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.
The U.S government brought in tax breaks and made specific changes to help businesses hold out during the pandemic.
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’ 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 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.
The 2022 income tax brackets are as shown.
Two primary factors determine your small business tax rates.
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.
Deductions reduce your taxable income. Examples of business deductions include rent expenses and legal fees. Individual deductions include medical expenses and charity donations.
Small businesses must pay other taxes besides federal income taxes.
Here are several ways to make tax filing more successful in the 2022 tax year.
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.