Being your own business comes with perks like flexibility, independence and personal control—benefits that inspire many entrepreneurs to carve their own paths. But self-employment also brings new challenges, especially when it comes to taxes.
Unlike traditional employees, entrepreneurs shoulder full responsibility for their tax obligations, which can feel overwhelming at first. However, understanding how taxes work for small business owners and knowing which deductions apply can significantly ease this responsibility.
Tax deductions reduce your taxable income, allowing you to save money legally. By identifying expenses tied to your business operations, you can take control of your finances and optimize cash flow.
The self-employment tax is a federal tax covering Social Security and Medicare obligations. While traditional employees split these costs with their employers, self-employed individuals pay the full 15.3% rate, which includes:
Business taxes are broken into two categories:
Some businesses, typically corporations, face double taxation. This means a business pays income taxes on its profits, and the owners pay personal taxes on dividends or profit distributions.
If you earn $400 or more in net self-employment income, you’re required to file and pay this tax. While the rate may seem steep, there’s a silver lining: you can deduct 50% of your self-employment tax from your taxable income, reducing your overall tax burden.
Your business's legal structure directly affects your tax liability, filing requirements, and deduction opportunities. Choosing the right structure is critical to aligning with your financial goals and tax strategies. Here’s a quick breakdown:
This is the simplest structure, where you and your business are treated as a single entity. You report business income and expenses on your personal tax return, but you’re responsible for self-employment tax on all profits.
LLCs offer flexibility. By default single-member LLCs are taxed like sole proprietorship, while multi-member LLCs are treated like partnerships. LLCs can also elect corporation taxation for additional options.
Partnerships pass income, deductions and tax obligations to individual partners. Each partner pays self-employment tax on their share of the profits. Partnerships must file an informational tax return and issue Form K-1 to all partners. This process can get complicated for entrepreneurs, so consulting a CPA or tax advisor is recommended.
An S corporation allows you to pay yourself a “reasonable salary,” which is subject to payroll taxes. Distributions, however, are not, offering significant tax savings for higher-income businesses.
Strategic use of tax deductions can significantly reduce your taxable income. Here are eight key deductions entrepreneurs should consider:
If you regularly use part of your home exclusively for business use, you may deduct a portion of home office expenses, such as rent, utilities, insurance and even property maintenance costs. The deduction is based on the square footage of your office space relative to your home and is available whether you rent or own.
You can calculate this deduction in two ways:+
If you’re self-employed and are not eligible for a spouse’s employer-sponsored health plan, you can deduct premiums paid for your health, dental and qualified long-term care (LTC) insurance. This deduction also applies to premiums paid for your spouse, dependents and children under age 27—even if not claimed as dependents.
This is an “above-the-line” deduction, meaning you don’t need to itemize to claim it. It directly reduces your adjusted gross income, providing additional savings.
Use your vehicle for business expenses? You can deduct either business travel-related mileage or actual car expenses such as fuel, maintenance and repairs. Keep detailed records to meet IRS guidelines. Choose one of these calculation methods:
Launching a new venture comes with costs, and the IRS allows entrepreneurs and sole proprietors to deduct up to $5,000 in start-up costs in their first year. Eligible expenses include business registrations, permits, market research, travel to start a business and advertising fees. Expenses beyond that are treated as capital expenses, which you can amortize over 15 years.
Pro Tip: If you establish a corporation, you may also deduct up to $5,000 in “organizational costs” such as fees for temporary directors, state incorporation and legal services.
Contributing to a qualified retirement plan provides valuable tax write-offs for self-employed entrepreneurs, helping you prepare for the future while reducing current taxable income. Eligible plans include SEP IRAs, Solo 401(k)s and SIMPLE IRAs, each with specific annual contribution limits:
As noted earlier, self-employed people pay the entire 15.3% self-employment tax. The good news is, you can deduct half of this amount from your taxable income—an automatic benefit for eligible small business owners.
Calculate and report this deduction on Schedule SE, then claim it on Schedule 1 of Form 1040. This deduction lowers your adjusted gross income and helps offset your Social Security and Medicare payments.
Investing in professional development not only enhances your skills but also can reduce your tax bill. You can deduct the cost of attending conferences, workshops or courses directly related to your business.
To qualify the education must:
Qualified deductions include:
You may also deduct any ordinary and necessary expenses for education costs incurred for your employees.
The QBI deduction, also known as Section 199A, allows owners of eligible pass-through businesses to deduct up to 20% of their qualified business income, gains, deductions and losses. It applies whether or not you itemize deductions and can mean substantial savings—though certain income limits and qualifications apply:
For 2025, you’ll receive the full 20% deduction if your taxable income is:
The deduction phases out at:
The QBI deduction is one of the most powerful tools for lowering taxes on self-employment income, as long as you stay within these thresholds.
Maximizing these deductions requires meticulous recordkeeping. Be sure to save receipts, invoices and statements to support your claims if audited by the IRS.
Navigating taxes as a self-employed individual can feel complicated, but it doesn’t have to be. By understanding your business structure and leveraging smart deductions, you can reduce your tax burden and boost your bottom line.
At LTax, we specialize in proactive tax planning for entrepreneurs. Let us help you build a tax strategy tailored to your unique needs. Call us at 561.453.1441 to schedule your consultation today!
The Treasury Department will allow exceptions for specific cases. Waivers may be granted for:
To apply for a waiver, call the Treasury Electronic Payment Solution Waiver Line at 1-855-290-1545 or complete FMS Form 1201W. Waivers are reviewed individually and are not automatically approved.
Unfortunately, major transitions like this one can create opportunities for fraud. Be cautious and watch for red flags, such as:
Remember, federal agencies will never contact you unexpectedly for personal or financial information. Only update your information through official government websites or verified phone numbers. If you’re unsure, contact the agency directly.
The end of IRS paper checks is part of a broader shift to digital payments across federal agencies. While many taxpayers won’t notice a change, those previously depended on paper checks should act immediately to avoid interruptions.
If you have questions about how this transition may affect you or a loved one, contact an LTax Team Member. We are here to help you review your options and make the switch smoothly.
LEGAL OR TAX: The information herein is not legal, such as trust or estate planning, advice, or tax advice. Any such information is provided for illustrative purposes only and must not be relied upon without the benefit of the advice of your lawyer and/or tax professional. Lido specifically disclaims any liability from any reliance on such information. Lido is not a legal service provider or tax professional and does not offer legal or tax advice. Should you desire to obtain tax or legal services or advice, you must enter into your own, independent engagement agreement with a licensed attorney or tax professional.