Starting a business is exciting — until tax season shows up and you realize no one taught you this part.
If you’re a first-time founder, freelancer, or side hustler, small business taxes can feel like an overwhelming maze of rules, forms, and acronyms. But the truth is: it doesn’t have to be complicated. With a few key concepts and the right systems, you can handle taxes with confidence — and keep more of what you earn.
Here’s a beginner-friendly guide to small business taxes so you can stay legal, stay profitable, and stay out of trouble.
1. Know What Counts as a “Business”
If you’re making money independently — even from a side hustle — you’re likely considered self-employed by the IRS. That means you’re running a business, even if you haven’t officially formed an LLC or corporation.
As a sole proprietor, you’ll report your business income and expenses on Schedule C, which gets filed with your personal tax return (Form 1040). Once your income grows, you might consider forming an LLC or electing S Corp status, but at the start, sole proprietorship is the default setup.
Bottom line: if you’re making money on your own — you’re in business, and yes, you need to pay taxes on it.
2. Understand Your Tax Responsibilities
When you’re self-employed or running a small business, you’re responsible for several types of taxes — not just income tax.
Here’s what you’ll need to manage:
- Federal income tax (based on your profits)
- Self-employment tax (covers Social Security and Medicare — currently 15.3%)
- State and local taxes, depending on where you live
- Sales tax, if you sell physical products or taxable services
- Quarterly estimated taxes, if you expect to owe over $1,000 for the year
These can sneak up fast if you’re not tracking income and setting money aside. Plan ahead by saving 25–30% of your profit for taxes in a separate account.
3. Track Income and Expenses From Day One
The foundation of your tax strategy is solid record-keeping. Every dollar earned and every business-related expense should be logged and categorized.
Start with:
- A separate business bank account (even if you’re a sole proprietor)
- Basic bookkeeping software like Wave, QuickBooks, or even a spreadsheet
- Weekly or monthly review sessions to stay on top of it all
Common deductible expenses include:
- Software and subscriptions
- Internet and phone (business portion)
- Marketing and advertising
- Office supplies and equipment
- Professional services (legal, accounting, consulting)
- Travel, meals, and mileage related to business
Keeping receipts (physical or digital) and having clear categories will save you time, money, and stress come tax season.
4. Learn About Quarterly Estimated Taxes
Unlike traditional employees, small business owners don’t have taxes withheld from their paychecks — which means the IRS expects you to pay taxes as you go.
If you expect to owe at least $1,000 in taxes for the year, you’re supposed to make estimated tax payments four times per year:
- April 15
- June 15
- September 15
- January 15 (of the following year)
These payments cover your income and self-employment taxes. You can calculate your estimates using IRS Form 1040-ES, or use tools like QuickBooks Self-Employed or Keeper to stay on track.
5. Know When to Bring in a Pro
You don’t need to hire an accountant right away — but as your income grows, your tax situation will get more complex.
A tax professional can help you:
- Maximize deductions
- File correctly and avoid penalties
- Plan for quarterly taxes
- Decide when it’s time to form an LLC or S Corp
Think of it this way: a good tax advisor doesn’t just help you file — they help you strategize. And that can save you thousands in the long run.
Action Step:
Open a dedicated business bank account and start tracking all income and expenses this week. It’s the fastest way to get clarity on what you earn — and what you’ll owe.
