Small Business Taxes for Dummies: Easiest Guide You'll Find
Running a small business brings plenty of rewards, but tax season can quickly turn those feelings of satisfaction and pride into stress and uncertainty. Many business owners find themselves drowning in tax forms, confused about what they owe, and worried about making costly mistakes.
So, here's a small business taxes for dummies guide! It breaks down everything you need to know about business tax returns into simple, manageable pieces so you can stay on top of it year-round.
Types of Small Business Taxes
As a small business owner, you face several different types of taxes throughout the year. Each type serves a specific purpose and comes with its own set of rules and requirements. Here's what they are.
Income Tax
Business income tax works much like personal income tax – you pay a percentage of your profits to the government. The key difference is that you get to subtract your business expenses from your revenue first. This means you only pay taxes on your actual profits, not your total revenue.
For example, if your business brings in $100,000 in revenue but you spend $40,000 on legitimate business expenses like inventory and marketing, you'll only pay income tax on the $60,000 profit.
The tax rate depends on your business structure and total income, but the idea remains the same: you pay taxes on what your business keeps as profit, not what it brings in as revenue.
Self-Employment Tax
Self-employment tax often surprises new business owners because it's different from regular income tax. This tax covers your Social Security and Medicare contributions – the same ones that employers typically withhold from employee paychecks.
The difference is that you're typically responsible for both the employer and employee portions.
As of January 2025, the self-employment tax rate is 15.3%. This breaks down into 12.4% for Social Security and 2.9% for Medicare. The Internal Revenue Service (IRS) can adjust this tax in the future.
You'll need to pay self-employment tax if your net earnings are $400 or more for the year. This threshold is much lower than the standard income tax filing requirement, so even part-time business owners often need to pay self-employment tax.
The good news is that, like income tax, you only pay this tax on your profits after deducting business expenses. Learn more about paying yourself as a business owner.
Employment Tax
If your business has employees, you're responsible for employment taxes. These include portions of Social Security and Medicare taxes (similar to self-employment tax, but split between employer and employee), federal income tax withholding, and federal unemployment tax (FUTA).
As an employer, you must withhold part of these taxes from employee paychecks and pay your portion as well.
For Social Security and Medicare, you and your employees each pay 7.65% (6.2% for Social Security and 1.45% for Medicare). You're also required to withhold federal income tax based on each employee's W-4 form. FUTA tax is paid entirely by you as the employer – employees don't contribute to this tax.
If you're hiring contractors, you don't have to pay any taxes, but you'll still need to file a Form 1099-NEC if you've paid them $600 or more.
Sales Tax
Sales tax requirements are different in every state or even a city. Generally, if you sell physical products directly to consumers, you'll need to collect and remit sales tax. Some services are also taxable, depending on your location and the type of service.
The key is understanding where you have "nexus" – a significant business presence that requires you to collect sales tax. This could be your physical store location, a warehouse, or even reaching a certain amount of sales in a state.
You'll need to collect the correct tax rate for each location where you make sales and send these funds to the appropriate tax authorities, usually monthly or quarterly.
Excise Tax
Excise taxes apply to specific products or activities. Unlike sales tax, excise tax is often built into the price of products rather than added at checkout. Common examples include taxes on:
Fuel for business vehicles
Airline tickets
Indoor tanning services
Heavy trucks or trailers
Certain tobacco and alcohol products
Most small businesses won't deal with excise taxes unless they operate in specific industries.
State and Local Taxes
Beyond federal taxes, your business may have to pay state and local taxes. These depend on your location and business type, but some common ones include:
State income tax (rates and rules vary by state)
Local business taxes (vary by city/county)
Property tax on business real estate or equipment
Business license fees and taxes
Industry-specific taxes and fees
To figure out which state and local taxes you have to pay, start by checking your Secretary of State's website and your local government's business portal. You can also work with a local tax professional.
How Do I Know Which Small Business Taxes I Need to Pay?
Your tax obligations depend on three main factors: your business structure, whether you have employees, and what you sell.
So, first, you should understand the basic requirements for your business type (ex: LLC, sole proprietorship, etc.). Then add employment taxes if you have employees, sales tax if you sell taxable goods or services, and any industry-specific taxes that apply to your business.
What Taxes Does a Sole Proprietorship Have to Pay?
As a sole proprietor, you'll pay income tax on your business profits using the Schedule C of your personal tax return. Self-employment tax is also required to cover your Social Security and Medicare contributions.
If your business requires quarterly estimated tax payments, you'll make these four times per year using Form 1040-ES.
A sole proprietorship isn't separate from you as an individual, so you'll also need to pay state and local taxes based on your business activities. This might include sales tax if you sell goods, property tax if you own business property, and any professional licenses or permits that your area requires.
Learn how much you should set aside for taxes as a real estate agent.
What Taxes Does a Partnership Have to Pay?
