Taxes are the thing most new business owners dread but few truly understand. The confusion isn't helped by the fact that the US tax system for small businesses involves multiple overlapping taxes, forms, and deadlines that can feel deliberately obscure. But here's the truth: once you understand the basics, small business taxes are manageable. The anxiety comes from uncertainty, and certainty is achievable with a little knowledge.
The foundational concept: how your business is taxed depends on its legal structure. A sole proprietorship and an S-Corp get taxed very differently, even if they earn identical revenue. This is why choosing a business structure affects your taxes — not just your legal liability.
The Three Taxes That Affect Most Small Businesses
Income tax: Your business's share of its profits goes on your personal tax return. As a sole proprietor, this is straightforward — the profit from your Schedule C gets added to your other income. As an LLC taxed as S-Corp, you pay yourself a reasonable salary and then take distributions, which have different tax treatment. The specifics matter enormously, which is why you want a CPA, not just tax software.
Self-employment tax: This is Social Security and Medicare tax for people who work for themselves. If you're an employee, you and your employer each pay half. When you're self-employed, you pay both halves — 15.3% on net earnings up to the Social Security cap, and 2.9% on all earnings above that. This is a significant expense that surprises many new entrepreneurs.
Sales tax: If you're selling physical products or certain services, you may need to collect sales tax from customers and remit it to your state. The rules vary dramatically by state and by product/service type. If you're selling digital products, the rules have changed significantly in recent years. Know your obligations.