Sole proprietor or single-member LLC: prepare Schedule C with Form 1040
Schedule C is due April 15 with your personal return. If your gross receipts are under $5,000 and you have no employees, inventory, or vehicle deductions, you may qualify for the simplified Schedule C-EZ (though the IRS discontinued it — use the full Schedule C).
Partnership or multi-member LLC: prepare Form 1065 and distribute Schedule K-1s
Form 1065 is due March 15, one month before individual returns. Each partner receives a Schedule K-1 showing their share of income, deductions, and credits. Late filing penalty is $235 per partner per month, up to 12 months.
S Corporation: prepare Form 1120-S and distribute Schedule K-1s to shareholders
Form 1120-S is also due March 15. S-corp owner-employees must pay themselves a reasonable salary before taking distributions. The IRS audits S-corps that pay unreasonably low salaries to avoid payroll taxes.
C Corporation: prepare Form 1120
Form 1120 is due April 15 for calendar-year corporations. The flat corporate tax rate is 21%. C-corps face double taxation: the corporation pays tax on profits, and shareholders pay tax again on dividends received.
Organize Financial Records
Run a profit and loss statement for the full tax year
Your P&L should match your bank activity and accounting records exactly. If you use cash-basis accounting (most small businesses do), only include income received and expenses paid during the tax year.
Prepare a balance sheet if required by your entity type
Partnerships filing Form 1065 and corporations filing Form 1120 or 1120-S must include a balance sheet on Schedule L if total assets are $250,000 or more. Sole proprietors don't need a balance sheet.
Reconcile all bank accounts and credit card statements to your books
Unreconciled accounts are a top audit trigger. Every deposit should tie to recorded income, and every payment should match a recorded expense. Aim for zero unexplained discrepancies before filing.
Compile a list of all assets purchased or sold during the year
Assets costing $2,500 or more must generally be capitalized and depreciated (or expensed under Section 179). Items under $2,500 can be deducted immediately using the de minimis safe harbor election.
Gather all 1099 forms issued to contractors and received from clients
You must file 1099-NEC for each contractor you paid $600 or more. These are due to contractors and the IRS by January 31. Penalties for late or missing 1099s range from $60 to $310 per form.
Claim Key Business Deductions
Deduct ordinary and necessary business expenses: rent, utilities, supplies, insurance
An expense must be both ordinary (common in your industry) and necessary (helpful and appropriate) to be deductible. A graphic designer can deduct design software, but a restaurant owner probably can't.
Calculate vehicle expenses using actual costs or standard mileage rate
The 2025 standard mileage rate is 70 cents per mile. If you drove 15,000 business miles, that's a $10,500 deduction. You must choose your method in the first year you use the vehicle for business — switching later has restrictions.
Apply Section 179 deduction or bonus depreciation for equipment purchases
Section 179 allows you to deduct up to $1,250,000 of qualifying equipment in the year purchased (2025 limit). Bonus depreciation is 40% for 2025 on the remaining amount. This applies to computers, furniture, vehicles, and machinery.
Deduct business meals at 50% of the cost
Business meals are 50% deductible when you discuss business with a client, customer, or employee. Keep the receipt, note the business purpose, and record who attended. Entertainment expenses like sporting events are not deductible.
Deduct business travel expenses: airfare, lodging, and transportation
Travel must be primarily for business and require you to be away from your tax home overnight. You can deduct 100% of airfare and lodging. If a trip is mixed business and personal, only deduct expenses for business days.
Claim the home office deduction if you have a dedicated workspace
The simplified method is $5 per square foot up to 300 sq ft ($1,500 max). The regular method lets you deduct the actual percentage of rent, mortgage interest, utilities, and insurance used for the office. A 200 sq ft office in a 2,000 sq ft home = 10% of expenses.
Handle Payroll Tax Obligations
File Form 941 (Employer's Quarterly Federal Tax Return) for each quarter
Form 941 is due by the last day of the month after each quarter ends: April 30, July 31, October 31, and January 31. It reports withheld income tax and the employer and employee share of Social Security and Medicare taxes.
File Form 940 (Federal Unemployment Tax Return) annually by January 31
FUTA tax is 6% on the first $7,000 of each employee's wages, but you get a credit of up to 5.4% for state unemployment taxes paid on time, bringing the effective rate to 0.6%. That's $42 per employee per year.
