The answer is that it depends on the type of business. Sole proprietorships have the lowest effective tax rate, while corporations have the highest. A report just issued by the Office of Advocacy of the Small Business Administration shows that average effective tax rates range from 13.3 percent for sole proprietorships to 26.9 percent for S corporations. The effective federal income tax rate, says the SBA, is the actual amount of taxes paid by a firm as a percent of its net income.
Average effective tax rate. I don't like averages, because they don't tell you much of anything about the ends of the scale, but for what it's worth, small businesses of all types pay an estimated average effective tax rate of 19.8 percent. According to the report,
Sole proprietorships face a 13.3 percent rate, small partnerships face 23.6 percent, and small S corporations face 26.9 percent. While not directly comparable, the rate faced by small C corporations is 17.5 percent.Note that C corporations are taxed as separate entities, while the other business forms in this report are taxed through the owner personal tax returns.
Net Income Differences. What is more interesting to me is the statistics about net income.
Nearly 60 percent of small sole proprietorships have a net income of less than $10,000, while only 3.1 percent have a net income of at least $100,000. On the other hand, more than 18 percent of small S corporations have a net income of at least $100,000.
The higher income for corporations would be a factor in explaining their higher tax rate. If you are wondering why limited liability companies (LLCs) are not listed, remember that LLCs are taxed as either sole proprietorships (single-member) or partnerships (multiple-member)