This is general information, not tax advice. Rules change and situations differ — consult a qualified tax professional.

Two businesses with identical profits can owe very different taxes, depending on one early decision: how the business is legally structured.

Pass-through vs. corporation

Most U.S. small businesses are pass-through entities — sole proprietorships, partnerships, LLCs and S-corporations. The business itself pays no federal income tax; instead, profits "pass through" to the owner's personal return and are taxed at individual income-tax rates.

A C-corporation is taxed as its own entity, at a flat 21% federal rate. When it then pays profits out to shareholders as dividends, those are taxed again on the shareholder's return — double taxation. The 21% corporate rate has held since 2018, per NerdWallet.

The brackets that apply to pass-throughs

Because pass-through profit lands on the owner's personal return, it faces the same graduated federal brackets as wages — ranging from 10% up to 37% at the top, with the thresholds adjusting for inflation each year (the figures here reflect NerdWallet's 2026 brackets). These are marginal rates: each slice of income is taxed at its bracket's rate, not your whole income at the top rate.

Self-employment tax: the second bill

Working for yourself means paying self-employment tax — the Social Security and Medicare contributions an employer and employee normally split. Self-employed owners pay both halves: 15.3% (12.4% Social Security + 2.9% Medicare) on 92.35% of net earnings, kicking in at $400 of net self-employment income, the IRS explains. The Social Security portion applies only up to an annual wage base ($184,500 in 2026, per NerdWallet); the 2.9% Medicare part has no cap, and high earners owe an extra 0.9% Medicare surtax above $200,000 (single) / $250,000 (married). One break: you can deduct half of your self-employment tax when figuring your income.

The 20% pass-through deduction

The qualified business income (QBI) deduction (Section 199A) lets many pass-through owners deduct up to 20% of qualified business income — a meaningful cut to the effective rate. Originally set to expire after 2025, it was made permanent under recent federal tax legislation, NerdWallet notes (the exact statutory details are worth confirming with a professional). It phases out at higher incomes and is tighter for certain "service" businesses such as law, health, consulting and finance; C-corporations don't get it at all.

If you have employees

Hiring adds payroll taxes: you withhold income tax and the employee's Social Security and Medicare from paychecks, then match the Social Security and Medicare yourself (about 13.65% of wages, per NerdWallet), plus federal unemployment tax, with quarterly filings.

State taxes and quarterly payments

Federal is only part of it. State and local taxes vary widely — from no income tax to graduated rates above 10% — and states treat pass-through income and the QBI deduction differently. And because no employer is withholding for you, owners who expect to owe $1,000+ generally must pay estimated taxes four times a year, the IRS says. A safe harbor helps: you typically avoid penalties by paying 90% of this year's tax or 100% of last year's, whichever is lower.

The bottom line

Structure, income, employees and location all combine into a tax bill unique to each business. The rates here reflect federal rules as understood in mid-2026, and tax law changes often — so treat this as a map, not a substitute for a tax professional who can apply it to your numbers.