Small business taxes, decoded
The jump from freelancer to business owner adds a layer: entity choice. Get that right and the rest of your tax life gets simpler. Here's how the common structures actually tax.
LLC vs S-Corp at a glance
| Question | LLC (default) | S-Corp election |
|---|---|---|
| How profit is taxed | Passes through to your personal return | Also passes through, but split into salary + distribution |
| Self-employment tax | On all net profit | Only on the salary portion |
| Payroll required? | No | Yes — you must run reasonable W-2 payroll for yourself |
| Paperwork | Light | Heavier — payroll filings, a separate return |
| Worth it around | Any income level | Often once profit clears roughly $40–60k |
An S-Corp is a tax election, not a separate company type — an LLC can elect to be taxed as one. Run the numbers (or have an accountant do it) before flipping the switch.
You trade payroll paperwork and an accountant's fee for a cut in self-employment tax on the distribution portion. Below a certain profit, the fees eat the savings. Above it, the math tilts the other way.
Deadlines that differ from yours
Business returns run on their own clock. S-Corps and partnerships file by March 15 — a full month before personal returns. C-corps generally follow the April date. Miss the business deadline and the per-partner, per-month penalty adds up fast, so calendar it separately from your 1040.
Deductions that move the needle
- Section 179 — expense qualifying equipment in the year you buy it instead of depreciating it slowly.
- Qualified Business Income — the same up-to-20% deduction freelancers get, with phase-outs at higher income.
- Retirement plans — a solo 401(k) or SEP shelters meaningful sums and lowers taxable profit.
- Startup costs — a chunk of what you spent getting off the ground is deductible in year one.
- The boring stuff — software, contractors, a business bank account that keeps personal and company money apart.
Bookkeeping is the real tax strategy
Most owners overpay not because they missed a clever loophole, but because their records were a mess and they couldn't prove an expense. Clean books, a separate account, and receipts kept through the year do more for your bill than any single deduction.