10 Min. Read

Small business taxes for beginners

May 30, 2025

As a small business owner, few things are as important to master as your taxes. Not only does a solid grasp of taxes help you avoid discrepancies, audits, or penalties, but it can also save you money. By learning about the different ways to reduce your taxable income, you’ll owe less business tax, helping your bottom line. So, what do small business owners need to know about income tax basics? Let’s take a look.

Key takeaways

Small businesses may be required to pay several different kinds of taxes.
Corporate structure affects how taxes are calculated—C-corporations and S-corporations have different requirements than sole proprietorships.
Depending on your corporate status, you’ll be required to file federal, local, and state taxes using different forms.
With careful planning, strategy, and compliance with tax law, you can reduce your taxable income and save money at tax time.
Tax deductions and credits are vital for reducing taxable income.
Most businesses are required to make quarterly estimated tax payments.
You can pay your corporate income tax online, by check, or with a money order.
For help with small business taxes, consider hiring a tax professional, using accounting software, or referring to tax resources from the IRS.

Table of contents

Understanding small business taxes
Tax forms and filing requirements
Tax planning and compliance
Tax deductions and credits
Estimated tax payments and quarterly filings
Paying small business taxes
Resources for small business taxes

Understanding small business taxes

Small businesses may be required to pay several different kinds of taxes. By understanding your business’s specific tax liabilities, you can ensure compliance with tax law while minimizing the amount you owe. This is often done with the help of special tax credits and deductions, though other strategies can help as well.

What is considered a small business for tax purposes?

The Internal Revenue Service defines a small business as a taxpayer that files Form 1040 or 1040-SR, Schedules C, E, F, or Form 2106, as well as any business with assets under $10 million. This means that sole proprietorships, partnerships, LLCs, C-corporations, and S-corporations can all be considered small businesses.

Types of small business taxes

In general, businesses must pay five kinds of tax. Here’s a breakdown of which taxes are paid by different small business types.

Income Tax: All businesses (except for partnerships) must file a federal income tax return every year.
Employment Tax: Small businesses with employees—sole proprietorships, partnerships, and C or S corporations—must pay employment taxes, including those required by the Federal Unemployment Tax Act (FUTA), which funds federal and state unemployment programs.
Self-Employment Tax: Sole proprietors and partnerships, instead of traditional employment taxes, are subject to paying a self employment tax rate, which covers Social Security and Medicare.
Sales Tax: Small businesses may be required to collect and pass sales taxes to the relevant taxing authority.
Excise Tax: Sole proprietors, partnerships, C corporations, and S corporations may be subject to excise taxes on specific goods and services.

Tax forms and filing requirements

In order to meet your tax obligations, you’ll need to understand which forms you must complete and file at tax time and whether you file your business taxes with your personal tax returns. Here’s what you need to know about preparing business tax returns:

Federal tax forms

Depending on the type of business you run, your tax form requirements may vary. For instance, if you operate a sole proprietorship, you must report your business income and expenses on Schedule C, which is then attached to your personal tax return, Form 1040. Sole owners of LLCs also report business income with their personal income taxes.

However, if your business is a corporation (or a limited liability company that is treated as a corporation), you’ll prepare a separate corporate tax return from your personal income taxes.
We have a detailed guide on filing business and personal taxes separately. C-corporations use Form 1120, while S-corporations use Form 1120S. Meanwhile, multi-member LLCs are typically considered partnerships and usually file taxes using Form 1065.

State and local tax forms

In addition to federal tax responsibilities, small business owners must address state and local tax obligations, which are subject to geographical variations. Primary considerations include state income tax and employment taxes, with potential supplementary local levies.

Your business structure and location directly influence filing procedures. For example, a sole proprietorship operating in a state without individual income tax, such as Texas, will primarily focus on federal tax compliance. Conversely, a retail establishment in California must adhere to state income tax regulations and collect and remit sales tax. Employers in California are also responsible for state unemployment tax contributions.

Alternatively, a business incorporated as a C-corporation in New York is required to file a separate state corporate income tax return, distinct from individual tax filings. Businesses owning real property within city limits are also subject to local property taxes.

To ensure comprehensive compliance, consult the relevant state department of revenue website. Additionally, city or county tax authorities can clarify local tax obligations. Given the inherent complexity of state and local tax regulations, seeking guidance from a qualified tax professional is strongly recommended.

Tax planning and compliance

The best way to save money on small business taxes is by planning and strategizing throughout the year. Here are a few suggestions to help you stay organized and save more money on your tax bill.

