Business & self-employed

What entity should a US small business choose?

The choice of business entity drives the entire downstream tax workflow. Six structures dominate US small-business tax filings [SC1]. Sole proprietorships are the default for single owners: no separate entity, income reported on Schedule C of Form 1040, full self-employment (SE) tax exposure at 15.3 percent on net earnings up to the Social Security wage base (USD 168,600 for 2025) plus 2.9 percent Medicare on all earnings. Single-member LLCs are sole proprietorships for federal tax purposes (disregarded entity) but provide state-law liability shield. Partnerships file Form 1065 and pass income through to partners on K-1; general partners and active LLC members pay SE tax on their distributive share.

S corporations file Form 1120-S and pass income to shareholders, but with one critical advantage over the sole-prop / partnership path: pass-through distributions are NOT subject to SE tax (they are dividend-like, not earned income). Owner-operators must take reasonable W-2 compensation subject to FICA — the IRS audits this rigorously — but the portion of profit above reasonable comp escapes the 15.3 percent SE tax. For an owner-operator with USD 200,000 of net business profit, splitting USD 100,000 to W-2 and USD 100,000 to distributions can save USD 12,000-USD 15,000 in employment tax versus sole-prop SE tax. C corporations pay a flat 21 percent federal corporate income tax under IRC §11 [SC2], with dividends taxed again at the shareholder level — the classic double taxation that makes C-corp suboptimal for closely-held small businesses unless the business plans to retain earnings for growth or seek venture capital.

The S-corp election is made on Form 2553 within 75 days of the start of the tax year (or 75 days of incorporation). Late elections can be granted under Rev. Proc. 2013-30 for non-wilful late filings. Once elected, S-corp status persists until revoked or until the corporation fails to meet eligibility requirements (more than 100 shareholders, ineligible shareholder type, multiple classes of stock). Conversions between structures involve their own tax mechanics — sole-prop to LLC is generally tax-free; LLC to corporation is treated as a deemed Section 351 transfer (tax-free if specific requirements are met); revocation of S-status by filing Form 2553-R carries a five-year waiting period before re-electing without IRS consent.

How does the Section 199A QBI deduction work for small business?

The Qualified Business Income (QBI) deduction under IRC §199A allows pass-through business owners (sole prop, partnership, S-corp) to deduct up to 20 percent of qualified business income from taxable income [SC3]. The deduction was created by the Tax Cuts and Jobs Act of 2017 and made permanent by the One Big Beautiful Bill Act in 2025. For tax year 2025, full QBI without limitations applies up to USD 241,950 (single) / USD 483,900 (MFJ). Within the phase-in range (USD 241,950 - USD 291,950 single; USD 483,900 - USD 583,900 MFJ), additional limitations apply progressively. Above the upper threshold, two limitations apply fully: the W-2 wages plus UBIA limit (deduction limited to greater of 50 percent of W-2 wages or 25 percent of W-2 wages plus 2.5 percent of unadjusted basis immediately after acquisition of qualified property), and the Specified Service Trade or Business (SSTB) exclusion (filers above the upper threshold in health, law, accounting, consulting, financial services, investment management, performing arts, athletics, and trades whose principal asset is the reputation or skill of one or more employees are excluded).

Form 8995 (simplified) or Form 8995-A (full) computes the deduction. The result is below-the-line — it does not reduce AGI but reduces taxable income. The interaction with reasonable S-corp compensation matters: paying too little W-2 to satisfy a low-comp reasonable-comp position can throttle the 50-percent-of-W-2 limit on the QBI deduction. The compensation level that minimizes total tax is usually higher than the minimum that satisfies the reasonable-comp test. Practitioners model both vectors before finalizing the year's payroll. Filers seeking a credentialed practitioner for these calculations can browse the US tax-pros directory.

When are quarterly estimated tax payments due?

Small business owners whose withholding will not cover their year-end tax liability owe quarterly estimated payments under IRC §6654 [SC4]. The four 2025 deadlines are April 15, June 15, September 15, and January 15 (of 2026). The safe-harbor rule avoids underpayment penalty if payments total the lesser of 90 percent of the current year's tax liability or 100 percent of the prior year's tax liability (110 percent if prior-year AGI exceeded USD 150,000). The underpayment penalty rate is based on the federal short-term rate plus 3 percent — approximately 8 percent for most of 2024-2025.

Estimated payments are submitted via Form 1040-ES (individuals), Form 1120-W (C corporations), or the corresponding state forms for state income tax. EFTPS (Electronic Federal Tax Payment System), IRS Direct Pay, or check by mail are the federal payment channels. Underpayment computed quarterly on Form 2210 — a Q3 shortfall produces penalty even if Q4 catches up. The penalty applies independently of the final-year liability; a filer who pays full balance due by April 15 of the following year can still owe penalty on undermatched quarterly estimates.

New businesses without prior-year tax history use the 90-percent-of-current-year prong. The estimate worksheet on Form 1040-ES walks through current-year income projection, deductions, credits, and tax calculation. Many small business owners track estimated taxes through accounting software (QuickBooks Online, Xero, Wave) that integrates with EFTPS submission.

What deductions matter most for small business?

