Small Business Taxes: What You Actually Owe and When

Why owners get blindsided

When you had a job, tax came out of every paycheck and you forgot about it. As an owner, no one does that for you. The money lands in your account looking like yours. You spend it. Then April arrives with a bill for income tax and a 15.3 percent self-employment tax you never set aside, plus a penalty for not paying quarterly. The first year is when it hurts most, because you did not know the bill was coming.

What changed when you became the employer

You now wear both hats: the worker and the employer. The 15.3 percent self-employment tax is roughly what you and a past employer used to split. You pay the whole thing now. I found this out the expensive way. Year one, I treated every deposit as take-home. April hit and the number was more than I had left. I paid a penalty I did not see coming and spent nights digging through statements. I start my Bachelor's in Accounting this September, but you should not need a degree to avoid that. You need a system.

The tax system, step by step

1. 1

   Know the two taxes you owe.

   Income tax on your profit, and self-employment tax of 15.3 percent on top. Both come from the same profit number. Most owners land near 25 to 30 percent combined once you add state tax. Check current figures on IRS.gov.

2. 2

   Pay quarterly, not yearly.

   Due dates are April 15, June 15, September 15, and January 15. If you expect to owe one thousand dollars or more, the IRS expects quarterly payments. Skipping them triggers an underpayment penalty.

3. 3

   Set aside tax money on receipt.

   The day a payment lands, move 25 to 30 percent to a savings account you do not touch. This is the single habit that prevents a spring surprise. The account is your withholding.

4. 4

   Track deductible expenses all year.

   Real deductions lower your profit, which lowers both taxes. Keep receipts as you go. Waiting until April means guessing and losing write-offs. See the bookkeeping guide for the system.

5. 5

   Know the deductions that are real.

   Ordinary and necessary business costs: software, a home office you actually use, business mileage, bank fees, professional services, part of your phone and internet. The test is simple: would the business have spent this if you did not own it?

6. 6

   Collect W-9s before you pay contractors.

   If you pay a contractor six hundred dollars or more, you may need to file a 1099-NEC. Get their W-9 first so filing in January is painless. The form is covered in the related guides.

7. 7

   Reconcile and file on time.

   Match your books to your bank, total your profit, and file by the deadline. If you cannot pay in full, file anyway. The penalty for late filing is heavier than the penalty for late payment.

8. 8

   Keep proof for three years.

   Bank statements, receipts, invoices, mileage logs. If a deduction is questioned, the receipt is your answer. Digital copies are fine.

Checklist

Tools that help

• A separate tax savings account

  Move 25 to 30 percent of every payment here. It is your personal withholding system.

• The Ledgely Tax Estimate tool

  Roughs out what you may owe so quarterly payments are not guesses.

• IRS.gov and your state revenue site

  The only places to confirm current rates, thresholds, and dates. Everything else is an estimate.

• A mileage log

  App or notebook. Business miles are a real deduction and easy to lose without a record.

Summary

• •You pay income tax plus 15.3 percent self-employment tax on your profit.
• •No one withholds for you. Pay four times a year.
• •Move 25 to 30 percent of every payment to a tax account on receipt.
• •Real deductions lower your profit, so track them all year.
• •File on time even if you cannot pay in full. Late filing costs more.

Frequently asked questions