Tax Tips for Small Business Owners

You’ve opened your doors, your website. Or both. Now what?

Whether it’s a small side hustle or your more-than-full-time passion project, going into business for yourself is a thrilling yet scary proposition. Supply chain, sales, accounts receivable, accounts payable. With everything you need to keep track of, taxes^* can land toward the bottom of your to-do list.

But even a one-person shop needs a smart tax strategy. It starts with determining what kind of ownership structure you want. If it’s just you running the show, you could be a sole proprietor or independent contractor, a limited liability company (LLC), or an S corporation.

In the US, approximately 73% of businesses are registered as sole proprietorships.¹ It is quick and easy to establish, and you can open and close your business at will. Unlike an LLC, S corporation, or partnership, you don’t actually have to register anywhere to form a sole proprietorship. If you don’t, the IRS will automatically treat you as one.

As a sole proprietor, the IRS makes no legal distinction between you the person and you the business. You’re the boss who makes all the business decisions. You’re entitled to all the profits. You’re also responsible for all debts, losses, and liabilities. Regardless of which of these structures you choose, your business earnings are considered part of your personal income and are reported as part of your annual income tax.

Is it déjà vu, or is it tax time again?

It’s often said that in life, only two things are certain: death and taxes. Unfortunately, taxes come around every single year. Even worse, independent business owners need to pay taxes four times a year.  On the bright side, a little learning and preparation up front can prepare you for regular payments and fewer nasty surprises.

Every U.S. worker is required to pay employment taxes on their income. When you work for someone else, your employer (or their payroll provider) deducts your estimated tax from each paycheck and sends it to the Internal Revenue Service. When you’re self-employed, it’s all on you.

While you’re not required to submit tax payments every time your business makes money, the IRS does ask that you pay self-employment taxes on your income every quarter. 

Even if your business provides only a small fraction of your annual income, you must pay self-employment taxes if you earn a profit of $400 or more. The self-employment tax rate of 15.3% is made up of 12.4% for Social Security and 2.9% for Medicare. That’s in addition to the income tax you pay on your profits.

The good news is that, as a sole proprietor, you can deduct 50% of the self-employment tax you do pay. You don’t need to file separately, you can combine your business income with any other income you make during the year and submit everything on your personal income tax return.

Here’s where it gets tricky:

You must pay estimated taxes to the IRS every quarter if you expect to owe more than $1,000 in taxes for the year.

How do you know how much you might owe?

Start by estimating your annual gross income. That’s how much you expect your business to make from all sources of income before taking any deductions or tax credits. Let’s use Laurie’s Landscapes as an example. Laurie expects to bring in $100,000 this year. She multiplies that by 92.35% to determine her self-employment taxable income and multiplies that by 15.3% to determine her self-employment tax.

She calculates her adjusted gross income (the amount she owes taxes on) for the year by taking her $100,000 gross income and subtracting her above-the-line deductions, like health savings account contributions and health insurance premiums. They come to $3,600 for the year. Then, she calculates her business expenses. Potting soil. Promotional flyers. Tulip bulbs. Gas and maintenance for her truck. For Laurie, it adds up to $20,000 for the year. She subtracts those two from the first to determine her adjusted gross income.

Now, Laurie needs to decide if she wants to claim the standard deduction for single filers ($15,750 for the 2025 tax year, $16,100 for 2026) or itemize her personal deductions, which can include things like charitable donations, student loan or mortgage interest, and personal property taxes. Laurie decides, like most filers, that the standard deduction is higher. So, she deducts it and her self-employment tax from her adjusted gross income. This, finally, reveals her taxable income.

Laurie has two more steps to determine her estimated quarterly tax. She finds the IRS Tax Rate Schedule online or in her printed forms and sees that $53,585 in taxable income puts her in the 22% tax bracket for single filers for 2025. She should owe about $11,800 in taxes for the year. She divides that by 4 to get her estimated quarterly tax. 

By these calculations, Laurie should be paying the IRS $2,947 every quarter. To make sure she pays on time, she creates an account on the free IRS Direct Pay website, selects “Direct Pay”, and submits her payments from a checking or savings account. She uses her Vantage Credit Union Rewards Checking account to set up automatic payments, so she doesn’t have to worry about penalties or late fees.

Claiming your expenses

It costs money to make money. Claiming business expenses on your annual income tax is where you can get at least some of that money back. Those expenses must be considered “ordinary” and “necessary” in your type of business to be deductible. You claim your business expenses using the Schedule C form. Some common items include:

• Advertising
• Vehicles, fuel, and maintenance
• Insurance
• Legal and professional services
• Rent/mortgage and utilities on office space
• Office supplies
• Phone service and website hosting
• Repairs and maintenance
• Tools
• Travel

Tips for the smart sole proprietor

Save time, money, hassles, and headaches with these simple tax tips.

1. Set aside 25–30% of your income. Like Laurie, our fictitious landscaper, calculating your estimated annual and quarterly taxes is essential for making sure you’re sending the IRS a suitable amount each quarter. Saving 25–30% of your income as you earn it is how to ensure you have the money to pay your taxes. A Vantage Business Savings account is a great place to earn interest on that money before you share it with the IRS.
2. Set aside money from every payment you receive. In the day-to-day rush of running a business and managing a life, this can be tough. But it will go a long way towards helping you achieve Tip 1. If business tends to fluctuate throughout the year, at least be sure to set aside more money during higher-earning quarters.
3. Set up an SEP-IRA or Solo 401(k). Without an employer doing it for you, saving for the future is all on you, Boss. A Simplified Employee Pension (SEP-IRA) or Solo 401(k) will help you prepare for life after business while lowering your taxable income right now.
4. Track, track, track your spending and income. Save those receipts, invoices, and payment confirmations. From coffee with a client to your Chamber of Commerce membership to the lease on that new delivery van—track all your expenses all year round. Not only will it help ensure you get every deduction you’re entitled to, it can save your sanity should the IRS ever start questioning your returns.
5. Use accounting software or online services. Programs like QuickBooks Solopreneur, Wave, and FreshBooks were developed specifically for self-employed business owners like you. They can greatly simplify management of your business finances, from invoicing and estimating to time and expense tracking and tax prep.
6. Hire a CPA for your first year. Let an expert set you up for success from the start. A Certified Public Accountant will work with you to create systems specifically for your business and way of working. They can help you calculate your estimated income and taxes and set up accounts to ensure that your taxes are paid on time.

The cost of non-compliance

If you underpay, fail to pay, or are late to pay your quarterly taxes, you could be charged penalties in addition to the tax you already owe. Although the number can change quarterly, the IRS charges approximately 8% annual interest on late taxes. So, it’s well worth the effort to get those payments in by the quarterly deadline.

All of this may seem like a lot of effort and risk to take on just for the satisfaction of being your own boss. Even so, in a 2025 survey of small business owners, 76% said they are “much” or “somewhat” happier working for themselves.² 

Your business advantage

If you’re an independent business owner, dream of becoming one, or do gig work on the side, you will need to pay taxes. And setting up a system to manage tax payments can make things a whole lot easier for you. Vantage Credit Union is proud to offer a suite of services for all your business and personal banking needs—from Business Rewards Checking with cyber liability protection and tax filing assistance to Vantage Rewards+ Checking that can get you up to 30% cash back on purchases from your favorite retailers. 

Let Vantage help you set up the right accounts for managing your business taxes.

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* This article is not a substitute for expert tax advice. Please consult your financial planning professional for guidance.

¹ The Independent Contractor’s Guide to Taxes.

² Case, Tony. WorkLife.com, June 3, 2025. Small business owners find happiness in freedom and passion, not just profits.