There’s a lot to figure out when starting a new business. But when you throw taxes into the mix, it can feel especially overwhelming—and you're not alone. Gusto's own research found that small-business owners spend more than 200 hours a year navigating tax compliance and regulations, and taxes rank as their #1 policy concern.
Hiring an accountant or other tax professional is definitely a good place to start. So is knowing the answers to these five common tax-related questions inside and out.
1. What type of business am I starting?
When starting your own company, you need to decide what type of business entity you will be. The entity you choose determines how you’ll file taxes and how much protection you’ll have if you find your business in the middle of a lawsuit.
Choosing your business entity type is a big question that has both legal and tax implications. To discuss the legal implications, you’ll want to reach out to a small business attorney, and to determine how it will impact your individual tax situation, consult an accountant who has experience working with businesses like yours.
If you’re just starting out or looking to optimize your business structure, here’s an overview of what you’ll need to know from a tax perspective- (along with all the forms you’ll need to file):
Sole Proprietorship
This is the simplest form of business entity. As the only owner, you’ll file:
Your individual income tax return, Form 1040, along with
Schedule C, Profit or Loss from Business. The Form 1040 is due to be filed by April 15th each year or, if you file for an extension, by the extended deadline of October 15th. When those deadlines fall on weekends or a holiday, the deadline is the next business day.
You will be required to pay self-employment tax on the net profit reported on your Schedule C—calculated on Schedule SE, Self-Employment Tax—and may be required to pay quarterly estimated tax payments using Form 1040-ES. For more information on filing as a sole proprietor, see Publication 334.
Partnership
A business partnership has two or more partners, and each partner includes their share of the partnership’s income or loss on their individual income tax return.
A partnership must file Form 1065, U.S. Return of Partnership Income, to report its income, deductions, gains, losses, etc. by March 15th, or file for an extension to September 15th.
A partnership does not pay income tax, but instead “passes through” profits or losses to its partners according to the terms of the partnership agreement using Schedule K-1 (filed with Form 1065 and issued to each partner).
You will be required to pay self-employment tax on your share of the partnership's net profit if you're a general partner. Limited partners are generally exempt from self-employment tax on their distributive share, except for any guaranteed payments received for services rendered to the partnership. You may also be required to pay quarterly estimated tax payments.
Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a popular structure that many sole props and multi-member partnerships use to protect their personal assets. Unlike a sole proprietorship or partnership, an LLC isn't a distinct tax classification on its own—the IRS taxes it based on how many members it has and how (or whether) it elects a different structure:
Single-member LLCs will still file a Schedule C with their personal 1040 return.
Multi-member LLCs will file a separate return called Form 1065 (along with K-1s) by March 15th, or file for an extension to September 15th.
The LLC can also elect to be taxed as a corporation and file an 1120 or 1120S form, if the business meets the qualifications for the S-Corporation or C-Corporation elections.
To make that election, file Form 8832 for C-corp treatment, or Form 2553 for S-corp treatment.
Corporation (aka C Corporation)
In forming a corporation, shareholders exchange money, property, or both, for the corporation's capital stock. For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity from its shareholders.
Corporations, on a calendar year, are required to file Form 1120, U.S. Corporation Income Tax Return by April 15th, or file for an extension to October 15th. Corporations expecting to owe $500 or more in tax generally must make quarterly estimated payments, calculated using Form 1120-W.
The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates "double taxation" and can be a big disadvantage of forming a C corp.
S Corporations
S corporations are corporations with 100 shareholders or fewer that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.
A calendar-year S-Corporation must file Form 1120S, U.S. Income Tax Return for an S Corporation by March 15th, or file for an extension to September 15th.
Shareholders of S corporations report the flow-through of income and losses on their personal tax returns by using the K-1 form generated with the 1120S return.
Shareholders are assessed tax at their individual income tax rates, which allows S corporation shareholders to avoid double taxation on the corporate income. Keep in mind, though, that shareholders who work in the business are still required to pay themselves a reasonable salary through W-2 wages—subject to normal payroll taxes—before taking any remaining profit as a distribution. The IRS closely scrutinizes S corps that underpay owner wages to avoid payroll tax.
