The U.S. tax system is highly complex. This is largely due to the numerous types of taxes at the federal, state, and local levels, each with its own rules and regulations. On top of that, there are countless laws and guidelines that determine who has to pay taxes, on what, and in what amount. For example, employees are subject to different tax obligations than business owners. This overview provides insight into the different types of taxes in the U.S. and which ones are particularly relevant for businesses.

The main types of taxes for businesses

In the U.S., businesses typically follow either cash basis accounting or accrual basis accounting for tax reporting. These methods track all operating income and expenses that the IRS and state tax authorities need to determine whether a company is paying the correct amount of taxes. Here’s a list of the types of taxes:

Federal taxes (apply to most businesses):

  • Income tax – Paid by corporations and passed through to owners in other business structures.
  • Employment tax – Covers Social Security, Medicare, and Unemployment Taxes (for employees and employers).
  • Self-employment tax – Covers Social Security and Medicare for self-employed individuals.
  • Excise tax – Applies to specific goods and services (e.g., fuel, alcohol, tobacco).

State & local taxes (varies by state):

  • Sales & Use tax – Charged on certain goods/services; not all states have this tax.
  • Property tax – Paid by businesses that own real estate.
  • Franchise tax – Charged in some states (e.g., Texas, Delaware) for the privilege of operating.
  • Gross receipts tax – Levied in certain states instead of income tax.

Additional tax considerations:

  • Estimated tax – Required for businesses and self-employed individuals expected to owe $1,000+ in taxes.
  • Alternative minimum tax (AMT) – Applies to some corporations.

Understanding these tax obligations is crucial for businesses to ensure compliance and avoid penalties.

What types of taxes are there? A detailed explanation

Income tax

All businesses, except partnerships, must file and pay taxes on any income earned or received during the year. C-corporations (C-corps) pay corporate income tax on their profits, while pass-through entities (such as sole proprietorships, S-corporations, and LLCs) report business income on the owners’ personal tax returns. Most states impose a corporate income tax, but rates and structures vary widely—some states have no corporate income tax but instead impose a gross receipts tax or franchise tax. You can find the latest corporate income tax rates in this State Corporate Income Tax Report by the Tax Foundation. Partnerships do not pay corporate income tax directly but must file an annual information return (Form 1065) to report income, gains, and losses, which are then passed through to the individual partners, who report them on their personal tax returns. S-corporations and LLCs also function as pass-through entities, meaning they typically do not pay corporate income tax at the entity level.

Employment tax

If you have employees, you must comply with federal and state tax requirements for payroll taxes and reporting. Employers must withhold federal income tax, Social Security tax, and Medicare tax from employees’ wages and pay their own share of Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA). Additionally, employers are responsible for paying the Federal Unemployment Tax (FUTA) and state unemployment taxes (SUTA/SUI, varies by state). Most states also require businesses to provide workers’ compensation insurance, and some impose additional payroll taxes, such as disability or family leave contributions. Employers must report wages and withholdings using Form 941 (quarterly) or Form 944 (annually) and provide employees with Form W-2 for tax reporting.

Self-employment tax

If you are self-employed, you are responsible for paying Social Security and Medicare taxes to remain covered under the Social Security system. Unlike traditional employees, who share these costs with their employer, self-employed individuals must cover both the employer and employee portions, totaling 15.3% of net earnings (12.4% for Social Security and 2.9% for Medicare).

Self-employment tax is based on net income, meaning you can deduct eligible business expenses—such as advertising, office supplies, equipment, and travel—to reduce your taxable income. Additionally, you can deduct 50% of your self-employment tax when calculating your adjusted gross income (AGI), helping to lower your overall tax liability. For more details, refer to the IRS Self-Employment Tax Guide.

Excise tax

Excise tax is a specific tax on certain goods, services, and activities rather than general income or sales. While often called a “sin tax” when applied to products like tobacco, alcohol, and gasoline, it also applies to industries such as air transportation, heavy trucks, indoor tanning, and firearms. Businesses that manufacture, sell, or use excise-taxed products must collect and remit the tax to federal and state authorities.

At the federal level, excise taxes are regulated by the IRS, while alcohol, tobacco, and firearms fall under the Alcohol and Tobacco Tax and Trade Bureau (TTB). Many states also impose additional excise taxes, so businesses should review IRS guidelines and state tax regulations to ensure compliance.

Sales and use tax

Sales tax is a state-imposed tax on the sale, lease, or rental of goods and certain services. However, tax laws vary by state, and some states exempt essential items like groceries, prescription medications, and clothing from sales tax.

