How Much Tax Does a Small Business Pay? Rates by Entity Type

I’ve been doing taxes for Houston business owners for a decade now. Last month I had two clients in the same week. Both pulling in $200,000 a year. One runs a restaurant over on Westheimer, the other has a consulting practice near the Galleria.

The restaurant owner paid $64,000 in federal taxes that year. The consultant paid $48,000. That’s a $16,000 difference on the same take-home. Not some shady loophole. Just the difference between a sole proprietorship and an S-Corp election.

This is what I want to show you today. How the entity you pick determines what you owe.

Note: Tax rules change. This is general information, not tax advice. Get a tax professional to review your specific situation.

Marginal vs. Effective: Two Different Numbers

You need to know the difference between these before we go further.

Your marginal rate is what you pay on the last dollar you earn. Federal brackets in 2026 run from 10% to 37%. When you hit the 24% bracket, only the money in that bracket gets hit at 24%. Not your whole income.

Your effective rate is what you actually pay across your entire income once all deductions and credits work through. A business owner in the 24% marginal bracket might have an effective rate of 16-18%.

The effective rate drives your planning. The marginal rate matters when you’re deciding whether a specific deduction is worth pursuing.

Sole Proprietorships: Simple But Expensive

Most small businesses start this way by accident. If you never formed an LLC or corporation, you’re automatically a sole proprietor.

Everything you earn on your business flows onto your personal 1040. Schedule C. The IRS sees you and your business as the same thing.

Income tax: Your profit gets taxed at whatever bracket you land in. Single filer with $100,000 in taxable income sits at 22%. Effective rate around 16%.

Self-employment tax: This is what kills you. You owe 15.3% on the first $184,500 of self-employment income (2026 threshold). That 15.3% covers both halves of Social Security (12.4%) and Medicare (2.9%). Above $184,500, you keep paying 2.9% on the rest. Single filers over $200,000 get hit with another 0.9% Medicare surtax on top.

You can deduct half the SE tax from your AGI. That helps. But it doesn’t touch the SE tax you actually owe.

Example: $150,000 net profit, single filer, sole proprietor

• Self-employment tax: about $21,200
• Deductible half of SE tax: about $10,600
• Federal income tax (after standard deduction and SE deduction): about $20,500
• Total federal tax: about $41,700
• Effective total rate: about 27.8%

That $21,200 chunk is why clients start asking me about other options. You’re paying both sides of the employment tax with no employer to split it.

Single-Member LLCs: Same Tax Bill, Better Legal Protection

An LLC with one owner gets taxed as a sole proprietorship unless you tell the IRS otherwise. The IRS call it a disregarded entity. Everything goes on Schedule C. SE tax still applies to all your profit.

But the LLC walls off your personal stuff from business liability. That protection is real. From the tax side, nothing changes automatically.

Here’s the power move: that same LLC can file a form and elect S-Corp taxation. The legal entity doesn’t change. The tax filing changes everything. That’s why picking your structure at the start matters so much.

S-Corporations: The Self-Employment Tax Play

S-Corp is not an entity. It’s a tax election. You can own an LLC and file Form 2553 with the IRS to get taxed as an S-Corp.

As an S-Corp owner, you pay yourself a real salary. W-2 taxes apply to that salary. Everything else that flows through gets taxed on your return but skips the SE tax.

The QBI deduction (20% of qualified business income, now permanent) applies to the profit that passes through. That’s up to 20% less income you owe taxes on.

Example: $150,000 net profit, single filer, S-Corp with $75,000 salary

• Payroll taxes on $75,000: about $11,475 (employer + employee)
• QBI deduction on $75,000 distribution (20%): about $15,000 reduction in taxable income
• Federal income tax (after standard deduction, QBI): about $16,200
• Total federal tax: about $27,675
• Effective total rate: about 18.5%

That’s $14,000 a year less than sole prop on the same $150,000 profit.

Once a Houston business owner hits $50,000 to $60,000 in profit, S-Corp elections start making sense. Below that, the payroll setup and Form 1120-S filing costs eat the savings.

The IRS watches for fake salaries. You can’t pay yourself $10,000 and take the rest as profit to dodge payroll tax. The salary has to be what someone in your industry actually makes doing your job. We’ve covered this in our S-Corp vs. LLC breakdown.

C-Corporations: Flat Rate, Double Tax

C-Corps are different. They have their own tax rate that doesn’t care what bracket the owner sits in.

The C-Corp files Form 1120 and pays a flat 21% on profits. Then if you take that money as a dividend, you pay taxes again. Two layers of tax on one dollar.

Corporate tax: Flat 21% on everything the corporation makes. A C-Corp doing $100,000 pays the same rate as one doing $10 million.

