Resources | Tax Guide
Small Business Tax Guide for 2026
Small business tax preparation in 2026 covers entity choice, payroll, the QBI deduction, depreciation, BOI compliance, and quarterly estimates. This 15 section guide walks through what each piece means for an owner with revenue from 50 thousand to a few million, written for the operator who wants to know enough to make decisions, not become a tax professional.
What kind of small business should I form?
Most small businesses in 2026 are either sole proprietorships, single member LLCs, multi member LLCs taxed as partnerships, or S corporations. Each has different tax consequences. Sole proprietorships and single member LLCs file Schedule C and pay self employment tax (15.3 percent) on net profit. Multi member LLCs default to partnership taxation, file Form 1065, and issue K-1s. S corporations file Form 1120-S, also issue K-1s, but split owner income between W-2 wages (subject to payroll tax) and distributions (not subject to self employment tax).
The choice depends on profit level, partner structure, and growth plans. A profitable solo business making more than 50 thousand in net earnings often benefits from electing S corporation status to reduce self employment tax. Below that level, the cost and complexity of running an S corp (separate payroll, 1120-S filing, reasonable salary requirement) usually outweigh the savings.
C corporations exist but are uncommon for small operating businesses because of double taxation. They make sense in specific situations: planning for venture capital, large retained earnings, or fringe benefit optimization.
How does the Qualified Business Income (QBI) deduction work?
Section 199A allows a deduction of up to 20 percent of qualified business income for individuals, trusts, and estates with pass through income (sole proprietorships, partnerships, S corporations, and some rental real estate). The deduction reduces taxable income, not adjusted gross income.
The deduction phases out for Specified Service Trades or Businesses (SSTBs) above income thresholds. SSTBs include health, law, accounting, consulting, financial services, athletics, and performing arts. Non SSTB businesses face only a wage and qualified property limitation above the same thresholds.
The QBI deduction is scheduled to sunset after the 2025 tax year unless Congress extends it. As of mid 2026, that extension status is unresolved; plan accordingly with year end strategy.
What can I deduct as a business expense?
Section 162 allows deduction of all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. Ordinary means common in the field; necessary means helpful and appropriate. Some expenses (entertainment) are non deductible regardless of business connection.
Common deductible categories: rent, utilities, supplies, software subscriptions, professional services, insurance, advertising, employee wages, contractor payments (1099-NEC over 600), travel, 50 percent of meals, vehicle expenses (mileage or actual), home office (Form 8829 or simplified), depreciation on property over one year, retirement plan contributions, health insurance for self employed, and Section 179 immediate expensing of qualifying property.
Substantiation matters. Keep receipts for purchases over 75 dollars, mileage logs with date and business purpose, and bank/credit card statements showing the transactions. The IRS audit standard for business expenses is 'who, what, when, where, why' and the burden is on the taxpayer.
Do I need to make quarterly estimated tax payments?
Yes if you expect to owe at least 1000 dollars in tax beyond what is withheld. Self employed individuals pay both income tax and self employment tax through quarterly estimates. The deadlines are April 15, June 15, September 15, and January 15 of the following year (the year you file the return).
The safe harbor to avoid an underpayment penalty: pay through withholding and estimates either 90 percent of the current year's total tax, or 100 percent of the prior year's total tax (110 percent if your prior year AGI was over 150 thousand). The lower of these is your minimum.
Most clients use IRS Direct Pay or EFTPS for quarterly payments. Form 1040-ES vouchers are still accepted by mail. Underpayment in any quarter triggers a Form 2210 penalty even if you make up the shortfall by year end.
Should I elect S corporation status for my LLC?
Maybe, depending on profit level and time commitment. The S corp election (Form 2553) lets you split income between W-2 wages (subject to payroll tax) and distributions (not). On the wage portion you pay 15.3 percent payroll tax; on the distribution portion you save it. So if 60 thousand of your 100 thousand profit becomes W-2 wages and 40 thousand becomes distribution, you save 15.3 percent on the 40 thousand, or roughly 6,120 dollars per year.
