Small Business Taxes for Beginners: A Step-by-Step Guide

The difference between successful small businesses and those constantly fighting fires often comes down to systems. Tax planning shouldn't be a last-minute scramble or a mystery that keeps you up at night. 

Getting it right means more money in your pocket, fewer surprises, and one less thing to worry about. Sure, the forms look scary and the rules can be confusing, but with a little know-how, you can handle your small business taxes without breaking a sweat. 

This small business taxes for beginners guide cuts through the jargon to give you exactly what you need to stay compliant and maybe even save some money along the way. 

Follow these steps to take control of your business taxes once and for all.

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What taxes do small businesses have to pay?

Understanding small business taxes starts with knowing your obligations. If you’re asking yourself, "Do small businesses pay taxes?" The answer is yes—and there are several types of taxes you’ll need to understand.

Federal business taxes

The federal government requires most businesses to pay four main types of taxes:

1. Income tax

All businesses except partnerships pay income tax on their profits. Partnerships file information returns, with individual partners reporting their share of income or losses on their personal tax returns. The amount you pay depends on your business structure and profit level.

2. Self-employment tax

This covers Social Security and Medicare for self-employed individuals, currently at 15.3%. Unlike employees who split this tax with employers, self-employed people pay the full amount themselves.

3. Employment taxes

If you have employees, you're responsible for:

• Federal income tax withholding based on each employee's W-4 form.
• Social Security and Medicare taxes (you pay half, and withhold half from employee wages).
• Federal unemployment tax (FUTA), which funds unemployment benefits and is generally paid only by employers.

4. Excise tax

Excise tax applies to specific industries like fuel, tobacco, or alcohol. They're often included in the price of products and may be less visible than other taxes, but businesses in affected industries must report and pay them quarterly.

State & local business taxes

Beyond federal obligations, you'll need to navigate state and local tax requirements that vary significantly by location.

State income taxes are collected in most states, with rates ranging from less than 5% to over 10%. In 2025, nine states (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming) don't have individual state income tax.

Sales tax requirements can be particularly complex. You'll need to:

• Determine which of your products or services are taxable in each jurisdiction.
• Register for sales tax permits where required.
• Collect the correct tax amount from customers.
• File returns and remit payments to state and local tax authorities.

Sales tax rates and rules differ dramatically not just by state, but also by city, county, and special districts, creating a patchwork of regulations to follow.

Property tax applies to business-owned real estate and, in many jurisdictions, to business personal property like equipment, furniture, and inventory. These taxes fund local services like schools, roads, and emergency services.

Many cities and counties impose additional business taxes or licensing fees that can include:

• Local business license fees.
• Gross receipts taxes.
• Occupancy taxes for hospitality businesses.
• Industry-specific local taxes.

How to calculate and file small business taxes

Navigating the tax filing process requires understanding your business structure, maintaining proper records, making timely payments, and completing the right forms. 

Here's how to approach each step:

Step 1: Determine your business structure.

Small business taxes 101: Your business structure fundamentally affects how you file taxes and how much you pay. Each structure has different tax implications:

Sole proprietorship: The simplest structure, where all business profits are taxed at your personal income tax rate, and you'll pay self-employment tax on your net earnings. 

You’ll report business income and expenses using: 

• Form 1040 (Individual Income Tax Return)
• Schedule C (Profit or Loss From Business)
• Schedule SE (Self-Employment Tax)

Partnership: Files Form 1065, which is an information return showing the business's income, deductions, and profit division. 

Each partner receives a Schedule K-1 showing their share of income or losses to report on their personal tax returns. Partners pay self-employment tax on their portion of partnership income.

LLC: Limited Liability Companies (LLC) have flexible tax treatment. By default:

• Single-member LLCs are taxed as sole proprietorships.
• Multi-member LLCs are taxed as partnerships.

However, LLCs can elect to be taxed as S corporations or C corporations by filing Form 8832, which may offer tax advantages depending on your situation.

