Small-Business Tax Rates Explained: A 2026 Guide

Small businesses in the United States are taxed at widely varying rates depending on their legal structure, location, and income level, with pass-through entities facing personal income tax rates while C corporations pay a flat corporate rate.

Pass-through entities, which include sole proprietorships, partnerships, and S corporations, pay personal tax rates on business income. Those rates range from 10% to 37%, according to NerdWallet^[1][2]. C corporations, by contrast, pay a flat 21% tax on business income^[1][2]. The Internal Revenue Service uses a progressive tax system, meaning income is taxed in segments rather than at a single rate^[1].

Businesses that are not structured as S or C corporations also owe self-employment tax. That tax amounts to 15.3% of income^[1][2]. Companies with employees must pay employment taxes, which come out of the employer's pocket rather than workers' wages^[1].

Location adds another layer of complexity. Most states levy their own income tax, and cities and municipalities in more than a dozen states do so as well. Rates vary according to location and income^[1]. Businesses may also owe sales tax or excise tax depending on what they sell, with rates differing by state and product^[1].

Tax deductions can reduce taxable income and potentially move a business into a lower bracket. Common deductions include expenses related to home offices, vehicles, and travel^[1]. Some LLCs and sole proprietorships may reduce their tax liability by electing S corporation status, which eliminates the 15.3% self-employment tax, though this adds complexity and requires paying the owner a reasonable compensation that the IRS does not explicitly define^[1].