The catch is reasonable compensation. The IRS requires you to pay yourself a salary that reflects what comparable workers would earn for similar work. Underpaying salary to maximize distribution is the most common S corp audit issue. Plan for at least the lower bound of what your role would pay in the market.
Also account for the cost: separate quarterly 941 payroll filings, annual W-3 transmittal, 1120-S return, K-1, separate state requirements, payroll software or service. These typically add 1,500 to 3,000 dollars in fees, plus your time. The break even on S corp benefit is usually 50 to 70 thousand of net profit.
How does payroll tax work for small businesses?
Payroll tax has two components paid on every employee's wages. Social Security: 6.2 percent each side (employer + employee), capped at the wage base (176,100 in 2026 estimate). Medicare: 1.45 percent each side, no cap, plus an additional 0.9 percent employee only on wages above 200 thousand single or 250 thousand MFJ.
The employer remits both the employee's withholding and the employer share via Form 941 quarterly (April 30, July 31, October 31, January 31). Annual reconciliation on Form 940 (FUTA) and W-2/W-3 wage reporting (January 31). State unemployment and state withholding add to the federal obligations.
Failure to remit payroll taxes properly triggers the Trust Fund Recovery Penalty, which is personally assessable against responsible persons (officers, owners, even bookkeepers in some cases) at 100 percent of the unpaid trust fund portion.
What is the BOI report and do I need to file it?
BOI stands for Beneficial Ownership Information, a FinCEN filing required by the Corporate Transparency Act of 2021. Most US business entities must report individuals who own 25 percent or more of the entity or exercise substantial control over it. Each beneficial owner provides name, date of birth, address, and a copy of an acceptable identification document.
Existing entities formed before January 1, 2024 had a 2024 deadline. New entities formed in 2024 had 90 days; entities formed in 2025 and beyond have 30 days. Updates to ownership or beneficial owner information are required within 30 days.
Penalties are significant: up to 591 dollars per day in 2026 (inflation adjusted) plus criminal penalties for willful violations. 23 categories of exemption exist, mostly for entities already federally regulated (banks, insurance companies, public companies, large operating companies with 20+ employees and 5 million in receipts). Court rulings have created uncertainty; check current enforcement status before filing.
What records do I need to keep?
Keep all bank and credit card statements for the business account. Keep receipts for purchases over 75 dollars, all real estate transactions, all auto expense documentation, and any documents supporting deductions or basis.
Retention rules: 3 years for most documents (matches the IRS audit statute of limitations), 6 years if income could have been understated by more than 25 percent, indefinitely for property records (basis, depreciation), and 7 years for write off documentation. Estate records should be kept indefinitely.
Digital records (PDF or photo) are acceptable. The IRS does not require paper. Maintain backups separate from the originating device. A document portal or cloud storage with consistent naming saves enormous time during preparation and audit response.
How do I track mileage for the business deduction?
Two methods: standard mileage rate or actual expenses. The standard rate is set annually (70 cents per mile in 2026 estimate, indexed). Actual expenses include gas, oil, repairs, insurance, depreciation or lease payments, registration, prorated by business use percentage.
You must choose a method in the first year a vehicle is placed in service. If you choose standard mileage in year one, you can switch later but with restrictions. If you choose actual expenses in year one, you cannot switch back to standard.
For either method, log business trips with date, destination, business purpose, and miles driven. A trip to a client and back is one round trip. Commuting to a regular work location is not deductible. A real time log (app or paper) is far stronger evidence than reconstructed mileage during preparation.
How does the home office deduction work?
Available if you use part of your home regularly and exclusively for your business and that space is your principal place of business or where you meet clients. The exclusive use rule is strict: a desk in the corner of your living room rarely qualifies; a dedicated office room does.
Two methods: Simplified (5 dollars per square foot, up to 300 square feet, no depreciation, no reduction in home sale exclusion) or Actual (Form 8829, prorate utilities, insurance, mortgage interest or rent, repairs, depreciation by business use percentage of square footage). The Actual method usually generates a larger deduction but requires more record keeping and creates depreciation recapture on home sale.
