Small Business CPA

Entity choice is the first decision that shapes every tax return you file afterward, so it deserves real thought rather than a quick pick at the county clerk window. A sole proprietorship reports on Schedule C and pays self-employment tax on the full net profit. A single-member LLC is taxed the same way by default, because the IRS treats it as a disregarded entity unless you elect otherwise. A partnership files Form 1065 and passes income to the owners on Schedule K-1. A C corporation files Form 1120 and pays a flat 21 percent at the entity level, then owners pay a second tax on dividends they receive. An S corporation files Form 1120-S and splits owner pay between wages and a distributive share of profit. The IRS explains each of these on its page about business structures at business structures, and the broader hub for owners lives at small businesses and self-employed. Each of these carries a different filing, a different tax base, and a different set of ongoing chores.

Here is where a small business cpa earns the fee. The choice is rarely about the current year alone. It is about the next five years of profit, how much you draw versus reinvest, whether you plan to add partners, whether you want to keep earnings inside the company, and whether you will ever sell. Say you net 60,000 dollars as a sole proprietor. You pay roughly 15.3 percent self-employment tax on most of that, which comes to around 8,500 dollars after the deduction for half of it, plus income tax on top. Now suppose the same 60,000 dollars flows through an S corporation where you pay yourself a reasonable wage of 40,000 dollars and take the remaining 20,000 dollars as a distribution. The payroll taxes apply only to the 40,000 dollars of wages, which can trim a few thousand dollars off the self-employment side. The trade is real cost and real work: payroll filings, a separate return, and a defensible salary. The formation mechanics for each type are covered by the IRS at starting a business, and once you are up and running the daily obligations are described at operating a business.

Getting an employer identification number is usually part of the setup, and the IRS issues one at no charge through the page at get an employer identification number. A partnership or corporation needs one to file, and even a single-member LLC often wants one to open a bank account and keep the owner Social Security number off vendor forms. If you later switch from a sole proprietor to an S corporation, you generally form a new entity and obtain a fresh number, which is one more reason to plan the structure before you build a mountain of accounts under the old setup. We map the identification number, the bank account, and the accounting file to the entity from the start so nothing has to be unwound later. Doing that groundwork once, correctly, saves hours of cleanup and keeps your first return clean.

Liability protection matters too, though it is a legal question that runs alongside the tax one. A sole proprietor has no legal separation between personal and business assets, so a lawsuit against the business reaches the owner directly. An LLC or corporation creates a separate legal person, which can shield personal assets if the entity is run properly with its own bank account and records. That protection is only as good as the separation you keep, which is why the bookkeeping habit and the entity choice are tied together. You cannot form an LLC, run every dollar through a personal debit card, and expect the shield to hold.

The common mistake I see is forming an S corporation far too early, when profit is still thin. If your business nets 18,000 dollars, the payroll cost, the extra return, and the state fees can wipe out any savings, and you have added a compliance burden for nothing. The reverse mistake is staying a sole proprietor at 180,000 dollars of profit and handing the government self-employment tax on money that a wage-plus-distribution split would have shielded. Another error is picking a C corporation for a small operating business and getting taxed twice, once at the entity and again on dividends, when a pass-through would have taxed the profit only once. The right answer moves as your numbers move, which is why we revisit entity choice every year rather than treating it as a one-time filing.

To make the decision concrete, we build a two-column comparison. Column one is your current setup. Column two is the proposed structure. We fill in projected profit, owner wage, distribution, payroll tax, income tax, franchise or state fees, and preparation cost, then read the bottom line. If the switch saves 4,000 dollars a year and costs 1,500 dollars to run, it pays for itself. If it saves 600 dollars and adds a payroll headache, we wait. Structure also drives how clean your books stay, so our bookkeeping service keeps the separation tight from day one, and our tax strategy consulting service is where we model the entity math with your actual figures before you commit. State treatment varies, and we serve owners in Austin, Chicago, Los Angeles, Miami, and New York City, so the state layer gets folded into the federal picture rather than bolted on at the end. The point is that a small business cpa gives you the number, not a slogan, so you can decide with your eyes open. As your revenue climbs, we expect to revisit this comparison and shift you into the structure that fits the larger business you are becoming, and we would rather make that move a year early than a year late.