Use tax applies when goods are purchased from out-of-state sellers who do not collect sales tax. This ensures that states still receive tax revenue when taxable items are bought from a different state or online retailer. Businesses and individuals are responsible for remitting use tax if sales tax was not collected at the time of purchase.

Currently, 45 states and Washington, D.C. impose a statewide sales tax, while five states (Alaska, Delaware, Montana, New Hampshire, and Oregon) do not have a general state sales tax. However, some local governments—such as those in Alaska—may still impose their own local sales taxes.

Property tax

Property tax laws vary widely across states, and not all states tax business property the same way. Some states impose property taxes only on real estate (such as commercial buildings and land), while others also tax business personal property (BPP), which includes equipment, machinery, furniture, IT assets, and vehicles used for business purposes. Tax rates and assessment methods depend on local jurisdictions, and businesses may need to file annual property tax returns listing their taxable assets. To find detailed information on property taxes in your state, visit the State Government Websites section of the IRS.

Franchise tax

Franchise tax is a state-imposed tax on businesses for the privilege of operating within a state, regardless of profitability. It applies to certain businesses, including corporations, partnerships, and LLCs, depending on state laws.

The tax is calculated differently across states—some base it on net worth, assets, or capital stock, while others use a fixed fee or revenue-based formula. Businesses may also owe franchise tax in multiple states if they have a physical presence or conduct business there.

For state-specific requirements, refer to the Federation of Tax Administrators (FTA).

Gross receipts tax

A gross receipts tax (GRT) is a state-imposed tax on a business’s total revenue, rather than on its profits. Unlike sales tax, which is collected from customers at the point of sale, GRT is paid directly by businesses, regardless of whether they make a profit. Some states impose a gross receipts tax instead of a corporate income tax, while others levy it alongside other business taxes.

This tax is typically based on a business’s total revenue with little or no deductions for expenses such as wages, materials, or operating costs. As a result, businesses may owe tax even if they operate at a loss. Currently, states such as Delaware, Ohio, Nevada, Texas, and Washington impose some form of a gross receipts tax. However, rates and regulations vary by state, so businesses should review their state’s specific requirements.

Estimated tax

Estimated tax payments are required for individuals and businesses that do not have enough taxes withheld throughout the year. This applies to self-employed individuals, business owners, freelancers, and those earning income from sources like interest, rent, dividends, or capital gains. If you expect to owe at least $1,000 in taxes after subtracting withholding and credits, the IRS requires you to make estimated payments quarterly.

Estimated tax payments cover more than just federal income tax—they also include self-employment tax (Social Security & Medicare) and alternative minimum tax (AMT), if applicable. Businesses such as corporations may also need to make estimated tax payments if they expect to owe $500 or more in federal taxes for the year. For details on due dates and payment methods, visit the IRS Estimated Tax Guide.

Alternative minimum tax

The Alternative Minimum Tax (AMT) is a parallel tax system that ensures high-income individuals and certain corporations pay a minimum amount of tax, regardless of deductions or credits. Taxpayers must calculate their liability under both the regular tax system and AMT rules, paying the higher amount. The AMT primarily affects those with large deductions, but most middle-class taxpayers are exempt due to high income thresholds set by the Tax Cuts and Jobs Act (TCJA). While the corporate AMT was repealed in 2017, the Inflation Reduction Act of 2022 introduced a 15% corporate AMT for businesses with at least $1 billion in annual financial statement income.

What happens if a business does not file its taxes correctly?

Filing taxes accurately and on time is essential for businesses. Corporations must file Form 1120 with the IRS, even if they have no taxable income, while other business structures—such as sole proprietorships, partnerships, and S-corporations—file different tax forms based on their obligations.

Failing to file a tax return on time can result in late-filing penalties. If a corporate tax return is filed more than 60 days late, the IRS imposes a minimum penalty of $485 (as of 2024) or the total unpaid tax, whichever is smaller. Additionally, if unpaid taxes are discovered, the business may face late-payment penalties, interest charges, and potential audits.

Businesses that do not file may also lose valuable tax benefits, such as the ability to claim a net operating loss (NOL) deduction, which requires timely reporting on Form 1120. To avoid penalties, businesses should ensure timely and accurate tax filings or request an extension using Form 7004 if additional time is needed. The IRS Business Tax Penalties Guide has more details on the consequences.

Please refer to the legal disclaimer for this article.

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