Small Business Tax Guide for Beginners

Starting a small business brings exciting opportunities and new tax responsibilities. Understanding business taxes from the beginning helps you avoid costly mistakes, maximize deductions, and stay compliant with IRS requirements. This guide covers essential tax information every small business owner should know.

Choosing Your Business Structure

Your business structure significantly affects your taxes. Sole proprietorships are the simplest—you report business income and expenses on Schedule C attached to your personal return. All profit is subject to both income tax and self-employment tax.

LLCs offer liability protection with flexible tax treatment. Single-member LLCs are treated as sole proprietorships by default, while multi-member LLCs are treated as partnerships. You can also elect S-Corporation status to potentially reduce self-employment taxes.

S-Corporations allow you to split income between salary (subject to payroll taxes) and distributions (not subject to self-employment tax). However, you must pay yourself a reasonable salary, and there's additional complexity with payroll and corporate returns. C-Corporations face double taxation but may benefit businesses that want to retain earnings.

Essential Business Deductions

Business deductions reduce your taxable income, potentially saving thousands in taxes. Common deductions include office supplies, equipment and computers, software subscriptions, professional services, advertising and marketing, business insurance, business meals (50% deductible), and vehicle expenses.

The home office deduction is available if you use part of your home exclusively and regularly for business. You can deduct a portion of rent, utilities, insurance, and maintenance based on the percentage of your home used for business, or use the simplified method of $5 per square foot up to 300 square feet.

Section 179 allows immediate expensing of equipment purchases up to $1,220,000 in 2026, rather than depreciating over years. This powerful deduction can significantly reduce taxes in profitable years when you make major equipment purchases.

Understanding Self-Employment Tax

Self-employment tax covers Social Security and Medicare contributions—15.3% on net business income. This is in addition to regular income tax. Employees split this tax with employers, but business owners pay both halves.

You can deduct half of your self-employment tax when calculating adjusted gross income, which provides some relief. The Social Security portion only applies to the first $168,600 of net earnings in 2026, while the Medicare portion applies to all earnings, with an additional 0.9% on high incomes.

Quarterly Estimated Tax Payments

Business owners must make quarterly estimated tax payments to cover both income and self-employment taxes. Payments are due April 15, June 15, September 15, and January 15. Calculate payments based on your expected annual income or use last year's tax as a safe harbor.

Underpaying quarterly taxes results in penalties and interest. Set aside 25-30% of business income for taxes throughout the year. If income varies seasonally, you can use the annualized income installment method to adjust quarterly payments accordingly.

Record-Keeping Requirements

Proper records are essential for claiming deductions and defending against audits. Keep receipts for all business expenses, bank statements showing business transactions, mileage logs for business driving, and invoices for customer payments.

Separate business and personal finances by opening dedicated business bank accounts and credit cards. This simplifies record-keeping and provides clear documentation of business expenses. Accounting software like QuickBooks or FreshBooks automates much of the tracking and organization.

Retain tax records for at least three years, longer for certain situations. Digital storage of receipts and documents is acceptable—many apps let you photograph receipts and categorize expenses in real-time.

Hiring Employees or Contractors

Hiring employees creates additional tax obligations including payroll taxes, unemployment insurance, and workers' compensation. You must withhold income and payroll taxes from employee paychecks and file quarterly payroll reports.

Independent contractors are simpler from a tax perspective—you don't withhold taxes or pay employer taxes. However, you must correctly classify workers. Misclassifying employees as contractors can result in significant penalties. Send 1099-NEC forms to contractors paid $600 or more annually.

Tax Planning Strategies

Time income and expenses strategically. If you expect higher income next year, accelerate deductible expenses into the current year. If income will be lower next year, defer income and accelerate collections into next year when possible.

Maximize retirement contributions through SEP-IRAs or Solo 401(k)s, which offer much higher contribution limits than personal retirement accounts. These contributions reduce current taxable income while building retirement security.

Conclusion

Small business taxes are more complex than personal taxes, but understanding the basics helps you stay compliant and minimize your tax burden. Focus on good record-keeping, understanding available deductions, making timely quarterly payments, and seeking professional help when needed.

Start by setting up a separate business bank account and implementing basic bookkeeping from day one. The habits you establish in your first year will shape your business's financial health for years to come.

Use our Self-Employment Tax Calculator to estimate your quarterly tax payments and Deduction Tracker to organize your business expenses year-round.