Tax planning strategies for small business taxes

There are a number of strategies you can use to reduce your tax liability, including:

Maintaining accurate, organized records of income and expenses year-round
Taking advantage of available tax deductions and credits to reduce taxable income
Keeping up with estimated tax payments throughout the year to avoid late payment penalties
Reducing tax liability by changing your business’s corporate structure
Maximizing tax-deferred or tax-advantaged contributions to a 401(k), Simplified Employee Pension (SEP-IRA), or other similar plans

Compliance and audits

Small businesses must comply with all federal, state, and local tax laws or else risk audits, penalties, and fines from the Internal Revenue Service.

Exact regulations vary by state, municipality, and business type, so it’s wise to do your research on all relevant laws to learn about which tax applies to you and ensure compliance.

Tax deductions and credits

Tax deductions and credits are some of the best ways to reduce your taxable income, saving you money when it’s time to pay your tax bill.

Business expenses and depreciation

Every business incurs expenses. The costs you pay throughout the year to run your business can be deducted from your business income, lowering the amount you’ll owe at tax time.

Take a look at the many available deductions to determine which ones apply to your business, and make sure you keep all receipts safely stored and organized to make deductions easier.

Claiming depreciation on certain assets can also be a great way to reduce your tax obligations. Depreciation is essentially the recovery of an asset’s cost over the course of its useful life.

For instance, say you spend $20,000 on computer equipment for your company. Rather than deducting the entire amount from your taxes, you’ll claim depreciation for the amount of value that the equipment loses per year. So, if your computer equipment loses 10% of its value per year, you would deduct $2,000 (10% of $20,000) in depreciation per year for the next 10 years.

Home office deduction and other credits

Depending on the nature of your business, there are many other small business tax deductions and credits you may be able to claim.

One common tax deduction for owners of a sole proprietorship is the home office deduction, which allows you to deduct a portion of the costs of your home (e.g., mortgage payments, utility bills, maintenance, repairs, etc.) from your annual income tax return.

Other available tax credits for small businesses include the research and development (R&D) credit, foreign tax credit, the Work Opportunity Tax Credit (WOTC), and more. Look into the IRS’s list of tax credits to find out which ones you may qualify for.

Estimated tax payments and quarterly filings

If you expect to owe more than $1,000 in taxes per year as a small business owner, you’re required to pay estimated taxes throughout the year. How does estimated tax work?

Understanding estimated tax payments

Small business owners are required to pay estimated tax on a quarterly basis. Estimated tax payments are due on April 15th, June 15th, September 15th, and January 15th of the following tax year.

Depending on whether your estimated tax payments were higher or lower than your actual liability, you will either pay the balance due or request reimbursement when you file your regular tax return for the year.

Quarterly filing requirements

If your small business withholds federal income tax, Social Security, or Medicare taxes, you’re required to make quarterly filings. This is done using Form 941, Employer’s Quarterly Federal Tax Return.

Businesses that provide goods or services subject to excise tax must also make filings each quarter. These taxes are reported quarterly to the Internal Revenue Service using Form 720, Quarterly Federal Excise Tax Return.

Failure to file quarterly when you’re required to can result in penalties and fines, so be sure to research the requirements and determine your quarterly tax return obligations.

Paying small business taxes

Once your business tax returns are properly filed, it’s time to actually pay your tax bill. There are a few different payment methods to choose from, though the easiest method is online payment.

How to pay taxes online or by mail

The fastest, easiest way for small businesses to pay taxes is through the Electronic Federal Tax Payment System (EFTPS). If you don’t want to pay your taxes online for whatever reason, you still have the option of paying your taxes by mail with a check or with a money order.

Resources for small business taxes

It can be a lot of work to efficiently file small business taxes. You must meticulously track your income and expenses, keep up-to-date on federal, state, and local tax requirements, and pay attention to specific tax rules for different kinds of business entities.

Here are a few resources to help make the next tax year easier.

Tax software and tools

Small business taxes don’t have to be daunting. While tax software focuses on tax preparation and filing, accounting software offers a more comprehensive solution for managing your business finances. With accounting software, you can track income and expenses, invoice clients, and generate essential financial reports, simplifying your tax preparation process.

FreshBooks is accounting software designed to support businesses during tax time. By providing accurate financial tracking and reporting throughout the year, FreshBooks can make tax season less stressful.

Want to learn more about how FreshBooks can help your business during tax time? Check out our Tax Time page. Ready to take your business to the next level? Try FreshBooks for free today!