The Small Business Tax Stack
Running a small business means navigating multiple tax obligations:
Federal income tax: Business profit flows to your personal return at ordinary income rates (10%–37%). Sole proprietors report on Schedule C.
Self-employment tax: 15.3% on net SE income up to $168,600 (2024), then 2.9% above that.
Quarterly estimated payments: Required if you'll owe $1,000+ in federal taxes. Four payments per year.
State business taxes: Most states tax business income through the owner's personal return, but some add franchise or gross receipts taxes.
Small businesses (fewer than 500 employees) employ 46.4% of the U.S. private workforce. Source: SBA Office of Advocacy (2023) — Source
Estimating Your Tax Liability
Step 1: Net business income = Revenue – business expenses
Step 2: SE tax = Net income × 0.9235 × 15.3%
Step 3: AGI = Net income – (half of SE tax) – other above-the-line deductions
Step 4: Taxable income = AGI – standard deduction
Step 5: Apply income tax brackets; add SE tax
Example: $100,000 net SE income, single filer
- SE tax: $14,130
- AGI: $100,000 – $7,065 – $14,600 = $78,335
- Federal income tax: ~$13,200
- Total federal tax: ~$27,330 (27% effective rate)
The average small business owner pays a combined effective federal tax rate of 25–30% on net income. Source: National Federation of Independent Business (2023) — Source
The Most Impactful Planning Strategies
Solo 401(k): Contribute as both employee ($23,000) and employer (up to 25% of net SE income) — total up to $69,000 in 2024. The single most powerful tax tool for high-income self-employed workers.
Maximize business deductions: Every legitimate deduction reduces both SE tax and income tax. Keep rigorous records.
S-Corp election: At $150,000 net income, can save $10,000–$12,000 in SE taxes annually by splitting income between salary and distributions.
An S-Corp election for a business with $150,000 net income can save approximately $10,000–$12,000 in SE taxes annually. Source: IRS S-Corp guidance — Source
QBI deduction: Deduct up to 20% of qualified business income — saves $4,400 in federal taxes on $100,000 net income at 22% bracket.
Quarterly Payment Strategy
Set aside 25–30% of net business income each month into a dedicated tax savings account. Pay quarterly from that account. See our quarterly tax calculator and self-employment tax calculator.
Also see: reduce taxable income and the tax estimator guide.
Get Started with Avenue to track business income, estimate quarterly payments, and identify tax-saving opportunities year-round.