The partnership itself must file an annual information return using Form 1065, but it doesn't pay taxes directly. Instead, each partner reports their share of income on their personal tax return using the Schedule K-1 they receive from the partnership.
Partners must pay self-employment tax on their portion of partnership income and make quarterly estimated tax payments. The partnership might also need to handle other tax obligations like sales tax collection, property taxes, and payroll taxes if it has employees.
What Taxes Does an LLC Have to Pay?
By default, single-member LLCs follow the same tax rules as sole proprietorships. You'll report business income on Schedule C with your personal return and pay self-employment tax on your profits.
Multi-member LLCs typically follow partnership tax rules. The LLC files Form 1065, and members receive Schedule K-1 forms showing their share of profits.
LLCs can also elect to be taxed as corporations by filing Form 2553. Getting taxed as an S-Corp can potentially help you save money on self-employment taxes. Learn more about the pros and cons of an S-Corp.
What Taxes Does an S-Corp Have to Pay?
S-Corporations file an annual tax return using Form 1120S, but the business itself doesn't pay federal income tax. Instead, profits and losses pass through to shareholders (AKA, you), who report their share on personal tax returns.
S-Corporation owners who work in the business must receive reasonable compensation as employees. This means you'll pay payroll taxes on your salary, but any additional profits can be taken as distributions, which aren't subject to self-employment tax.
This is one of the best tax reduction strategies, but it comes with strict rules. Learn more about LLC vs S-Corp structures.
What Taxes Does a C-Corp Have to Pay?
C-Corporations have the most complex tax situation because they pay taxes at both the corporate and personal levels.
The corporation files Form 1120 and pays tax on its profits at corporate rates. When profits are distributed to shareholders as dividends (so, to you as the owner), shareholders pay tax again on their personal returns.
This is known as "double taxation" because you're basically getting taxed on the same income twice.
As an employer, C-Corps handle all employment tax obligations for their employees, including owner-employees who receive salaries. They're also responsible for all other business taxes, such as sales taxes, property taxes, and more.
What Are Estimated Tax Payments? Do I Need to Make Them?
Estimated tax payments are quarterly payments to cover your tax liability throughout the year. When you run a business, taxes aren't automatically withheld from your income like they are for employees. You need to estimate and pay these taxes yourself.
You'll need to make estimated payments if you expect to owe $1,000 or more in taxes for the year (for C-Corps it's $500). These payments cover both income tax and self-employment tax. They're due four times per year: April 15, June 15, September 15, and January 15 of the following year.
Paying too little can result in penalties, while paying too much ties up cash you could use in your business. Working with a tax professional can help you figure out the best way to pay estimated taxes.
Small Business Tax Deductions
Smart use of tax deductions can help reduce your tax bill by a LOT! Here are common deductions that your small business may be able to claim:
Home office expenses (if you have a dedicated space)
Vehicle expenses and mileage
Office supplies and equipment
Business insurance premiums
Professional services (legal, accounting, consulting)
Employee salaries and benefits
Marketing and advertising costs
Internet and phone services
Professional development and training
Rent or lease payments
Utilities
Software subscriptions and tools
Contributions to retirement accounts
Learn more about how Desi Tax helped a realtor save $9,811 in taxes.
Do Small Business Owners Need an EIN?
An Employer Identification Number (EIN) works like a Social Security number for your business. You need an EIN if you have employees, operate as a corporation or partnership, file employment tax returns, have a Keogh plan, or work with certain types of tax-deferred accounts.
Sole proprietors without employees can use their Social Security number instead of an EIN, but getting one is still smart. It helps keep your personal and business identities separate and protects your Social Security number from unnecessary exposure.
Getting an EIN is easy, and you can do it online through the IRS website.
How to File Small Business Taxes
Ultimately, the process for filing your small business taxes depends on your business structure, but here's the general process you can expect:
Gather your records throughout the year, such as income statements, expense receipts, and payroll records.
Calculate your business income and expenses - you can use accounting software or work with a bookkeeper.
Complete and file all required forms for your business structure (Schedule C with Form 1040 for sole proprietors, Form 1120 or 1120S for corporations, etc.).
Complete and file any required information returns, like 1099s for contractors or W-2s for employees.
Prepare your tax return, file on time, and pay any taxes due.
It's best to use a tax professional, but you can do it yourself, too. It's just more complicated, is going to take a lot of your time, and you may miss out on potential tax savings.
There's an Easier Way to Deal with Small Business Taxes!
Working with a tax professional can save you time, money, and (a lot of) stress. A qualified tax professional helps you make strategic decisions throughout the year to minimize your tax burden and avoid costly mistakes. So, you get to keep more money in your pocket!
If you're looking for tax help, learn more about our services! The truth is, the money you spend on professional tax help often pays for itself through tax savings and the peace of mind that comes from knowing your taxes are handled correctly.
