for quarterly payments. For example, a consultant with $120,000 in net income might owe $26,400 in taxes ($18,000 income tax + $8,400 self-employment tax, after deductions). Quarterly payments would be $6,600. Tax software or an accountant can refine these estimates, accounting for deductions like the QBI deduction or Section 179.

• Due Dates: April 15, June 15, September 15, 2026, January 15, 2027.
• Calculation: Based on net income, tax rates, and self-employment taxes.
• Penalties: Apply if underpayment exceeds IRS thresholds (typically 90% of current year’s tax).

Accurate projections and timely payments are key to staying compliant in 2026.

FAQ 8: What State and Local Taxes Will Small Businesses Pay in 2026?

State and local taxes vary widely in 2026, depending on the business’s location and structure. Most states impose income taxes on pass-through entities, with rates from 0% (e.g., Texas, Florida) to over 8% (e.g., California). Some states, like Washington, have unique taxes like the Business and Occupation (B&O) tax, a gross receipts tax regardless of profitability.

Local taxes include property taxes on business-owned real estate and sales taxes on goods or services. For example, a Chicago retailer might face a 10.25% combined sales tax rate, while a rural service business might owe none. Franchise taxes (e.g., California’s 8.84% for LLCs) and business license fees also apply in some areas. A Texas-based sole proprietor with $100,000 in net income pays no state income tax but may owe local property taxes on a storefront. In contrast, a California LLC might pay $8,840 in franchise taxes plus local fees.

• Income Taxes: Vary by state, 0%–8%+ for pass-through entities.
• Sales Taxes: Apply to goods/services, rates vary (e.g., 5%–10%).
• Property Taxes: Based on business-owned real estate value.
• Other Taxes: Include franchise taxes or B&O taxes in specific states.

Check state and local tax websites for 2026 rates and requirements.

FAQ 9: How Can Small Businesses Minimize Their Tax Liability in 2026?

Minimizing tax liability in 2026 requires strategic planning and leveraging available deductions and credits. Small businesses can reduce taxes legally by optimizing expenses, retirement contributions, and tax-advantaged programs.

Key strategies include maximizing deductible expenses (e.g., rent, supplies, marketing), claiming the QBI deduction (if available, up to 20% of net income), and contributing to retirement plans like a SEP-IRA (up to 25% of net income or $69,000, projected). For example, a photographer with $80,000 in net income could contribute $20,000 to a SEP-IRA, reducing taxable income to $60,000. The Section 179 deduction allows deducting equipment costs (up to $1.2 million, projected). Hiring family members can shift income to lower tax brackets, and accurate quarterly estimated tax payments avoid penalties. A café owner might deduct $50,000 in equipment purchases, saving $11,000 in taxes at a 22% rate.

• Deductions: Track expenses like utilities, travel, and home office costs.
• Retirement Plans: Use SEP-IRA or Solo 401(k) to reduce taxable income.
• Section 179: Deduct equipment costs immediately.
• Hiring Strategies: Employ family to optimize tax brackets.

Work with a tax professional to tailor these strategies for 2026.

FAQ 10: What Potential Tax Changes Should Small Businesses Prepare for in 2026?

2026 may bring significant tax changes due to the expiration of the Tax Cuts and Jobs Act in 2025. Small businesses must stay informed to adapt their financial planning. The Qualified Business Income (QBI) deduction, which allows a 20% deduction on net income, is set to expire unless extended by Congress, potentially increasing tax bills for pass-through entities. For example, a sole proprietor with $100,000 in net income could lose a $20,000 deduction, raising their tax liability by $4,400 at a 22% rate.

Proposals to increase the corporate tax rate from 21% to 25% or higher could affect C corporations, raising taxes for a business with $1 million in net earnings from $210,000 to $250,000. Individual tax brackets may also adjust, with top rates potentially reverting to pre-2017 levels (e.g., 39.6%). State tax changes, like new sales tax rules or increased rates, could also emerge. Businesses should monitor legislative updates and consult tax professionals to prepare.

• QBI Expiration: Potential loss of 20% deduction for pass-through entities.
• Corporate Rate: Possible increase to 25% or more.
• Individual Rates: May revert to higher pre-2017 brackets.
• State Changes: Watch for new taxes or rate hikes.

Proactive planning and flexibility will help small businesses navigate 2026 tax changes effectively.