The existing Microenterprise tax regime has a negative impact on the development of the business environment in Latvia, because it has not sufficiently contributed to employment, it fosters social security problems for workers in Microenterprise tax regime and the Microenterprise tax regime is used for tax optimization. The purpose of this research is to evaluate the optimal taxation regime for small businesses. The object of the research is taxation of small businesses in Latvia. The tasks for the research: to analyse the existing taxation regime gaps, including whether this tax regime is not used for tax optimization; to evaluate how the existing taxation regime impacts the employment in Latvia and social security contributions; to identify the opinion of international experts; to develop possible solutions and to evaluate the impact on taxpayers with various income levels. In the research, authors have used such methods as descriptive, theoretical research, statistical and calculation method. The research found that the existing taxation regime contributes to the tax optimization and improvements are needed for optimal taxation regime of small businesses in Latvia. The optimal taxation for small businesses can be achieved by the state social insurance contribution segregation from Microenterprise tax by linking it with paid salaries. In order to reduce the tax burden on small businesses, it is necessary for smaller wages to implement untaxed minimum of the social security insurance contributions. At the same time, the Microenterprise tax rate shall be reduced. In addition, the necessary changes for other taxes shall be evaluated.