The home office deduction is no longer available to W-2 employees as a result of TCJA's elimination of unreimbursed employee expense deductions through 2025.
What retirement plans should small businesses consider?
Solo or one owner businesses have several options. The Solo 401(k) allows employee deferral (23,500 in 2026 estimate, plus 7,500 catch up at 50+) plus employer profit sharing (25 percent of compensation), capped at 70,000 total. SEP IRA is simpler to administer but only allows employer contribution (25 percent of compensation, capped at 70,000). SIMPLE IRA has lower limits but mandatory 3 percent match makes it easy for businesses with employees.
For businesses with employees, options include Safe Harbor 401(k), Profit Sharing 401(k), and SIMPLE IRA. Each has different employer contribution requirements and administrative burden.
Roth versions of Solo 401(k) and 401(k) are now available, allowing after tax contributions to grow tax free. This is increasingly attractive for owners under 50 with long time horizons.
How does sales tax work?
Sales tax is a state level tax (no federal sales tax). The South Dakota v. Wayfair decision (2018) gave states the right to require sales tax collection from out of state sellers based on economic nexus, typically 100 thousand in sales or 200 transactions in the state per year.
If you sell physical goods or taxable services, register for a sales tax permit in any state where you have nexus. Collect tax at the customer's destination rate (destination based) for most states, with origin based exceptions. Remit on a state defined schedule (monthly for high volume, quarterly or annually for lower).
Software services, downloadable products, and SaaS taxation varies wildly by state. Arkansas taxes some software; Texas taxes some SaaS; California taxes none of it for most B2B. Get state specific advice before assuming.
How do I separate business and personal finances?
Open a separate business bank account and credit card immediately when you start the business. Run all income and expenses through them. Pay yourself by transfer to your personal account; do not buy personal items from the business account.
This separation is critical for liability protection (LLC and S corp veil), audit defense (clean records), and your own clarity (knowing what the business actually earns). Commingling is the single most common mistake new business owners make and it makes everything harder later.
If you accidentally use the business card for a personal expense, record the transaction as Owner Draw (sole prop or LLC) or Distribution (S corp or partnership), not as a business expense. Reimburse the business if possible. The IRS finds commingled records suspicious in audits.
When should I hire an accountant or year round preparer?
Different from a one shot tax preparer, a year round preparer is available throughout the year for questions, planning, and notice handling. Most small business owners benefit from this once they have any of the following: an S corp election, multi state operations, employees, complex inventory, real estate holdings, or revenue above 150 thousand.
Year round support changes the value proposition from filing the return correctly (table stakes) to making decisions throughout the year that reduce next year's tax bill. Estimated tax accuracy, retirement contribution timing, S corp salary right sizing, asset purchase timing, hiring vs contractor decisions all benefit from professional input ahead of year end.
At Handled, the Foundation membership starts at 49 dollars per month and includes year round access. Planning at 125 covers more involved planning. Full Picture at 225 includes ongoing financial review. Financial Partnerships are monthly retainer for business owners who need more depth.
Where can I learn more or get help?
For tax preparation and year round advisory in all 50 states, contact Amanda Emerdinger at Handled Tax & Advisory directly via the contact page. For specific topics: see the multi state tax guide for cross state filing, the retirement tax guide for retirement contribution and conversion strategy, and the audit defense guide for IRS notice and audit response.
Free authoritative sources: IRS Publication 17 (individual tax overview), Publication 535 (business expenses), Publication 463 (travel, entertainment, gift, car), Publication 583 (starting a business), and the instructions for Schedule C, Schedule E, Form 1120-S, and Form 1065.
For state specific rules, your state's Department of Revenue website. For BOI, FinCEN.gov. For payroll tax, IRS.gov/payroll-tax-faqs. None of these substitute for a tax professional who knows your specific facts.
Need help applying this to your situation?
This guide explains the rules. Applying them to your facts is what year round advisory is for. Book a call with Amanda.