Distribute W-2 forms to all employees by January 31
File Copy A of all W-2s with the Social Security Administration by January 31. You can e-file W-2s for free using the SSA's Business Services Online. Paper filing is only allowed if you have fewer than 10 W-2s.
Make federal payroll tax deposits on the required schedule
Most small businesses deposit monthly, due by the 15th of the following month. If your total tax liability exceeds $50,000 in the lookback period, you must deposit semi-weekly. All deposits must go through EFTPS.
Apply for Credits and Special Provisions
Check eligibility for the Qualified Business Income (QBI) deduction
Pass-through businesses (sole proprietorships, partnerships, S-corps) can deduct up to 20% of qualified business income. For 2025, the deduction phases out for specified service businesses above $191,950 (single) or $383,900 (joint).
Review the small business health care tax credit if you provide employee insurance
Businesses with fewer than 25 full-time employees with average wages under $58,000 may qualify. The maximum credit is 50% of premiums paid (35% for tax-exempt employers). You must pay at least 50% of employee premiums.
Claim the research and development (R&D) credit if applicable
Small businesses with gross receipts under $5 million can apply up to $250,000 of the R&D credit against payroll taxes instead of income tax. This is useful for startups that don't yet have taxable income.
Deduct startup costs up to $5,000 in the first year of business
You can deduct up to $5,000 in startup costs and $5,000 in organizational costs in your first year. The $5,000 deduction phases out dollar-for-dollar if total startup costs exceed $50,000. Remaining costs are amortized over 15 years.
File and Maintain Records
File your business return by the applicable deadline
Partnerships and S-corps: March 15. C-corps and sole proprietors: April 15. Late filing penalties are steep: 5% of unpaid tax per month for individual returns, $235 per partner per month for partnerships.
Make estimated tax payments for the next year based on current year projections
Business owners must pay estimated taxes quarterly if they expect to owe $1,000+ (individual) or $500+ (corporation). Use your current year P&L as the starting point for next year's estimates.
Store all tax returns, receipts, and financial records for at least 7 years
While the standard audit period is 3 years, employment tax records must be kept for 4 years and asset records should be kept until 3 years after you dispose of the asset. Seven years covers most situations.
Frequently Asked Questions
What tax forms does a small business need to file?
The form depends on your business structure. Sole proprietors file Schedule C with their personal Form 1040. Partnerships file Form 1065 and issue K-1s to partners. S-Corporations file Form 1120-S with K-1s. C-Corporations file Form 1120. Single-member LLCs default to Schedule C unless they elect S-Corp or C-Corp treatment. Each structure has a different filing deadline — partnerships and S-Corps are due March 15, while C-Corps and sole proprietors file by April 15.
How much can a small business deduct for startup costs?
You can deduct up to $5,000 in startup costs and $5,000 in organizational costs in your first year of business. These deduction limits phase out dollar-for-dollar once total startup costs exceed $50,000. Remaining costs must be amortized over 180 months (15 years). Startup costs include market research, advertising before opening, employee training, and travel to find suppliers or locations. Tax laws change frequently — verify current rules with the IRS or a tax professional.
Does a small business need to pay payroll taxes?
If you have employees, you must withhold federal income tax, Social Security (6.2%), and Medicare (1.45%) from their wages, and match the Social Security and Medicare amounts as the employer. You also pay federal unemployment tax (FUTA) at 6% on the first $7,000 per employee, with a credit of up to 5.4% for state unemployment taxes paid. Payroll tax deposits are due semi-weekly or monthly depending on your total liability — missing deposits triggers penalties starting at 2% and climbing to 15%.
What is the Qualified Business Income deduction for small businesses?
The QBI deduction (Section 199A) allows pass-through businesses — sole proprietors, partnerships, S-Corps, and LLCs — to deduct up to 20% of qualified business income. For 2025, the full deduction is available if taxable income is below $191,950 (single) or $383,900 (joint). Above those thresholds, specified service businesses (law, accounting, consulting, health) face phase-outs, and other businesses must meet W-2 wage or property tests. Tax laws change frequently — verify current rules with the IRS or a tax professional.
How long should a small business keep tax records?
The IRS recommends keeping business tax records for at least 3 years from the date you filed the return. Keep records for 6 years if you underreported gross income by more than 25%, and 7 years if you claimed a deduction for bad debts or worthless securities. Employment tax records should be kept for at least 4 years after the tax is due or paid. Asset purchase records should be kept for the entire time you own the asset plus 3 years after you dispose of it, since you need cost basis to calculate gain or loss.