Reasonable compensation is the wage an S corporation owner must pay themselves for the work they actually perform, before taking any profit as a distribution. The rule exists because distributions escape Social Security and Medicare tax while wages do not, so an owner who pays a tiny salary and takes everything else as a distribution is dodging payroll tax. The IRS knows this pattern well and challenges it in audits and in court. The wage runs through payroll and shows up on Form 941 each quarter, described at about Form 941, with the annual unemployment piece on Form 940 at about Form 940. The S corporation return itself is Form 1120-S, covered at about Form 1120-S, and each owner receives a Schedule K-1 for their share.

There is no single dollar figure in the tax code, but the standard is the pay a comparable employee would command for the same duties. A small business cpa sets it by looking at what the role is worth on the open market, how much time you spend, your training and experience, and how much of the company profit comes from your personal effort versus invested capital or the work of others. Courts have listed factors like training, duties, time devoted, comparable pay for similar work, and what the company would pay an outsider to do the same job. If you are a solo consultant who does all the billable work, most of the profit traces back to you, so your salary should sit high. If you own an auto shop with six mechanics and you mostly manage, a smaller salary can hold up because the profit comes largely from their labor and the equipment they run.

Work a real example. Your S corporation nets 120,000 dollars before owner pay. You do skilled work that a hired manager would earn 70,000 dollars to do. A defensible plan pays you 70,000 dollars in wages and leaves 50,000 dollars as a distribution. Payroll tax at 15.3 percent applies to the 70,000 dollars of wages, roughly 10,700 dollars split between you and the company. The 50,000 dollars distribution carries no Social Security or Medicare tax. Compare that to paying yourself only 30,000 dollars to shrink payroll tax. You save on payroll in the short run, but you have set a salary far below market for the work, and an examiner can reclassify the distribution as wages, then add back tax, penalty, and interest. In several court cases owners who took a token salary or none at all had large distributions recharacterized as wages, with penalties on top. The safe move is the salary you could defend to a skeptical stranger, and we document how we arrived at it.

A properly set salary also unlocks benefits that a distribution cannot. Retirement contributions for a solo owner often key off W-2 wages, so a reasonable salary can support a larger deductible contribution to a plan described in Publication 560 at about Publication 560. Health coverage the company pays for a more-than-two-percent owner has its own reporting on the W-2, and the wage figure interacts with the qualified business income deduction as well. So the salary is not only about payroll tax. Set it too low and you may shrink the retirement contribution you can make and the deduction you can claim, which can cost more than the payroll tax you saved. We look at all of those levers together when we land on a number, because moving one moves the others. That is the difference between a figure pulled from the air and one built from the whole picture.

The common mistake is treating reasonable compensation as a number you get to minimize freely. Owners sometimes pick a round figure like 24,000 dollars because a friend did, with no link to duties or market pay. That is exactly the fact pattern the IRS targets. The other mistake runs the opposite way: paying yourself all 120,000 dollars as wages out of caution, which hands over payroll tax on money a proper distribution would have spared. A third mistake is paying no salary at all in a year with strong distributions, which is the single easiest thing for an examiner to attack. Both extremes cost money, and the no-salary version invites a penalty. A salary of 24,000 dollars against 150,000 dollars of profit is a bright flag, while a market figure near 80,000 dollars rarely draws a second look. The middle, supported by real comparables and a written rationale, is where you want to live.

Running the salary correctly means real payroll, not a year-end guess. Wages must be withheld and deposited through the year, quarterly 941s filed, and a W-2 issued in January. The employment-tax rules are laid out by the IRS at employment taxes, and the recordkeeping that supports the figure is described at recordkeeping. We handle that cadence through our bookkeeping support and set the compensation figure inside our tax strategy consulting work, then document the basis so it survives review. State payroll rules differ across Austin, Chicago, Los Angeles, Miami, and New York City, and we fold those in. As your profit grows, the salary should be revisited each year so the split stays defensible, and we plan to raise your documented wage in step with the expanding scope of what you personally do. This is a place where a small business cpa keeps you out of trouble and out of overpayment at the same time.

Once you put anyone on payroll, including yourself as an S corporation owner, a fixed calendar of federal filings begins. The main one is Form 941, the employer quarterly return that reports wages, federal income tax withheld, and both halves of Social Security and Medicare. It is due the last day of the month after each quarter closes, so April 30, July 31, October 31, and January 31. The form and its rules sit at about Form 941. Very small employers who owe little may file annually on Form 944 instead, described at about Form 944, but only if the IRS tells you to use it. A small business cpa confirms which one applies before you file the wrong one, because switching between them without IRS permission causes matching problems.