S Corporation: Files Form 1120-S, with shareholders reporting their share of income or losses on their personal tax returns via Schedule K-1. 

The key tax advantage is that only wages paid to shareholders are subject to employment taxes, while distributions aren't—potentially saving on self-employment taxes compared to sole proprietorships or partnerships.

C Corporation: Files Form 1120 and pays corporate income tax on profits at the current corporate tax rate (21% as of 2025). 

If profits are distributed as dividends, shareholders pay personal income tax on these amounts, creating "double taxation." However, C corporations can deduct fringe benefits like health insurance, which can be helpful for some businesses.

For more details on each business structure, check out our post on small business tax tips.

Step 2: Keep accurate financial records.

Good bookkeeping isn't just helpful—it's essential for accurate tax filing and protecting yourself in case of an audit. Proper financial record-keeping includes several key practices:

• Track all business income and expenses throughout the year to create a clear picture of your financial activity. This means recording every transaction, no matter how small, and categorizing them correctly.
• Maintain organized documentation, which is critical for tax compliance. You should:
  
  • Save receipts for all business purchases.
  • Keep invoices for all income.
  • Document business mileage with dates, destinations, and purpose.
  • Store bank and credit card statements.
  • Retain payroll records if you have employees.
• Use accounting software. These platforms automatically categorize expenses and generate reports while tracking deductions. Plus, if you're using Homebase for payroll or team management, you get additional tax benefits since these platforms integrate seamlessly. 
• Perhaps most importantly, separating business and personal finances with dedicated accounts. Mixing them together creates tax headaches and could put your personal assets at risk.

Step 3: Estimate and pay quarterly taxes.

Unlike employees who have taxes withheld from each paycheck, most small business owners need to make estimated tax payments four times per year. These payments cover both income tax and self-employment tax.

Quarterly tax payments work on a "pay-as-you-go" system because the IRS doesn't want to wait until year-end to collect taxes. The process works like this:

1. Calculate your estimated annual tax liability based on projected income.
2. Divide by four to determine quarterly payment amounts.
3. Submit payments using Form 1040-ES by the following due dates:
   
   • April 15 for income earned January 1 – March 31
   • June 15 for income earned April 1 – May 31
   • September 15 for income earned June 1 – August 31
   • January 15 (following year) for income earned September 1 – December 31 (If you file your annual tax return by January 31 and pay the full balance, the January payment may not be required)

These dates shift slightly if they fall on weekends or holidays. You can pay electronically through the IRS Electronic Federal Tax Payment System (EFTPS), which provides confirmation and payment history. 

Alternatively, you can mail payments with payment vouchers, though electronic payment is faster and creates better documentation.

Underpaying estimated taxes can result in penalties, so it's wise to consult with a tax professional when determining your quarterly amounts, especially in your first year of business or if your income fluctuates significantly.

Step 4: File your tax return & submit payments.

When tax season arrives, you'll need to file annual returns that reconcile your quarterly payments against your actual tax liability. 

Begin by gathering all your financial documentation from the year, including:

• Income records (sales receipts, invoices, 1099 forms).
• Expense receipts organized by category.
• Asset purchase information.
• Mileage logs.
• Home office measurements and expenses (if applicable).
• Records of quarterly tax payments already made.

Next, you'll need to complete the appropriate tax forms based on your business structure:

• Sole proprietors: Schedule C attached to Form 1040
• Partnerships: Form 1065 and Schedule K-1 for each partner
• S Corporations: Form 1120-S and Schedule K-1 for each shareholder
• C Corporations: Form 1120

Most small businesses benefit from filing electronically, which offers several advantages:

• Faster processing
• Automatic error checking
• Quicker refunds
• Confirmation of receipt
• Reduced paperwork

If you owe additional taxes beyond your quarterly payments, you'll need to pay by the filing deadline to avoid interest and penalties. The IRS offers multiple payment options, including direct debit from your bank account, credit or debit card payments (with processing fees), and the Electronic Federal Tax Payment System (EFTPS).

