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Income tax rate depends on legal form of your business

How much income tax your business pays depends upon its legal taxesorganization, according to a report issued today by the Office of Advocacy of the U.S. Small Business Administration. Sole proprietorships pay an average rate of 13.3%, whereas S-corporations pay an average of 26.9%.


The effective federal income tax rate is the actual amount of taxes paid by a firm as a% of its net income.


Exceptions to the normal statutory tax rates, such as deductions, exclusions, and credits, have the effect of lowering the tax rates paid by firms. The result is a difference between the statutory rate and the actual or effective rate paid by the business or its owners. 


Overall, small businesses of all types pay an estimated average effective tax rate of 19.8%. Sole proprietorships face a 13.3% rate; small partnerships face 23.6%; and small S-corporations face 26.9%. Although not directly comparable, the rate faced by small C-corporations is 17.5%.


The progressivity of the tax code also affects effective rate calculations, as firms with less income face a lower statutory rate. Nearly 60% of small sole proprietorships have a net income of less than $10,000, while only 3.1% have a net income of at least $100,000. On the other hand, more than 18% of small S-corporations have a net income of at least $100,000.

Quantria Strategies wrote “Effective Federal Income Tax Rates Faced by Small Businesses in the United


States,” ( with funding from the Office of Advocacy. The authors primarily used data from the Internal Revenue Service Individual Statistics of Income Public Use File, 2004, as the basis for the study. For the purpose of this study, the authors define a small business as a firm with less than $10 million in gross receipts.


For more information and a complete copy of the report, visit the Office of Advocacy web site at The Office of Advocacy, the “small business watchdog” of the federal government, examines the role and status of small business in the economy and independently represents the views of small business to federal agencies, Congress, and the President. It is the source for small business statistics presented in user-friendly formats, and it funds research into small business issues.


Source: Office of Advocacy of the U.S. Small Business Administration,

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