From choosing a structure to running payroll and keeping clean books — if you own a business, these are the questions that actually matter. Broken into three parts: structure, bookkeeping, and workers.
What is the difference between a sole proprietor, an LLC, and an S-corp?
A sole proprietorship is just you doing business under your own name — the simplest option, with no legal separation between you and the business. An LLC gives you a legal wall between you and the business, protecting your personal assets. An S-corp is a tax election that can save you money on self-employment taxes once you’re profitable enough to justify the extra setup and paperwork. The right choice depends on your income level and goals.
Do I need an accountant if I have a small business?
Not legally — but most business owners benefit from having one. The cost of errors, missed deductions, and late filings almost always outweighs the cost of good accounting. The question is usually when you need one, not whether.
If you’re a sole proprietor or partnership, you take money out as owner draws — it’s not a paycheck, and it doesn’t change your taxes. If you’re an S-corp or corporation, you must pay yourself an actual salary through payroll. Getting this wrong for your structure creates tax errors and, for S-corps, a significant audit risk.
What is a “reasonable salary” for an S-corp owner, and why does it matter?
If you own an S-corp and work in the business, the IRS requires you to pay yourself a real wage that’s in line with what that role would pay in the real world. Setting your salary artificially low to avoid payroll tax is one of the most common and most scrutinized S-corp mistakes. It needs to be defensible and documented.
When does switching to an S-corp actually save me money?
The savings come from the part of your profit you take as a distribution — that money avoids the 15.3% self-employment tax that a sole proprietor pays on everything. But running an S-corp costs money too: payroll setup, a separate tax return, and more accounting. Below a certain profit level, the S-corp costs more than it saves. Finding your break-even point is the whole decision.
I missed the deadline to elect S-corp status. Is it too late?
Often no. The IRS allows late elections with reasonable-cause relief under certain conditions. It’s a procedural step that needs to be done correctly — a sloppy filing gets rejected — but it’s very often available. Worth looking into before writing off the current year.
I’m starting a business with partners. How does that get taxed?
A partnership files its own informational return and then issues each partner a Schedule K-1 showing their share of income. Each partner pays tax on their share — even if no cash was actually paid out that year. That “phantom income” situation surprises a lot of new business partners.
When do I need to get an EIN (Employer Identification Number)?
You need one if you have employees, run payroll, operate as a corporation or partnership, or want to open a business bank account without using your Social Security number. Even single-owner businesses often get one. It’s free, quick, and the right way to keep your personal and business identity separate.
How much does my business need to make before it’s worth forming an LLC or S-corp?
There’s no income floor for forming an LLC — it’s about liability protection, not profits. The S-corp election is a numbers decision: it starts making sense once profits are high enough that the SE tax savings clearly outweigh the added costs. That threshold is specific to your situation.
Can I deduct the money I spent setting up my business?
You can generally deduct up to $5,000 in startup costs in your first year — things like legal fees, marketing, and setup expenses — and spread the rest over time. Costs spent before the business officially opened have their own rules and are easy to overlook. Year one is the time to capture them.
What is an accountable plan, and does my business need one?
An accountable plan is a written arrangement that lets your business pay back owners or employees for business expenses without that reimbursement being treated as taxable income. Without one, those reimbursements can become wages. It’s a simple document that’s missing from a lot of small businesses that would benefit from having it.
Yes, up to 14 days per year — and the rental income is tax-free to you personally, while the business deducts it as a legitimate expense. It has to be for a real business purpose at a fair market rate, with documentation. Done right, it’s a clean and legal tax benefit. Overdone without documentation, it invites problems.
Final tax returns, final payroll filings, any remaining 1099s, and dissolution paperwork with your state. You also need to notify the IRS that the EIN is no longer active. Leaving these loose ends open generates notices and fees for years. A clean close is worth a little extra effort.
What is the difference between cash and accrual accounting?
Cash accounting is simple: you record income when money comes in and expenses when money goes out. Accrual accounting records things when they’re earned or owed, even if cash hasn’t moved yet. Most small service businesses use cash. Accrual gives a clearer picture of what’s actually happening financially, and lenders often require it.
Every transaction gets recorded in two places — money going in somewhere always means money going out somewhere else. It keeps the books balanced and is the foundation of accurate financial statements. Single-entry shortcuts are a big reason why small-business books fall apart at tax time.
It’s the organized list of categories your transactions get sorted into — income types, expense types, assets, liabilities. A well-structured chart of accounts is what turns a pile of transactions into clear financial statements and a fast, accurate tax return. A messy one is why “getting the books caught up” is always a nightmare.
It’s the direct cost of making or buying what you sell — materials, inventory, labor directly tied to production. It’s deducted separately from other expenses to show what your actual profit margin is. Service businesses don’t usually have cost of goods sold. Product businesses that skip tracking it end up with wrong profit numbers.
When you buy something expensive that will last several years — like equipment or a vehicle — depreciation spreads the cost across those years as an annual deduction. Section 179 and bonus depreciation let you skip that and deduct the full cost in the year you bought it. Under current tax law, bonus depreciation is back at 100%, which is a big deal for businesses buying equipment.
Why does my accountant keep saying I need to reconcile my accounts?