Small business tax deductions: How to lower your tax bill

Tax deductions reduce your taxable income, effectively lowering your tax bill. Understanding available deductions and properly documenting them can make a big difference for your bottom line.

Common tax deductions for small businesses

Don't pay more tax than you have to. Small businesses can write off a surprising number of expenses. Here's a quick rundown of deductions that could save you money:

Office and workspace deductions

• Home office (if used regularly and exclusively for business)
• Rent for business premises
• Utilities (electricity, water, internet, phone)
• Office supplies and equipment
• Office furniture
• Computer hardware and software

Travel and transportation

• Business travel expenses (airfare, hotels, ground transportation)
• Business meals (currently 100% deductible at restaurants)
• Vehicle expenses (either standard mileage rate or actual expenses)
• Parking fees and tolls for business purposes
• Public transit for business travel

Employee and professional expenses

• Employee salaries and wages
• Employee benefits and insurance
• Contractor payments
• Accounting and legal fees
• Consulting services
• Payroll taxes
• Employee training and education

Insurance and financial expenses

• Business insurance premiums
• Health insurance (for self-employed)
• Business loan interest
• Credit card interest for business purchases
• Bank fees on business accounts
• Retirement plan contributions

Marketing and business development

• Advertising and marketing costs
• Website development and maintenance
• Business cards and promotional materials
• Social media and online advertising
• Networking event fees
• Client gifts (limited to $25 per person annually)

For a full list of business tax deductions, check out our post on the ultimate small business tax deduction checklist.

How to maximize deductions

Taking full advantage of tax deductions requires strategy and excellent record-keeping. Here are proven approaches to maximize your legitimate deductions:

• Maintain detailed, real-time records of all potential deductions throughout the year. Waiting until tax season to organize receipts often leads to forgotten expenses and lost deductions. Consider using expense-tracking apps that let you photograph receipts and categorize expenses on the go.
• Understand the substantiation requirements for different deductions. The IRS has specific documentation rules for various expenses:
  
  • Travel, meals, and entertainment require records of amount, date, location, business purpose, and business relationship of people involved.
  • Vehicle expenses need a mileage log with dates, destinations, purpose, and odometer readings.
  • Home office deductions require documentation of the square footage used exclusively for business.
• Consider timing large purchases strategically. If you're planning to purchase business equipment, buying before year-end could provide deductions in the current tax year. Section 179 of the tax code allows businesses to deduct the full purchase price of qualifying equipment instead of depreciating it over several years, up to certain limits.
• Be careful about claiming deductions that might raise red flags with the IRS, such as claiming 100% business use of a vehicle when you also use it personally, or writing off personal vacations as “business trips” without substantial business activities. The tax savings from stretching the truth rarely outweigh the cost and stress of an audit. When in doubt, ask a tax pro. 

Do you need an accountant or tax software?

Not sure whether to DIY your taxes or call in the pros? The right choice depends on your business complexity and comfort level with tax matters. Here's a quick guide to help you decide.

Use DIY tax software if:

• Your finances are straightforward – You run a simple service business with clear income and expenses.
• You operate in just one state – No need to deal with multiple state tax rules or allocating income across states.
• You're comfortable with basic accounting – You know how to categorize expenses and understand basic tax concepts.
• You have time to learn – You can keep up with changing tax rules that might affect your business.
• You don't have inventory or employees – Your business structure is simple without the complexity of inventory tracking or payroll taxes.

Hire an accountant if:

• Your business is complex – You operate in multiple states or have complicated finances.
• You've had major business changes – You bought or sold assets, added partners, or restructured your business.
• You want strategic tax planning – You need help minimizing taxes beyond just filing correctly.
• You're worried about audits – Your industry has high audit rates or you have unusual deductions.
• Your time is better spent elsewhere – The hours you'd spend on taxes would cost your business more than professional fees.
• You want peace of mind – Knowing a pro has your back helps you sleep at night.