2. What accounting method am I using?
It’s important to choose one type of accounting method for tracking your income and expenses—and stick with it. While you can change your method down the road, it’s a bit of a pain and can lead to confusing calculations come tax season, so it’s easier to pick one from the start.
Your two choices are cash or accrual-based accounting, and here’s the deal with each:
Cash Accounting – You record income when it’s received and expenses when they’re paid. This is the most common method for small business owners because you’re only paying taxes on money that’s actually in the bank. Thanks to the Tax Cuts and Jobs Act, a small business can use the cash method as long as their average annual gross receipts for the past three years don't exceed the IRS's inflation-adjusted threshold—$32 million for tax years beginning in 2026 (up from the original $25 million base set in 2017). Gross receipts are the total amount your business received in a year from all sources, excluding expenses.
Accrual Accounting – You record income once you finish a service, or deliver all the goods a contract calls for, rather than when you actually receive the payment. Likewise, you record an expense once the service is completed or all goods have been received, rather than when you pay the cash. This could mean you end up paying taxes on money you haven’t received yet. This method is best for businesses with inventory and those that deal a lot with sales made on credit or other delayed payments.
3. Am I paying self-employment tax?
Hint: The answer to this question should be yes if you’re part of a sole prop or partnership. Self-employment tax covers Social Security and Medicare. Most wage-earners (those who receive a W-2 at the end of the year) have this automatically deducted from their pay by their employers, but self-employed folks have to pay this on their own (in addition to their regular income tax).
Generally, your net earnings from self-employment are subject to self-employment tax at a rate of 15.3% (12.4% for Social Security and 2.9% for Medicare). Unlike the Social Security portion, which stops applying once your income exceeds the annual wage base, Medicare taxes apply to all of your self-employment income—and above $200,000 (single) or $250,000 (married filing jointly), an Additional Medicare Tax of 0.9% kicks in on top of the standard rate.
If you're self-employed as a sole proprietor or independent contractor, you'll use Schedule C to calculate net earnings from self-employment.
If you're a general partner in a partnership, your share of income reported on a Schedule K-1 is typically subject to self-employment tax (limited partners are usually exempt, aside from guaranteed payments for services). You'll calculate the tax using Schedule SE and file it with your individual annual income tax return.
There's also a silver lining. If you pay self-employment tax, you get to deduct half of it from your taxable income on the personal part of your tax return.
Keep in mind, self-employment tax only covers your own income. Once you hire employees, you'll also owe Federal Unemployment Tax (FUTA)—a separate employer-only tax that funds unemployment benefits and isn't withheld from employee paychecks.
4. Am I taking full advantage of the tax deductions I’m eligible for?
As a small business owner, there are many deductions that can help reduce your taxable income, and it’s worth researching all of the ones available—you might find some that surprise you. Generally, a cost qualifies as a deductible business expense if it's "ordinary and necessary" for running your business—ordinary meaning common in your industry, and necessary meaning helpful and appropriate for your business (not that it's absolutely required).
Commonly-overlooked deductions include:
Health savings account deduction
Contributions to a self-employed SEP, SIMPLE, and qualified retirement plans
Self-employed health insurance deduction
IRA deduction
Home office deduction
And that’s just the start. Do your research (here are some great lists of deductions for shop owners, online sellers, self-employed business owners, and tech startups), keep digital and/or paper receipts for everything you’re going to deduct, and make sure all of these are reflected on your forms come tax season.
Pro tip: It's also worth knowing the difference between a deduction and a tax credit: a deduction lowers your taxable income, while a tax credit reduces your tax bill dollar-for-dollar—making credits generally more valuable when you qualify for one. A couple tax credits worth checking on as a new employer: the Retirement Plans Startup Costs Tax Credit (worth up to $5,000 a year for three years if you set up a new retirement plan) and the Work Opportunity Tax Credit for hiring from certain target groups.
5. Do I qualify for the 20% deduction available for pass-through entities?
Tax laws are always changing, and beginning in 2018, taxpayers have been allowed a 20% deduction on qualified business income. Originally set to expire after 2025, this deduction was made permanent under the One Big Beautiful Bill Act (signed July 2025)—so it's here to stay unless Congress changes the law again.
Qualified business income is defined as “ordinary” income minus ordinary deductions that you earn from a sole-proprietorship, partnership, or S-corporation. Note that it does not include any wages you earn as an employee.