Reconciling means checking that your books match what’s actually in your bank and credit card accounts — catching anything missing, duplicated, or miscategorized. Unreconciled books produce wrong numbers. Wrong numbers produce wrong tax returns. It’s the most basic monthly habit for keeping your records accurate.
What financial reports should I actually look at as a business owner?
The two most important are the profit and loss statement (how much money are you making or losing?) and the balance sheet (what does the business own and owe?). Once cash flow matters — when timing becomes tight — that report joins the list. These are how you make real decisions instead of guessing.
You don’t deduct inventory when you buy it — you deduct it when you sell it, as cost of goods sold. What’s still sitting unsold at year-end stays on your books as an asset. Product sellers who accidentally write off inventory at purchase usually have to correct it. Tracking it accurately is what makes your profit number real.
What happens if I mix my personal and business money?
A lot of things, and none of them good. It muddies your deductions, makes your books unreliable, and for LLCs and corporations it can legally expose your personal assets — effectively eliminating the protection you formed the LLC to get. A separate business bank account isn’t optional; it’s foundational.
Can I write off my car or mileage for business use?
Yes. You can either use the IRS rate (70 cents per mile for 2025, 72.5 cents for 2026) or track actual vehicle costs like gas, insurance, and maintenance. Larger business vehicles can sometimes be fully expensed in year one. Either way, you need a mileage log. The method you choose first can lock in your options going forward.
A client never paid me. Can I deduct that as a loss?
It depends on how you do your accounting. If you use accrual accounting and already reported that income, a genuinely uncollectible invoice may qualify as a bad debt deduction. If you use cash accounting, the income was never recorded in the first place, so there’s nothing to deduct. Which method you use determines the answer.
What is the difference between an employee and an independent contractor?
It comes down to control — who decides the work, the hours, the methods, and the tools. Calling someone a contractor doesn’t make them one legally. If they work like an employee, they may be one under IRS rules — and misclassifying an employee as a contractor to save on payroll taxes has serious consequences: back taxes, penalties, and interest.
For 2025, you issue a 1099-NEC to any contractor you paid $600 or more for services during the year. Starting with 2026 payments, that threshold goes up to $2,000 and will adjust with inflation going forward. Always get a W-9 from contractors before the first payment so you have what you need to file the form.
Do I need to use a payroll service once I hire employees?
You don’t legally have to use one, but payroll involves withholding federal income tax, Social Security, and Medicare on a schedule — and late or incorrect deposits trigger penalties fast. The “trust fund” portion (what you withheld from employees but didn’t deposit) carries personal liability for the business owner. Most businesses are better served using a proper payroll process.
What forms do I have to file once I have employees?
At minimum: Form 941 every quarter, Form 940 once a year for federal unemployment, and W-2s to each employee (plus Form W-3 to the SSA) by January 31. Your state will have its own requirements on top of those. Missing any of these has penalties attached.
FUTA is the federal unemployment tax — paid by you as the employer, not withheld from employees. SUTA is the same thing at the state level. Both fund unemployment benefits. New business owners often miss the state registration requirement until a notice shows up.
Why do I need to collect a W-9 from every contractor?
The W-9 gives you the contractor’s correct taxpayer ID number so you can file their 1099 accurately. If a contractor doesn’t give you a valid number, you’re generally required to withhold 24% of what you pay them and send it to the IRS. Collecting the W-9 before you pay anyone is far easier than dealing with it at year-end.
What do I need to do before I hire my first employee?
Get an EIN, register for payroll with your state, have the employee fill out a W-4 and verify their work eligibility, set up a payroll process, and check whether your state requires workers’ compensation insurance. It’s a real step-up in responsibility from just paying contractors. Setting it up right from the start prevents compounding problems.
I pay someone to clean my house or watch my kids full-time. Do I owe taxes on that?
Once you pay a household worker above the annual IRS threshold, you’re considered their employer and have tax obligations — even though it’s personal, not a business arrangement. This is called the household employment (or nanny) tax. Many families don’t realize this applies until they get a notice.
You do if you sell taxable goods or services and have a connection (called nexus) to a state — either physical presence or enough sales there. Rules differ a lot by state, and some platforms collect on your behalf for certain sales. Getting this wrong creates back tax exposure that compounds over time.
Any cost that’s ordinary and necessary for your business — rent, payroll, software, advertising, supplies, business travel, meals (50%), utilities. The expense has to be real, documented, and genuinely tied to the business. The gray areas are where good records protect you.
You take a documented, defensible salary through payroll — subject to payroll taxes — and then take any remaining profit as a distribution. The salary has to be reasonable for your role, and the payroll filings have to be on time. This is the exact mechanism the S-corp election depends on to work properly and hold up under review.
Conclusion: Structure, bookkeeping, and payroll decisions compound over time — get them right early, and they save you money for years. Get them wrong, and they quietly cost you. If you have further questions or need personalized guidance, our team at Black Inc Tax Services is here to help.
We assist business owners with:
Entity selection and S-corp election strategy
Payroll setup and reasonable salary compliance
Bookkeeping systems and financial reporting
Contractor classification and 1099/W-2 compliance
Disclaimer: This content is for informational purposes only and does not constitute legal or tax advice. Please consult a qualified tax professional for specific guidance.
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