Schedule C (for sole proprietorships and SMLLCs) and the equivalent business-return lines on Forms 1120, 1120-S, and 1065 itemize a standard set of deductible business expenses [SC1]. The high-leverage categories:

• Section 179 expensing: Up to USD 1,250,000 of qualifying tangible personal property (machinery, equipment, off-the-shelf software, qualified improvement property, certain real-property improvements) immediately expensed in the year placed in service for 2025, set by Rev. Proc. 2024-40. Phase-out above USD 3,130,000 of qualifying purchases. Limited to business taxable income (no NOL creation).
• Bonus depreciation under IRC §168(k): First-year depreciation allowance applicable to tangible property with a recovery period of 20 years or less. 40 percent rate for property placed in service in 2025 under TCJA phase-down; restored to 100 percent permanently by OBBBA 2025 effective for property placed in service after enactment. Practitioners track the date carefully.
• Home office deduction under IRC §280A: Two methods — simplified (USD 5 per square foot up to 300 sq ft, max USD 1,500) or regular (actual percentage of home expenses by square-footage allocation). Space must be regularly and exclusively used for business as the principal place of business or for meeting clients. Employees cannot deduct home office after TCJA repealed unreimbursed employee business expenses.
• Vehicle expense: Either actual expense method (gas, oil, repairs, depreciation, insurance, registration) or standard mileage rate (USD 0.67 per business mile for 2025, adjusted annually). The two methods cannot be combined for the same vehicle.
• Self-employed health insurance: Above-the-line deductible on Schedule 1, up to the net SE earnings from the activity providing coverage. Not subject to 7.5 percent AGI floor.
• Retirement contributions: SEP IRA (up to USD 70,000 for 2025, capped at 25 percent of compensation / 20 percent for sole proprietors) or Solo 401(k) (up to USD 70,000 plus USD 7,500 catch-up, reaching the cap at lower income levels because the employee deferral is not income-tested). Defined Benefit plans for higher-earning self-employed filers.

Meals: 50 percent deductible (subject to ordinary-and-necessary test plus substantiation). Travel: 100 percent deductible if for business. Entertainment: NOT deductible after TCJA. Recordkeeping requirements under IRC §6001 require receipts for expenses above USD 75 (lower threshold for travel and entertainment), mileage logs, bank/credit card statements, and invoices issued/received, retained for at least three years (six years if income substantially understated; indefinitely if no return filed or return fraudulent).

What payroll tax does a business with W-2 employees owe?

Any small business with W-2 employees faces payroll tax obligations under IRC §§3101-3128 [SC5]. Employer FICA: 6.2 percent Social Security on wages up to USD 168,600 (2025) plus 1.45 percent Medicare on all wages. FUTA: 6 percent on first USD 7,000 of each employee's annual wages, with 5.4 percent credit for state UI payments (effective 0.6 percent for most employers). State UI: experience-rated by state (rates from 0.1 to 6+ percent). Federal income tax withholding based on W-4. State income tax withholding in the 41 states with income tax.

Form 941 (quarterly) reports FICA and federal income tax withholding. Form 944 is the annual return for small employers with annual employment tax liability under USD 1,000. Form 940 (annual) covers FUTA. Form W-2 issues to each employee by January 31; W-2s plus W-3 transmittal go to SSA by the same deadline. Federal tax deposits via EFTPS on a monthly (smaller employers) or semi-weekly (larger employers) cadence. Trust fund recovery penalty under IRC §6672 makes responsible persons personally liable for unpaid withholdings — among the most personally-exposed liabilities in US tax.

Independent contractor classification matters: misclassification of an employee as an independent contractor avoids payroll tax obligations short-term but creates retroactive liability plus penalties if reclassified. The IRS multi-factor common-law test examines behavioral control, financial control, and type of relationship. Section 530 safe harbor (Tax Reform Act of 1978) protects businesses from retroactive reclassification under specific conditions. State-law classification (California AB5, Dynamex) is often stricter than federal.

Form 1099-NEC must be issued to non-corporate independent contractors paid USD 600 or more during the year, due to recipient and IRS by January 31. Failure to issue carries USD 290 per-failure penalty (USD 580 for intentional disregard, no annual cap). Platforms like Tax1099 handle e-filing and TIN matching. Form 1099-K thresholds for third-party payment networks are USD 5,000 for 2025, USD 2,500 for 2026, USD 600 from 2027 (absent further legislation).

What small business tax credits are available?

The federal credit landscape for small business includes:

• Research and Development Credit under IRC §41: Credit for qualified research expenses. Small-business simplified election (Alternative Simplified Credit) yields 14 percent of QREs above 50 percent of average QRE in the prior three years. Startups under USD 5M gross receipts and less than 5 years in business can elect to use up to USD 500,000 of the credit against payroll taxes rather than income taxes under IRC §41(h) — valuable for pre-profit startups.
• Work Opportunity Tax Credit under IRC §51: Credit for hiring members of targeted groups (long-term unemployed, veterans, ex-felons, certain SNAP recipients). Up to 40 percent of first-year wages up to USD 6,000 for most categories, higher for some.
• Small Employer Health Insurance Credit under IRC §45R: For small employers with fewer than 25 FTEs paying average wages under USD 64,400 (2025) and contributing at least 50 percent of premium for employee-only coverage through SHOP exchanges. Up to 50 percent of premium cost for two consecutive years.
• Section 1202 Qualified Small Business Stock: Original-issue stock of a C corporation acquired by a non-corporate shareholder and held more than 5 years qualifies for exclusion of gain on sale up to the greater of USD 10 million or 10x basis. Material for startup founders considering future exit.

The Employee Retention Credit (ERC) pandemic-era credit for 2020 and 2021 wages remains a substantial source of legitimate retroactive claims within the statute of limitations, but applications face aggressive IRS scrutiny in 2024-2025 against frivolous claims.

For a full picture of US small business tax mechanics — including detailed coverage of Small business tax in the United States, Self-employed tax, and VAT and sales tax obligations — see the linked country/topic crossovers. Filers managing 1099 issuance at scale use Tax1099 for e-filing; cross-border revenue flows route through WorldFirst for multi-currency banking. The US tax-pros directory lists credentialed practitioners.