This deduction is available to pass-through entities—in other words, sole proprietorships, LLCs, partnerships, and S-corps. If your business is a "specified service trade or business" (SSTB), you can still claim the full deduction as long as your taxable income is below $201,750 (single) or $403,500 (married filing jointly) for 2026. Above those thresholds, the deduction phases out gradually and disappears entirely once you exceed $276,750 (single) or $553,500 (joint). SSTBs include businesses in the following fields:
Accounting;
Actuarial science;
Athletics;
Brokerage services;
Consulting;
Financial services;
Health;
Law;
Performing arts;
Any business that consists of investing and investment management, trading or dealing in securities, partnership interests or commodities.
Any business where the principal asset is the reputation or skill of one or more of the employees or owners;
Determining whether your business truly qualifies for the deduction is complicated, as is calculating the amount of the deduction. You should work with your accountant to find out more about the deductions to which you’re entitled. But, if you do qualify, it could save you a whole lot of money, so it’s worth knowing the right questions to ask.
Take some time before things get too busy in your new business to understand the answers to these five questions. When tax time rolls around, understanding the structure of your business and how it affects the numbers can give you a much better understanding of why you’re paying the taxes that are due.
FAQs
What business structure is best for taxes when starting a business?
There's no single best structure—it depends on your liability needs and how you want profits taxed. Sole proprietorships and partnerships are simplest but pass all profit through to your personal return with self-employment tax. LLCs offer liability protection with similar pass-through tax treatment, while S-corps let shareholders avoid the "double taxation" that C-corps face. Most new business owners choose based on liability protection first, then work with an accountant or other tax professional on the tax implications.
Do I have to pay self-employment tax if I'm a sole proprietor?
Yes. If you're a sole proprietor or a general partner in a partnership, you're responsible for self-employment tax, which covers Social Security and Medicare at a combined rate of 15.3% (12.4% Social Security tax + 2.9% Medicare tax) on your net self-employment earnings. (Limited partners are generally exempt on their distributive share, aside from guaranteed payments for services.) Unlike W-2 employees, this isn't automatically withheld, so you calculate it yourself using Schedule SE—though you can deduct half of what you pay from your taxable income.
What's the difference between cash and accrual accounting for taxes?
With cash accounting, you record income when you actually receive it and expenses when you actually pay them—so you're only taxed on money that's in the bank. With accrual accounting, you record income once you've completed the work or delivered the goods, even if you haven't been paid yet, which can mean owing tax on money you haven't collected. Cash accounting is typically better for service providers, while accrual fits businesses with inventory or a lot of credit sales.
What is the 20% pass-through deduction, and do I qualify?
Starting in 2018, eligible pass-through business owners—sole proprietors, LLCs, partnerships, and S-corps—can deduct 20% of their qualified business income, lowering their overall tax liability. This deduction was originally set to expire after 2025 but was made permanent under the One Big Beautiful Bill Act (2025). If your business is a "specified service trade or business" (like law, accounting, consulting, health, or financial services), you can still qualify for the full deduction as long as your taxable income is below $201,750 (single) or $403,500 (married filing jointly) for 2026—above those thresholds, the deduction phases out and disappears entirely past $276,750 (single) or $553,500 (joint). Because the qualification rules and the deduction calculation are complex, it's worth working with an accountant to confirm eligibility.
What tax deductions do small business owners often overlook?
Generally, a cost qualifies as a deductible business expense if it's "ordinary and necessary" for your business—ordinary meaning common in your industry, and necessary meaning helpful and appropriate (not that it's strictly required). It's also worth knowing the difference between a deduction and a tax credit: a deduction lowers your taxable income, while a credit reduces your tax liability dollar-for-dollar, making credits generally more valuable when you qualify for one. Commonly overlooked deductions include the health savings account deduction, contributions to self-employed SEP, SIMPLE, and other qualified retirement plans, the self-employed health insurance deduction, the IRA deduction, and the home office deduction. Keeping thorough digital or paper receipts throughout the year makes it much easier to claim these when you file.
Quick note: This is not to be taken as tax, legal, benefits, financial, or HR advice. Since rules and regulations change over time and can vary by location, consult a lawyer or HR expert for specific guidance.
