Although most taxpayers dislike tax season, it’s important for small business owners to know how federal tax brackets might affect their tax bill. The Internal Revenue Service (IRS) uses tax brackets to determine how much you pay in federal income tax. Learn what tax brackets are, how they work, how to calculate the taxes you’ll pay, and more in this article from Nav.
Tax Brackets and How They Work
Tax brackets are federal income tax rates, or what percentage of your taxable income (the amount you make that is subject to federal taxes) you’ll pay to the federal government. Tax brackets allow the IRS to use what’s called a “progressive” tax system, which means you pay more in taxes the more you make. You pay taxes for the previous year, so last year’s taxes are due in April of each year.
There are seven tax brackets for 2022 and 2023 taxes ranging from 10% to 37%. This percentage depends on your taxable income and your filing status. The IRS made inflation adjustments for 2023. The tax brackets differ between married filing jointly, head of household, or single filers and married filing separately.
The amount of tax you pay depends on income thresholds. See the table below to get an understanding of the tax brackets for the tax years 2022 and 2023.
Tax Brackets 2022
|Tax bracket||Single filer||Married filing separately||Head of household||Married filing jointly|
Tax Brackets 2023
|Tax bracket||Single filer or married filing separately||Married filing separately||Head of household||Married filing jointly|
What Is a Marginal Tax Rate?
Finding your federal income tax isn’t as easy as multiplying your taxable income by the tax bracket you fall into (and you would pay more if it was). Instead, the IRS uses marginal tax rates. This means that rather than paying the same tax rate across your entire salary, you’ll pay a lower percentage in taxes for the lower portion of your income.
In other words, the first $10,000 or so that you make will be taxed at the lowest tax bracket. Then, the next $30,000 or so that you make — the amount before you hit the next tax bracket — will be taxed using the second-to-lowest tax bracket. This continues all the way up for your entire taxable income. The more you make, the higher rates you pay on that portion of your income.
Take a look at the example in the next section of this article to help clear up any confusion about marginal tax rates.
How to Calculate Federal Income Tax Bracket
Let’s use an example to help you understand exactly how to do the math to find how much federal income tax you’ll pay. For example, If your taxable income is $80,000 for 2022 and you file single, you’ll pay:
- 10% on your salary under $10,275: $1,027.50
- 12% on your salary from $10,275 to $41,775: $3,780.00
- 22% on your salary from $41,775 to $80,000: $8,409.50
Thus, you’ll pay $13,217 total in federal income taxes for 2022.
Say you got a raise that put your salary at $90,000. This income level is technically above the higher 24% tax bracket. However, you would only pay 24% of your taxable income on the $925 that falls in the higher tax bracket.
Find your effective tax rate, which is your overall tax rate spread across all your income, by dividing your total tax by your taxable income. This rate may make it easier to calculate your total expected on your tax filings going forward. You can also use a federal tax calculator to do the math for you.
The Difference Between Personal and Business Taxes
The ways in which your personal income taxes differ from your business income taxes will largely depend on the type of business you run. If you have a sole proprietorship or an LLC, you’ll automatically file what’s called pass-through taxes. This means that your business’s income taxes pass through to your personal return, so you’ll only need to file a personal income tax return. This is true even for joint filers who send in a joint return.
An LLC does have the option to be taxed as a partnership or corporation. If they choose to be taxed as a corporation, or the business entity is a corporation, the business has to file a corporate tax return that’s separate from the personal tax return. The current corporate tax rate is a minimum of 15%.
It’s also more important to use a professional tax preparer for business taxes than for personal taxes since business taxes are usually more complicated. Consider a certified public accountant (CPA) or tax software (or both together) to help ensure that you get the biggest possible tax refund back. And be sure to read about the many tax benefits of opening a business.
What Will the Standard Deduction Be for 2023?
The 2023 standard deduction amounts will depend on your filing status. Here’s a breakdown of the different standard deductions:
- Single filer: $13,850
- Head of household: $20,800
- Married filing separately: $13,850
- Married filing jointly: $27,700
More deductions mean a lower taxable income, so more is usually better. Taxpayers can use either a standard deduction or an itemized deduction. A standard deduction is what it sounds like — it’s a set deduction for anyone in the same filing status.
On the other hand, an itemized deduction is when a taxpayer tracks each deduction individually. Typically, tax filers only use an itemized deduction when their actual deductions are larger than the standard deduction.
So if your actual deductions will equal more than the standard, it may be a good idea to file your tax return using an itemized deduction.
Will Tax Returns Be Bigger in 2023?
Unfortunately, the IRS says that we should expect returns to be smaller in 2023. These small returns will be brought about from several of the COVID-era tax rules going back to pre-pandemic laws.
First, there are no more stimulus payments coming along with tax refunds like there were in 2021. Additionally, the child tax credit that had increased during the pandemic will be returning to its normal $2,000 for kids under 17. The tax credit for dependent care costs is also lower than it was in 2021, and you’re no longer allowed to deduct $300 to $600 of charitable contributions if you use the standard deduction.
All in all, these changes mean that taxpayers will likely get less this year than on their 2021 return.
What Is the Highest Tax Bracket in 2023?
High levels of income can mean a higher tax bracket. The highest tax bracket of 37% is required for individual taxpayers who make more than $578,125 in 2023. Married couples filing jointly and making over $693,750 will need to pay 37% on your highest income.
Lowering Your Tax Rate Through Business Expenses
Tax deductions, tax credits, and exemptions are the best way to fall into a lower tax bracket and to avoid what’s known as “bracket creep.” Deductions lower your taxable income, meaning your income level is lower and may fall into a lower income bracket. When you track your business expenses, you may have spent more than the standard deduction, which means you’ll be able to lower your taxable income (and possibly your tax bill) even more than if you took the standard deduction.
For help increasing cash flow to put toward necessary business expenses, business credit cards and small business loans may be able to help. Using Nav is the easiest way to find the financing options that’s right for your business.