Take on small business taxes with confidence

Whether you decide to handle taxes on your own or hire an accountant, the key is to stay informed and take the necessary steps to reduce paperwork (and costs!) before the end of the tax year.

Here's how Homebase can help you save on taxes and make the process more efficient:

• Homebase automatically calculates hours, breaks, overtime, PTO, and wages so you don't have to.
• Homebase handles tax calculations, sends direct deposits, and files payroll taxes.
• Homebase automatically submits new hire reporting and files and distributes W-2s and 1099s each year.

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FAQs about small business taxes

How much does a small business have to make to file taxes?

You need to file a tax return no matter how much (or little) your business makes. Even if you operate at a loss, filing is mandatory and actually helps you. 

Those losses can offset future profits, potentially reducing your tax bill when you start making money. For sole proprietors, you must file if your net earnings were $400 or more.

How do I pay taxes if I own a small business?

Small business taxes happen in two stages: quarterly payments throughout the year and an annual return.

First, make quarterly estimated tax payments using Form 1040-ES (due April 15, June 15, September 15, and January 15). Then at tax time, file your annual return based on your business structure. 

You can pay electronically through EFTPS, direct bank payment, credit card, or check—though electronic methods are faster and create better records.

How do I file taxes if I just started a business?

New businesses need to take a few key steps for tax compliance:

1. Choose and register your business structure (sole proprietorship, LLC, etc.).
2. Get your tax IDs:
   
   • Employer Identification Number (EIN) from the IRS
   • State tax accounts
   • Local business licenses

Set up proper bookkeeping from day one with separate business accounts and a system to track expenses. Start making quarterly estimated tax payments once you're generating income. 

For your first year, you might want to consult a tax pro to get those estimates right.

How much should a small business put away for taxes?

A good rule of thumb is to set aside 30-40% of your profit for taxes. This should cover federal income tax, self-employment tax (15.3% for Social Security and Medicare), and state taxes.

Your actual rate depends on your tax bracket, business structure, location, and available deductions. Many new business owners get surprised by self-employment tax, so don't underestimate it. 

Consider transferring tax money to a separate savings account when you get paid so you don't accidentally spend it.

When are small business taxes due?

Understanding what business taxes are includes knowing when they're due. Mark these key dates on your calendar:

Quarterly estimated taxes

• Q1: April 15
• Q2: June 15
• Q3: September 15
• Q4: January 15 (following year)

Annual returns

• Partnerships/S-corps: March 15
• Sole proprietorships/C-corps: April 15

If you have employees, don't forget payroll tax deadlines and W-2/1099 forms (January 31). Missing deadlines means penalties, so set reminders!

What happens if I don’t pay estimated taxes?

Skip your quarterly tax payments and you'll face penalties—even if you pay everything at filing time. When learning how business taxes work, remember that the IRS wants their money throughout the year, not just at the end.

You can avoid penalties if you owe less than $1,000 in tax or if you've paid at least 90% of your current year tax (or 100% of last year's tax). 

Beyond the financial hit, routinely missing estimated payments can increase your audit risk and create cash flow problems when you eventually have to catch up.

Can I file my business taxes online?

Absolutely, and you should! E-filing is available for all business tax returns and beats paper filing in every way. It's faster (processing in hours instead of weeks), more accurate (built-in error checking), more secure, and gets any refunds to you quicker.

You can e-file through commercial tax software, a tax professional, or IRS Free File if you qualify. Most states also support electronic filing that integrates with your federal return.

Are business meals deductible?

Yes, most business meals are 50% deductible. For a meal to qualify, it can't be lavish, you must be present, and it must involve a business contact. Keep records showing the amount, date, location, business purpose, and attendees.

Only specific situations qualify for 100% deduction (like employee recreational events or meals on oil rigs). The restaurant meals 100% deduction for 2021-2022 has expired. 

Entertainment expenses remain non-deductible, though food purchased separately might qualify for the 50% deduction.