Small Business Taxes for Dummies: 2025-2026 IRS Guide

How Your Business Structure Determines Your Tax Forms

The entity structure you choose dictates which federal tax forms you file. The IRS recognizes four main business structures: sole proprietorships, partnerships, corporations, and S corporations. A limited liability company (LLC) is a structure created by state statute, and the IRS taxes it based on how many members it has and whether you file an election on Form 8832 or Form 2553 to be taxed as a corporation.

If you own an unincorporated business by yourself, you are a sole proprietor and report your business profit or loss on Schedule C attached to your personal Form 1040 or 1040-SR. Under IRS Publication 334, a single-member LLC is treated as a disregarded entity for income tax purposes, meaning it also files on Schedule C unless it elects corporate tax treatment.

If two or more people carry on a business together, it is a partnership. A partnership does not pay federal income tax itself. Instead, it files an annual information return on Form 1065 and issues a Schedule K-1 to pass profits or losses through to the partners, who report their share on Schedule E of their personal return. Spouses who jointly own and operate an unincorporated business and share profits are treated as a partnership filing Form 1065 unless they wholly own the unincorporated business as community property in a community property state or elect to be treated as a Qualified Joint Venture (QJV) by filing separate Schedules C and SE. A business owned by spouses through an LLC does not qualify for the QJV election.

C corporations file Form 1120 and pay corporate tax when profits are earned, and shareholders are taxed again when profits are distributed as dividends. Eligible domestic corporations can avoid this double taxation by filing Form 2553 to elect S corporation status, filing Form 1120-S to pass income through to shareholders on Schedule E. Sole proprietors are not employees of the business and take personal withdrawals rather than deductible wages.

• IRS: Publication 334 (2025), Tax Guide for Small Business
• IRS: Business structures

The 5 Main Types of Small Business Taxes

Every small business deals with up to five categories of federal tax depending on how it operates, whether it hires staff, and what products it sells.

• Income tax: All businesses except partnerships must file an annual income tax return. Federal income tax is pay-as-you-go, meaning you must pay it as you earn or receive income during the year.
• Estimated taxes: Sole proprietors, partners, and S corporation shareholders generally must make regular estimated payments using Form 1040-ES if they expect to owe $1,000 or more (including self-employment tax) when filing their return. Corporations must make estimated payments if they expect to owe $500 or more.
• Self-employment (SE) tax: Social Security and Medicare tax for people who work for themselves. You must pay SE tax and file Schedule SE if your net earnings from self-employment are $400 or more (or if you have church employee income of $108.28 or more).
• Employment taxes: If you hire employees, you must withhold federal income tax from their wages using their Form W-4, withhold and match Social Security and Medicare taxes under FICA (reported on Form 941 quarterly or Form 944 annually), and pay Federal Unemployment Tax (FUTA) solely from your own funds (reported on Form 940).
• Excise taxes: Apply if you manufacture or sell specific products, use certain equipment, or receive payment for specific services. You report environmental, communications, air transportation, fuel, retail heavy truck, manufacturer, and indoor tanning taxes quarterly on Form 720. Highway motor vehicles with a taxable gross weight of 55,000 pounds or more require Form 2290, and wagering businesses require Form 730 and Form 11-C.

• IRS: Publication 334 (2025), Tax Guide for Small Business
• IRS: Business taxes

How Self-Employment Tax Works (With a Worked Calculation)

Self-employment tax funds your Social Security retirement, disability, survivor, and Medicare hospital insurance benefits. For 2025, you earn one Social Security credit for each $1,810 of income subject to Social Security tax ($1,890 in 2026), up to four credits per year. To get credit from the Social Security Administration, you must file your return within 3 years, 3 months, and 15 days after the tax year you earned the income.

The SE tax rate is 15.3%, made up of 12.4% for Social Security and 2.9% for Medicare. Under the regular method on Schedule SE, you multiply your self-employment earnings by 92.35% (0.9235) to find your net earnings subject to SE tax, and then deduct one-half of your total SE tax as an adjustment to income on Line 15 of Schedule 1.

Only the first $176,100 of your combined wages, tips, and net self-employment earnings in 2025 is subject to the 12.4% Social Security portion ($184,500 in 2026). There is no cap on the 2.9% Medicare portion. A 0.9% Additional Medicare Tax (figured on Form 8959) applies if your net self-employment earnings exceed $200,000 for single, head of household, or qualifying surviving spouse filers, $250,000 for married filing jointly, or $125,000 for married filing separately.

Worked example (our calculation from IRS Publication 334): Suppose you are a single sole proprietor with $100,000 in net profit on Line 31 of Schedule C in 2025 and no W-2 wages.

