Module 04 of 09
Small business taxes
Taxes are the most stressful part of running a small business for most owners — usually because no one explained how they work upfront. This module covers what you actually owe, when you pay it, and how to reduce your tax bill legally.
The taxes small businesses pay
Self-employed business owners and small business owners face several distinct taxes. Understanding each one prevents surprises.
Self-employment (SE) tax: When you work for an employer, they pay half of your Social Security and Medicare taxes. When you're self-employed, you pay both halves — 15.3% of net self-employment income. This is separate from income tax and is one of the most commonly overlooked costs for new business owners.
Federal income tax: On top of SE tax, your business profit is added to your personal income and taxed at your regular federal income tax bracket — 10%, 12%, 22%, 24%, 32%, 35%, or 37% depending on total income.
State income tax: Most states tax business income. Rates vary significantly by state. Nine states have no income tax at all.
Sales tax: If you sell physical products (and in some states, certain services), you're required to collect sales tax and remit it to your state. Rates and rules vary by state and sometimes by county or city.
THE NUMBER MOST NEW OWNERS MISS
When a new business owner earns $50,000 in profit and wonders why they owe $17,000+ at tax time — it's because they forgot about self-employment tax. Set aside 25–30% of every payment you receive into a separate savings account for taxes. This is a reliable rule of thumb for most sole proprietors in middle income brackets.
In this Module
What taxes you pay
Quarterly payments
Tax estimator
Common deductions
Structure differences
Related Modules
Legal structures
Bookkeeping basics
Setting up finances
Quarterly estimated tax payments
As a self-employed person, you don't have an employer withholding taxes from each paycheck. Instead, you're required to make estimated tax payments four times a year. Missing these triggers an underpayment penalty even if you pay everything owed at tax time.
Q1
April 15
Jan 1 – Mar 31 income
Q2
June 17
Apr 1 – May 31 income
SIMPLE METHOD
Take your estimated annual profit × 25–30% = annual tax estimate.
Divide by 4 = quarterly payment. Pay through IRS Direct Pay (free) or EFTPS.
Set a calendar reminder for each due date.
Q3
Sept 15
Jun 1 – Aug 31 income
Q4
Jan 15
Sept 1 – Dec 31 income
You can avoid the penalty by paying 100% of last year's tax liability in equal quarterly installments (110% if your income was over $150,000). Most owners simply estimate based on current-year profit and adjust as the year goes on.
Tax estimator
A rough estimate of your quarterly payment — not a substitute for a tax professional. (This estimator uses 2026 IRS figures.)
Common deductions for small businesses
Home office
A dedicated workspace used regularly and exclusively for business qualifies — either actual expenses or $5/sq ft (simplified method, max 300 sq ft).
Health insurance
Self-employed owners can deduct 100% of health insurance premiums for themselves and family as an above-the-line deduction.
Half of SE tax
You can deduct half of your self-employment tax from your adjusted gross income. This partially offsets the double-taxation of SE tax.
Vehicle use
Business mileage at the IRS standard rate ($0.725/mile in 2026) or actual vehicle expenses. Keep a mileage log.
Section 179 equipment
Business equipment can often be deducted entirely in the year of purchase rather than depreciated over years. Includes vehicles, tools, computers.
Professional development
Books, courses, trade publications, and professional memberships directly related to your business are fully deductible.
Self-employed retirement
Contributions to a SEP-IRA (up to 25% of net profit, max $69,000 in 2024) or Solo 401(k) are fully deductible.
Business meals (50%)
Meals with clients, vendors, or employees for a clear business purpose are 50% deductible. Keep receipts and note the business purpose.
What your business structure changes
How you're organized affects how you file and what elections are available:
Sole proprietor / single-member LLC: File Schedule C with your personal 1040. All profit is subject to SE tax. Simple, but SE tax applies to every dollar.
Partnership / multi-member LLC: Files Form 1065 (informational return). Each partner receives a Schedule K-1 and reports their share of income on their personal return.
S-Corp election: Once profitable enough, many LLC owners elect S-Corp tax treatment. You pay yourself a "reasonable salary" (subject to payroll taxes) and take remaining profit as a distribution (not subject to SE tax). Can save meaningful money above roughly $50,000 in profit — but adds payroll and administrative complexity.
WHEN TO TALK TO AN ACCOUNTANT
If your annual profit is approaching $50,000 or you're considering an S-Corp election, a one-time consultation with a CPA (typically $200–$400) often pays for itself many times over. Tax planning before year-end is far more valuable than tax filing after year-end.