Disclaimer: This guide is for general informational purposes only and does not constitute legal, tax, or financial advice. Requirements vary by state, industry, and business structure. Consult a qualified professional for advice specific to your situation.
The Tax Obligations Every Business Owner Faces
Running a business means dealing with business taxes at multiple levels simultaneously: federal income tax, self-employment tax, state income tax, payroll tax if you have employees, and potentially sales tax. Understanding what you owe and when prevents surprises, penalties, and the kind of tax debt that puts businesses under.
The good news: with a basic understanding of the system and good bookkeeping habits, most small business taxes are manageable.
Federal Income Tax by Entity Type
Sole proprietors and single-member LLCs report business income on Schedule C, attached to your personal Form 1040. Net profit is taxed at your personal income tax rate.
Partnerships and multi-member LLCs file Form 1065 (an informational return) and issue Schedule K-1 to each partner. Partners report their share of income on their personal returns. The entity itself pays no federal income tax.
S corporations file Form 1120-S and issue Schedule K-1 to shareholders. Like partnerships, income passes through to owners’ personal returns. The S-corp itself pays no federal income tax.
C corporations file Form 1120 and pay corporate income tax at a flat 21% rate on taxable income. Dividends distributed to shareholders are taxed again on personal returns.
Self-Employment Tax
If you’re a sole proprietor, partner, or active LLC member, you pay self-employment tax of 15.3% on your net business income – 12.4% for Social Security (on the first $168,600 of income in 2024) and 2.9% for Medicare. This replaces the payroll taxes that employers and employees split.
The effective rate feels high because employees only see half of these taxes – the employer pays the other half invisibly. As a self-employed person, you pay both sides. You can deduct half of your SE tax on your Form 1040.
The S-corp tax strategy: S-corp owners who work in the business pay themselves a “reasonable salary” subject to payroll taxes, then take additional profits as distributions – which are not subject to self-employment tax. This can save thousands per year once profits exceed roughly $50,000, but comes with additional administrative costs.
Estimated Quarterly Taxes
Unlike employees who have taxes withheld from each paycheck, self-employed business owners must pay estimated taxes four times per year. If you expect to owe $1,000 or more in federal taxes for the year, you’re required to make these payments.
2024 due dates: April 15, June 17, September 16, January 15, 2025.
To calculate your quarterly payment, estimate your full-year net income, calculate the tax you’ll owe on it (income tax + SE tax), and divide by four. A safer approach: pay 110% of last year’s total tax liability spread over four payments – this safe harbor prevents underpayment penalties even if your income was higher than expected.
Business Deductions
Business deductions reduce your taxable income dollar-for-dollar. Key deductions include:
- Home office: If you use part of your home regularly and exclusively for business, you can deduct either $5/sq ft (simplified method, max 300 sq ft) or actual expenses prorated by office percentage
- Vehicle: Business mileage at the standard rate (67 cents/mile in 2024) or actual expenses – keep a mileage log
- Equipment: Computers, machinery, and tools can be fully deducted in the year of purchase under Section 179 (up to $1.16M in 2023)
- Health insurance: Self-employed individuals can deduct 100% of health insurance premiums for themselves and their families
- Retirement contributions: Contributions to a SEP-IRA (up to 25% of compensation) or Solo 401(k) are fully deductible
- Business meals: 50% deductible when directly related to business
- Professional services: Accountant, attorney, and consultant fees are fully deductible
- Software and subscriptions: Business software and subscriptions are deductible
Payroll Taxes
The moment you hire an employee, your tax obligations expand significantly:
FICA withholding: You withhold 6.2% Social Security and 1.45% Medicare from each employee’s paycheck and match it with an equal employer contribution. This must be deposited with the IRS on a semi-weekly or monthly schedule.
Federal income tax withholding: Withhold based on each employee’s Form W-4 elections and deposit with FICA taxes.
FUTA: Federal unemployment tax of 6% on the first $7,000 of each employee’s wages. A credit of up to 5.4% applies for timely state unemployment tax payments, reducing the effective rate to 0.6%.
Form 941: File quarterly to reconcile payroll tax deposits. Form W-2 must be issued to employees by January 31.
Sales Tax
The US has no federal sales tax – it’s entirely state and local. 45 states plus DC impose sales tax, with rates ranging from 0% to over 10% when combined with local taxes. Alaska, Delaware, Montana, New Hampshire, and Oregon have no statewide sales tax.
You must collect and remit sales tax in states where you have “nexus” – either a physical presence (office, warehouse, employees) or economic nexus (typically $100,000 in sales or 200 transactions in a state over 12 months, following the 2018 Wayfair decision).
Not all products and services are taxable everywhere. Food, clothing, medicine, and professional services are exempt in many states. Check your state’s Department of Revenue for specifics.
State and Local Taxes
Most states with income tax tax business income similarly to federal – either as pass-through income on your personal return or as corporate income. Rates and rules vary significantly. Some states also impose a franchise tax or annual LLC fee regardless of income.
Check the State Law section for your state’s specific business tax obligations.
Common Mistakes
- Not setting aside money for taxes. A common rule of thumb: set aside 25–30% of every payment you receive into a dedicated tax savings account. Self-employment taxes are higher than most people expect their first year.
- Missing estimated payment deadlines. The penalties are small individually but add up – and missing payments signals to the IRS that you’re not staying current.
- Claiming deductions without documentation. Keep receipts for everything. The IRS can audit returns up to 3 years back (6 years if it suspects substantial underreporting).
- Mixing personal and business expenses. If an expense isn’t clearly business-related and documented, don’t deduct it.
- Ignoring state sales tax obligations. E-commerce businesses especially underestimate their multi-state exposure after Wayfair.
Where to Go Next
The Federal Law database covers specific IRS requirements in detail – EIN registration, Form 941, FUTA, estimated taxes, and major deductions. For state-specific tax obligations, browse the State Law section for your state. When your tax situation gets complex, invest in a CPA – the fee typically pays for itself many times over in tax savings and avoided penalties.