As a small business owner, dealing with taxes can feel overwhelming. But getting your taxes right—whether that means doing some research or reaching out for expert help—is definitely worth it. Not only does it help you stay compliant, but you might also find out how a small business can get a tax refund and optimize your venture's financial health.
The good news is, we've talked to tax experts so you don’t have to. We'll walk you through the basics of small business taxes and share tips on how to maximize your chances of getting a tax refund. Whether you’ve been in business for a while or are just starting out, this info will help you handle your taxes with more confidence.
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Types of business taxes
It’s important to have a base understanding of the types of taxes that apply to businesses. This is the first step in determining whether you might be eligible for a tax refund.
Small businesses in the U.S. are subject to various taxes, and the nature of these taxes can differ depending on the business structure, location, and industry.
Income tax
This tax is based on the income your business earns. If the business is a sole proprietorship, partnership, S-corporation (with up to 100 shareholders), or LLC (Limited Liability Company), the income taxes are passed through to the owners and reported on their personal tax returns. For C corporations (unlimited shareholders), the business pays the income tax directly.
Self-employment tax
If you’re self-employed, this tax covers Social Security and Medicare contributions. The self-employment tax rate is 15.3%, and it applies to net earnings from your business.
Payroll tax
If you have employees, payroll taxes must be withheld from their wages. This includes Social Security and Medicare taxes, as well as federal income tax withholding. Additionally, employers must pay a matching portion of Social Security and Medicare taxes, along with federal unemployment tax (FUTA).
Sales tax
Businesses that sell goods and some services are required to collect sales tax from customers and remit it to the state. The sales tax rate and what’s taxable vary by state and locality.
Excise tax
Certain industries, such as alcohol, tobacco, and fuel, are subject to excise taxes. These taxes are often included in the price of the product and collected by the business to be paid to the government.
Property tax
If your business owns property, such as real estate or equipment, you may be liable for property taxes, which are usually assessed by local governments.
Important to consider: “Most states have their own rules for these taxes and may even call them something different, so knowing the rules for the state or states a business operates in is pivotal,” says Carl Breedlove, lead tax research analyst at Block Advisors by H&R Block.
Can a business get a tax refund? How tax refunds work
“A tax refund generally occurs when a business or business owner pays more in estimated taxes throughout the year than the amount of tax they owe,” Breedlove says. “It could be generated from any of the taxes mentioned above.”
So, do businesses get tax refunds? Yes, but they operate under a slightly different set of rules than individual taxpayers:
Overpayment of taxes: Just like individuals, businesses can receive a tax refund if they overpay their taxes during the year. This can happen if you make estimated tax payments that exceed your actual tax liability or if you overestimate your income and pay too much in taxes.
Carrying back losses: Some businesses, particularly those structured as C corporations, may carry back net operating losses (NOL) to previous tax years. This means if your business had a loss this year, you might be able to apply that loss to a previous year’s tax return, resulting in a refund.
Tax credits: Certain tax credits can reduce your business’s tax liability, and in some cases, these credits can result in a refund. For example, the Research and Development (R&D) Tax Credit and the Work Opportunity Tax Credit are popular options for eligible businesses.
Payroll tax credits: The COVID-19 pandemic introduced several payroll tax credits, such as the Employee Retention Credit (ERC), which allowed eligible businesses to receive a refund on payroll taxes paid during the pandemic.
What qualifies as a small business—and do you fit this definition?
“There are a lot of different ways that this question could be answered—and in reality there isn’t a bright-line rule for us to follow,” Breedlove says.
In the U.S., the Small Business Administration (SBA) provides guidelines that generally classify a business as “small” based on its industry, revenue, and number of employees.
- Fewer than 500 employees. However, this number can be lower depending on the specific industry.
- The SBA also sets revenue thresholds, which can range from $1 million to $40 million in annual revenue, depending on the industry.
- The business structure, such as a sole proprietorship, partnership, LLC, or corporation, can also play a role in determining how your business is classified.
“Alternatively to the SBA, the IRS tends to include businesses that use the Form 1040 series in some way to report business income/loss or businesses with assets under $10 million as small businesses,” Breedlove says.
These qualifications are important because they influence which taxes apply to your business and whether or not you may be eligible for certain tax benefits or refunds.
Do small businesses get tax refunds?
Yes, small businesses can receive tax refunds, but it depends largely on the type of business entity.
The basic principles of tax refunds—like overpayment and eligibility for certain credits—apply to businesses of all sizes. However, the scale and methods used by larger businesses often differ from those of small businesses.
