Small business taxes 101

• Sole proprietors generally report business income and expenses on Schedule C with their personal return. A single-member LLC is usually treated the same way unless it elects otherwise.
• Partnerships, including most multi-member LLCs, file an information return, and each partner reports their share of income on their own return.
• S corporations generally pass income through to shareholders, who report it on their returns; owners who work in the business are also paid wages through payroll.
• C corporations pay tax on their own profits, and shareholders may pay tax again on dividends they receive.

The SBA’s pay taxes (opens in a new tab) guide outlines federal and state obligations, and IRS Publication 334 (opens in a new tab) is the IRS’s general tax guide for small businesses. Our business formation guide explains the structures themselves.

Employees have Social Security and Medicare taxes withheld from their pay, with the employer paying a share too. Self-employed people, such as sole proprietors and many partners, generally pay both sides themselves through self-employment tax, figured on their net earnings from the business. The IRS publishes the current rate and the rules for calculating it.

When no employer withholds tax from your income, the IRS generally expects you to pay as you go through estimated tax payments (opens in a new tab) during the year, covering both income tax and self-employment tax. The IRS explains who must pay, how to figure the amount, the payment due dates and the penalty that can apply for paying too little or too late.

In general terms, the IRS allows deductions for business expenses that are ordinary and necessary for your trade, with special rules and limits for some categories such as vehicles, meals, travel and home offices. Good records are what support a deduction; see how to track business expenses. Be cautious of anyone promising you can write off everything.

When you pay an independent contractor for services, you may need to file Form 1099-NEC (opens in a new tab) reporting what you paid. Many businesses ask contractors for a Form W-9 before the first payment so they have the name and taxpayer ID needed. The IRS sets the reporting threshold and filing deadline and publishes them with the form.

Whether a worker is a contractor or an employee depends on the actual working relationship, not on what you call it. Misclassifying an employee as a contractor can lead to back taxes and penalties.

Once you have employees, the IRS’s employment taxes (opens in a new tab) page describes the main duties: withholding federal income tax, withholding and paying Social Security and Medicare taxes (often called FICA), paying federal unemployment tax (FUTA), depositing these taxes on schedule and filing the related returns. Most states add their own withholding and unemployment taxes. Our first employee guide covers the setup.

Depending on where you operate and what you sell, you may need to collect and remit sales tax, pay state income or franchise taxes, and register for state payroll accounts. Your state’s revenue department is the place to check. Local governments may add business or property taxes.

• Advice to skip or delay payroll tax deposits.
• Promoters who say you can write off everything.
• Treating workers as contractors to avoid payroll taxes.

A CPA, enrolled agent or other tax professional can apply these rules to your business. Free and low-cost counseling is also available through SBA resource partners (opens in a new tab).