Alongside the quarterly return sits Form 940 for federal unemployment tax, filed once a year by January 31. It funds unemployment benefits and is described at about Form 940. Federal unemployment tax is a small percentage on the first 7,000 dollars of each employee wages, and a credit for state unemployment tax paid usually brings the net federal rate down sharply. The general framework for all of these obligations, including deposit schedules, lives on the IRS employment-taxes page at employment taxes. The piece that trips people up is not the return, it is the deposit. Withheld tax and the employer match generally have to be sent to the government on a monthly or semiweekly schedule that runs ahead of the quarterly filing. The 941 reconciles what you already deposited. If you wait until the return is due to send the money, you are late on every deposit inside that quarter.

Here is a worked example. You run payroll of 10,000 dollars a month in wages. Federal income tax withholding might be 1,200 dollars, and Social Security and Medicare add another 1,530 dollars combined between the employee share and the employer match. That is roughly 2,730 dollars a month that must be deposited on schedule, which comes to about 8,190 dollars for the quarter. When you file the 941 at quarter end, it should show 30,000 dollars of wages and the tax already deposited. Miss the deposit rhythm and the failure-to-deposit penalty climbs with how late you are, from 2 percent for a few days late up to 15 percent once it is more than ten days after a notice, plus interest. On 8,190 dollars, even a 10 percent penalty is over 800 dollars for a single quarter, so the deposits are the whole game. Over four quarters that same slip repeated could add more than 3,000 dollars in penalties on a payroll you already funded, which is money lost to nothing but a calendar mistake.

Depositing is done electronically, and the schedule you follow depends on a lookback period the IRS sets each year. New and small employers usually start as monthly depositors, meaning each month tax is due by the fifteenth of the following month. Larger payrolls move to a semiweekly schedule tied to paydays. Whichever applies, a separate rule says that if you ever accumulate 100,000 dollars of tax liability in a single day, it must be deposited by the next business day, a trap that can catch a growing company after a big bonus run. The deposit rules and the safe payment channels are summarized on the employment-taxes page at employment taxes, and you can pay through the options at IRS payments. We watch your lookback status so you are on the right schedule before a threshold forces a change, rather than after a late deposit teaches the lesson the expensive way.

The common mistake is confusing the filing deadline with the payment deadline. Owners see January 31 and April 30 on the calendar and assume the money is due then too. It is not. The deposits are due much earlier and much more often. A second frequent error is forgetting the state layer entirely, because states run their own withholding and unemployment systems on separate forms and dates. We track both. A third is misclassifying a worker as a contractor to skip payroll, which the IRS unwinds hard when it disagrees, adding back employment tax and penalties, and sometimes denying the chance to fix it cheaply. If a worker is truly an employee, they belong on payroll, and the difference turns on control over how and when the work is done. Guess wrong and the reclassification can reach back several years, adding the employer share of tax plus penalties on wages you never ran through a proper payroll system.

We keep this from becoming a fire drill by building the deposit schedule into your monthly close. Our bookkeeping service tracks each payroll run, funds the deposits on time, and files the 941 and 940 on the right dates, while our tax strategy consulting service checks that your owner wage and worker classifications hold up before the returns go out. The recordkeeping standards behind payroll are on the IRS page at recordkeeping. We serve owners in Austin, Chicago, Los Angeles, Miami, and New York City, so the state filings that ride alongside the federal ones get handled in the same cycle. As your headcount grows, the deposit frequency can shift from monthly to semiweekly based on your prior lookback period, and we will move you onto the faster schedule before the threshold forces a late deposit, so the calendar keeps working in your favor next year rather than against it.

The qualified business income deduction lets many owners of pass-through businesses subtract up to 20 percent of their qualified business income before they figure tax. It applies to sole proprietors, partnerships, and S corporations, and it is claimed on Form 8995 for simpler situations or Form 8995-A when income is higher or the business is a specified service field. The simpler form is described at about Form 8995 and the detailed version at about Form 8995-A. Because it flows through to your personal return, it connects to Form 1040, covered at about Form 1040. A small business cpa makes sure the deduction is calculated on the right form for your income level, because using the wrong one can either overstate the benefit or leave part of it unclaimed.