“The majority of small businesses are pass-through entities, meaning their net profit is passed through to the individual owner or owners tax returns,” Breedlove says. “The owners combine their share of the profit with their individual income to determine if they will get a refund. The business doesn’t generally pay income tax, the owners do.”
For C corporations, which can include small businesses like early-stage startups, the refund process is handled at the corporate level. Any refunds are related to the corporation's tax situation rather than the owners’ personal taxes.
“If the business isn’t a pass-through entity, it will take that net profit and calculate whether it gets a refund based on the payments it made during the year and the tax calculated on that profit, without considering the owners’ other income,” Breedlove says.
Tax rates for small businesses
Tax rates for small businesses depend largely on the structure of the business.
- For sole proprietorships and partnerships, business income is reported on the owner’s personal tax return, and the tax rate is based on individual income tax brackets, which range from 10% to 37%.
- LLCs can be taxed as a sole proprietorship, partnership, or corporation, depending on how they are structured. The tax rate will align with the chosen structure.
- C corporations are taxed separately from their owners at a flat rate of 21% on their profits.
- S-corporations are pass-through entities, meaning the income is taxed at the shareholder level, similar to partnerships and LLCs taxed as partnerships.
It’s important to note that state and local taxes may also apply, and these rates can vary significantly based on your location.
5 tips on how to increase your tax refunds
Maximizing your tax refund as a small business owner requires strategic planning and a thorough understanding of tax laws. George Birrell, CPA with extensive experience in the startup environment and co-founder of Taxhub, gave us his best advice.
1. Claim all eligible deductions
Ensure you’re taking advantage of all available deductions, such as those for business expenses, home office use, and depreciation. These deductions can significantly reduce your taxable income.
“Claim proper depreciation for assets placed in services for business uses,” Birrell says. “Claim mileage allowances for business use of personal cars.”
2. Take advantage of tax credits
Research and apply for any tax credits your business may qualify for. “Take advantage of the credits such as R&D credit, Work Opportunity Tax Credit, Energy Efficiency Credits etc,” Birrell says. Tax credits reduce your tax liability dollar-for-dollar, which can result in a larger refund.
3. Keep thorough records
“Track all ordinary and necessary business expenses,” Birrel says. Accurate and detailed record-keeping is essential for claiming deductions and credits. Proper documentation will also protect you in case of an audit and ensure you’re not missing out on potential refunds.
4. Consider tax-loss harvesting
If your business has investments, you can offset gains with losses through tax-loss harvesting. (Tax-loss harvesting involves selling investments at a loss to counterbalance gains from other investments, thereby lowering your taxable income.) This strategy can help reduce your tax liability and potentially increase your refund.
Still have doubts? Check out the answers to some common questions below.
FAQs
Will I get a tax refund if my business loses money?
If your business operates as a C corporation, you may be able to carry back the net operating loss (NOL) to a previous tax year and receive a refund. For other business structures, losses can typically offset other income on your personal tax return, potentially reducing your overall tax liability.
How much do small business owners get back in taxes?
The amount a small business owner gets back in taxes depends on several factors, including the business’s structure, the amount of taxes paid, and eligibility for deductions and credits. Refund amounts can vary widely, and in some cases, a refund may not be issued if there’s no overpayment of taxes.
How to get money back on taxes when self-employed?
Self-employed individuals can receive a tax refund if they overpay their estimated taxes or qualify for certain tax credits. Deductions for business expenses, retirement contributions, and the home office deduction can also reduce taxable income and increase the likelihood of a refund.
Can a small business get a tax refund in its first year?
A small business may be eligible for a tax refund in its first year if it has overpaid taxes or qualifies for refundable tax credits, even if it has not yet generated significant income. The business needs to file its tax return accurately, including all relevant deductions and credits, to determine if it qualifies for a refund. The specifics depend on the business's structure (e.g., sole proprietorship, partnership, S-corporation, LLC) and its overall tax situation for the year.
Can I claim a refund on payroll taxes?
Yes, under certain circumstances, such as through the Employee Retention Credit (ERC), you may be eligible to claim a refund on payroll taxes paid. It’s important to consult with a tax professional to understand your eligibility.
“For example, if the business overpaid payroll taxes throughout the year it could get a refund at the end of the year,” Breedlove says. “This has been prevalent in prior years because of all the pandemic-era tax credits that were claimed on payroll tax returns.”
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