• Step 1 (Figure net earnings subject to SE tax): Multiply $100,000 by 92.35% (0.9235) = $92,350.
• Step 2 (Calculate SE tax): Multiply $92,350 by 15.3% (0.153) = $14,129.55 total SE tax (entered on Schedule 2, Line 4).
• Step 3 (Deduct half of SE tax): Divide $14,129.55 by 2 = $7,064.78 adjustment to income on Schedule 1, Line 15.
• Effective rate check (our calculation): $14,129.55 divided by $100,000 net profit equals 14.13% of your Schedule C profit before factoring in the income tax savings from the 50% deduction.

• IRS: Publication 334 (2025), Tax Guide for Small Business
• IRS: Business taxes

What Counts as Business Income and Cost of Goods Sold

You must report all income connected to your trade or business on your tax return, whether you receive cash, checks, credit card charges, or the fair market value of bartered property and services, and even if you did not receive a Form 1099 from the payor. Nonemployee compensation of $600 or more (including Name, Image, and Likeness income) is reported to you on Form 1099-NEC, and payment card or third-party network transactions are reported on Form 1099-K.

Canceled business debt is generally taxable on Line 6 of Schedule C unless an exclusion applies, such as bankruptcy, insolvency, or qualified real property business debt reported on Form 982. Bona fide loans, appreciation on unsold property, goods held on consignment before sale, and state and local sales taxes you are required to collect from buyers and turn over to the government are not business income.

If you make or buy goods to sell, you subtract Cost of Goods Sold (COGS) from your net receipts to find your gross profit on Schedule C (Lines 35 through 42). You take your beginning inventory, add purchases minus the cost of any items withdrawn for personal use, add direct and indirect manufacturing labor (never including money paid to yourself), add manufacturing materials, supplies, freight-in, and overhead costs, and subtract your ending inventory.

• IRS: Publication 334 (2025), Tax Guide for Small Business
• IRS: Business taxes

Small Business Tax Deductions and Credits for 2025 and 2026

To be deductible, a business expense must be both ordinary (common and accepted in your field) and necessary (helpful and appropriate for your business). If an expense is partly business and partly personal, you can only deduct the business portion.

In addition to operating expenses on Schedule C, eligible owners can claim the Qualified Business Income (QBI) deduction on Form 8995 or Form 8995-A. Under P.L. 119-21 (enacted July 4, 2025), the 20% QBI deduction on Line 13a of your individual return is permanent for qualified active trades or businesses.

While deductions lower your taxable income, general business credits (claimed via Form 3800 alongside the specific credit form) subtract directly from the tax you owe. These include the Credit for Small Employer Pension Plan Startup Costs (Form 8881), the Credit for Increasing Research Activities (Form 6765), the Work Opportunity Credit (Form 5884), the Disabled Access Credit (Form 8826), and the Credit for Small Employer Health Insurance Premiums (Form 8941). Under P.L. 119-21, commercial clean vehicle credits (Form 8936) were eliminated for vehicles acquired after September 30, 2025, and the energy efficient commercial buildings deduction (Form 7205) is eliminated for property beginning construction after June 30, 2026.

• Car and truck expenses: Deduct actual business vehicle expenses prorated by business mileage, or use the IRS standard mileage rate of 70 cents per mile for 2025 and 72.5 cents per mile for 2026, plus business parking fees and tolls. To use the standard mileage rate on an owned car, you must choose it in the first year the car is available for business use. Beginning in 2025, you can deduct the business-use portion of car loan interest on Schedule C and may be eligible to deduct the personal-use portion of qualified passenger vehicle loan interest on Schedule 1-A.
• De minimis safe harbor for tangible property: Elect to deduct tangible property costing up to $2,500 per item or invoice ($5,000 if you have an applicable financial statement) in Part V of Schedule C instead of depreciating it.
• Section 179 and bonus depreciation (Form 4562): Elect under Section 179 to deduct up to $2,500,000 of qualifying equipment placed in service in 2025 (phasing out above $4,000,000, with SUVs capped at $31,300 and first-year passenger autos capped at $12,200, or $20,200 with the special depreciation allowance). A 100% additional first-year bonus depreciation deduction is allowed for qualified property acquired after January 19, 2025.
• Business start-up and organizational costs: Elect to deduct up to $5,000 of business start-up costs and up to $5,000 of organizational costs (reduced dollar-for-dollar once total costs exceed $50,000, with the remainder amortized).
• Travel and meals: Overnight business transportation and lodging are deductible, while business meal expenses are generally limited to 50% of the cost.
• Employees, insurance, and professional fees: Deduct reasonable employee wages, employer-paid payroll taxes, business liability insurance, legal and accounting fees, and the business portion of tax preparation fees or software. Self-employed owners can deduct self-employed health insurance premiums (using the return instructions worksheet or Form 7206) and retirement contributions to a SEP, SIMPLE, or qualified plan (employee contributions on Schedule C, Line 19, and owner contributions on Schedule 1, Line 16).
• New 2025 write-offs: Beginning in 2025, deduct domestic research and experimental expenditures currently (or amortize over 60 months or more), and claim individual deductions on Schedule 1-A for up to $12,500 of qualified overtime pay ($25,000 if married filing jointly) and up to $25,000 of qualified tips.