Dividend tax: Qualified dividends get hit at 0%, 15%, or 20%, depending on your income. Above $200,000 (single filer), add another 3.8% Net Investment Income Tax.

Example: $150,000 corporate profit, all distributed as dividends to a single owner

• Corporate tax at 21%: $31,500
• After-tax profit for distribution: $118,500
• Qualified dividend tax at 15%: about $17,775
• Total federal tax on $150,000: about $49,275
• Combined effective rate: about 32.9%

If you’re in the 20% dividend bracket and hit the 3.8% NIIT, you’re looking at roughly 39.8% combined.

C-Corps still make sense when:

• You’re reinvesting profit instead of taking it out. Retained earnings get taxed once at 21%, not twice.
• You’re going to sell the company and qualify for QSBS. You can exclude up to $10 million in capital gains. We have a whole guide on this.
• You want certain executive benefits that get better tax treatment in a C-Corp.

Multi-Member LLCs and Partnerships

Two or more owners? The default is partnership taxation (Form 1065). Income, losses, deductions pass through to each owner’s return based on what they own.

Each partner pays 15.3% SE tax on their share unless they’re a limited partner. Multi-member LLCs can elect S-Corp taxation and save the same way as single-member S-Corps.

The Texas Advantage

We don’t have state income tax in Texas. That’s huge for pass-through businesses. Your profit doesn’t get hit at the state level like it would in California (up to 13.3%) or New York (up to 10.9%).

Texas has a franchise tax, but it doesn’t apply to you unless you make over $2.65 million (2026 threshold). Most Houston businesses are way below that.

If you do cross it, the rate is 0.75% for most industries or 0.375% for retail and wholesale. Either way, that’s peanuts compared to a state income tax.

The QBI Deduction: 20% Off for Pass-Through Owners

Section 199A gives pass-through business owners a 20% deduction on qualified business income. It was set to expire after 2025, but Congress made it permanent in 2026.

On $100,000 of business income, you deduct $20,000. That saves about $4,800 in taxes at the 24% bracket.

The deduction phases out if your income hits $394,600 (married filing joint) in 2026. It completely disappears at $544,600 for joint filers.

Service businesses (consulting, law, medicine, financial advice) have tighter limits above the threshold. Construction, retail, logistics have more room. We’ve got a detailed QBI guide sorted by industry.

Side-by-Side: $150,000 Net Profit, Single Filer

	Sole Prop / LLC	S-Corp	C-Corp (all distributed)
Income tax	~$20,500	~$16,200	~$49,275 (combined)
SE / payroll tax	~$21,200	~$11,475	Included above
QBI deduction benefit	Yes	Yes	No
Total federal tax	~$41,700	~$27,675	~$49,275
Effective rate	~27.8%	~18.5%	~32.9%

These are estimates based on 2026 rates and standard deduction. Your situation is different.

At this income level, the S-Corp saves you $14,000 a year versus sole prop and $21,000 versus a C-Corp that pays everything out. But those numbers change when your income goes up or down.

Five Ways to Lower the Bill

1. Max out retirement contributions. A Solo 401(k) lets you contribute $23,500 as an employee (2025 limit), plus up to 25% of salary as employer, for a max of $70,000 ($77,500 if you’re over 50). Every dollar you contribute cuts your taxable income.

2. Time your income and expenses. On cash accounting, pay a December invoice in December instead of January. Skip invoicing until next year if you want. This shifts profit between tax years. Helps when you know you’ll be in a different bracket next year.

3. Protect the QBI deduction. Keep your income below the phase-out threshold. Structure your salary right. Keep service work separate from non-service work. You keep the full 20%.

4. Claim every legitimate deduction. Missing a business expense deduction at the 24% bracket plus 15.3% SE tax means you’re basically giving 40 cents to the IRS for every dollar you didn’t deduct.

5. Pay estimated taxes correctly. Underpay and you get hit with penalties. Overpay and the IRS holds your money. Get quarterly tax payments right based on what you actually earned.

There’s No Universal “Best” Entity

A food truck in the Energy Corridor doing $60,000 profit has different needs than a consulting firm in the Galleria doing $300,000. A tech startup trying to raise money has different needs than either.

Match your entity to your actual income, your growth plan, and how much paperwork you want to deal with. It’s planning, not guessing.

At EZQ Group, I work with Houston business owners on this every month. We look at entity selection, S-Corp elections, QBI optimization, year-round planning with real numbers. If you think you’re paying more tax than your structure requires, a tax planning session is the next step.

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This is general information, not tax advice. Your situation is unique. Talk to a tax professional before making changes.