• IRS: Publication 334 (2025), Tax Guide for Small Business
• IRS: Publication 583 (12/2024), Starting a Business and Keeping Records

Key Filing Deadlines, Extensions, and Information Returns

For calendar-year filers, your 2025 individual return with Schedule C and Schedule SE is due by April 15, 2026 (or the 15th day of the 4th month after the end of a fiscal year). File Form 4868 by the April deadline for an automatic 6-month filing extension to October 15. An extension gives you extra time to file the return, but you must still pay any tax owed by April 15 to avoid late-payment penalties and interest.

Collect each contractor's or landlord's SSN or EIN using Form W-9 before paying them, or you may have to withhold backup withholding. File Form 1099-NEC for each nonemployee to whom you have paid at least $600 during the year for services (or payments to an attorney) by January 31. Use Form 1099-MISC to report rents of $600 or more, prizes and awards of $600 or more, or royalties of $10 or more. For reportable payments made after 2025, the information reporting and backup withholding threshold increases to $2,000 under section 6041(a).

If your business receives more than $10,000 in cash in one transaction or related transactions, you must file Form 8300. Failing to supply a required TIN carries a $50 penalty per failure, and information return errors carry penalties unless you qualify for the de minimis error safe harbor (errors of $100 or less on income, or $25 or less on tax withheld, or correcting the greater of 10 returns or one-half of 1% of your total required information returns by August 1).

• IRS: Publication 334 (2025), Tax Guide for Small Business
• IRS: Publication 583 (12/2024), Starting a Business and Keeping Records

First-Year Small Business Tax Checklist: TINs, Accounting, and Recordkeeping

Our team put together this step-by-step setup and filing checklist using the rules in IRS Publications 334 and 583 so you can organize your books and file on time.

• 1. Get your Taxpayer Identification Number (TIN): Sole proprietors with no employees can use their SSN or ITIN (applied for on Form W-7). You must get a free Employer Identification Number (EIN) online at IRS.gov/EIN (or via Form SS-4) if you pay wages to one or more employees, file pension or excise tax returns, or operate as a partnership or corporation.
• 2. Open a dedicated business bank account: Deposit all business receipts into a separate business checking account and pay all business bills from it so personal and business funds stay separate.
• 3. Establish your tax year on your first return: Most sole proprietors use the calendar tax year (January 1 through December 31). You must use a calendar year if you keep no books or have no annual accounting period, and changing your tax year later requires Form 1128.
• 4. Pick your accounting method on your first Schedule C: Under the cash method, you report income in the year you actually or constructively receive it and deduct expenses when paid. Under the accrual method, you report income when earned and deduct expenses when incurred and economic performance occurs. Small business taxpayers (average annual gross receipts of $31 million or less over the prior 3 tax years and not a tax shelter) can use the cash method and choose not to keep a formal inventory if their method clearly reflects income. Changing your accounting method later requires Form 3115.
• 5. Collect Forms W-9, W-4, and I-9 before paying workers: Get a signed Form W-9 from every contractor before issuing payment, and have every new employee complete USCIS Form I-9 and IRS Form W-4.
• 6. Keep supporting documents for every receipt and expense: Save cash register tapes, deposit information, receipt books, invoices, credit card slips, and canceled checks to support gross receipts, inventory, expenses, and asset basis.
• 7. File and pay electronically: If your 2025 adjusted gross income (AGI) was $89,000 or less, you can prepare and e-file for free using IRS Free File software (or use Free File Fillable Forms at any income level). Pay balances and estimated taxes via IRS Direct Pay, your IRS Online Account, or the Electronic Federal Tax Payment System (EFTPS, required for federal tax deposits).

• IRS: Publication 334 (2025), Tax Guide for Small Business
• IRS: Business taxes

Flat-Price Small Business Tax Filing and Bookkeeping

Aldro is the cheapest way to get your business taxes done: $399 flat, with bookkeeping at $20 a month. The flat price covers everything tax for the year (every federal and state or provincial business return: Schedule C, 1065, 1120-S, 1120 and state returns), multi-state returns at the same price, the owner's personal return when the business income needs it, extensions and quarterly estimate reminders included, and 1099-NEC slips included.

• IRS: Publication 334 (2025), Tax Guide for Small Business
• IRS: Business taxes