The 20 percent is a starting point, not a guarantee. Above certain taxable-income thresholds the deduction phases into limits based on the wages your business pays and the cost of certain property it holds, sometimes described as the W-2 wage limit and the property limit. For a specified service trade or business, which includes fields like health, law, accounting, and consulting where the reputation or skill of the owner is the product, the deduction phases out entirely once taxable income climbs high enough. So two owners with the same 200,000 dollars of profit can get very different results depending on the type of work and how much in wages the business pays. This is why the S corporation salary discussed earlier ties directly into the deduction: paying wages can both cost payroll tax and, above the threshold, help preserve the deduction. The pieces interact, and you cannot plan one without the other.

Work an example. You are a sole proprietor with 100,000 dollars of qualified business income and total taxable income comfortably under the threshold where limits kick in. Your deduction is 20 percent of 100,000 dollars, or 20,000 dollars, subject to a separate cap tied to your overall taxable income. That 20,000 dollars comes straight off taxable income, so at a 22 percent marginal rate it saves roughly 4,400 dollars. Now raise the stakes. You are a consultant, a specified service field, with 250,000 dollars of income that pushes you into the phase-out. Part or all of the deduction can disappear, and the planning question becomes whether a different structure, larger retirement contributions, or timing of income and expenses can pull taxable income back under the line. If a 20,000 dollars retirement contribution drops you under the threshold and restores a deduction worth several thousand dollars, that move pays for itself twice. A small business cpa runs those levers before the year closes, not after.

The deduction also reaches income most owners forget to count. Qualified real estate investment trust dividends and certain publicly traded partnership income get their own 20 percent deduction that is not subject to the wage limit, and those often show up on a brokerage statement rather than a business return. Rental activity can qualify as a trade or business in some cases, which pulls net rental income into the deduction, a question that turns on how actively the property is run. Meanwhile capital gains and ordinary wage income never qualify, and pushing them into the calculation overstates the benefit. Sorting which dollars count and which do not is exactly the kind of line-drawing that goes wrong on a self-prepared return. We separate the qualifying business income from the investment and wage income before the form is filled, so the 20 percent lands only on the base the law actually allows and not a dollar more.

The common mistake is assuming the deduction is automatic and always 20 percent. Owners see the headline and budget for the full benefit, then get surprised when the service-business phase-out or the wage limit shrinks it. The opposite mistake is leaving the deduction on the table entirely because the return was self-prepared and the form was skipped, which happens more than you would think. Both cost real money. Another error is forgetting that the deduction sits on top of, not inside, your business net income, so it does not reduce self-employment tax at all. It only reduces income tax. A fourth is mixing rental income, capital gains, or wage income into the calculation when they do not qualify. Keeping those buckets straight matters when you forecast what you owe.

We handle the deduction as part of the annual return and the planning that leads up to it. Our individual tax returns service files the 8995 or 8995-A correctly with your 1040, and our tax strategy consulting service works the income-timing and structure moves that keep you under the phase-out where possible. The general rules for what income qualifies live on the IRS hub at small businesses and self-employed, and the deduction interacts with the operating rules at operating a business. Federal law drives the deduction, though some states do not follow it, and we serve owners in Austin, Chicago, Los Angeles, Miami, and New York City who each face a different state overlay. If you want us to model the deduction against your projected income and pick the structure that protects it, that is exactly the kind of question worth a Request Private Consultation before year-end. As the thresholds adjust for inflation each year, we plan to recheck where your income falls so the deduction stays as large as the rules allow going forward.

The tax system runs on pay-as-you-go. Employees meet that through withholding on each paycheck. Business owners have no employer taking money out, so they send it themselves four times a year as estimated tax. If you do not, the IRS charges an underpayment penalty even if you pay in full at filing, because the tax was owed all along and you paid it late. The rules and payment vouchers sit on Form 1040-ES, described at about Form 1040-ES, and the general framework is on the IRS estimated-taxes page at estimated taxes. For 2026 the due dates are April 15, June 15, September 15, and January 15 of 2027. A small business cpa builds your payments around those dates so nothing slips, and so a strong quarter does not leave you short.

Your estimate has to cover two taxes, not one. There is income tax on your profit, and there is self-employment tax, which is 15.3 percent covering Social Security up to the annual wage base plus 2.9 percent Medicare on everything above it. Self-employment tax alone can be the larger surprise for a new owner, because it lands on top of income tax and there is no employer splitting it. The self-employment computation is described at about Schedule SE, and Publication 505 walks through the whole estimated-tax method at about Publication 505. The cleanest way to avoid a penalty is the safe harbor: pay in either 90 percent of this year tax or 100 percent of last year tax, rising to 110 percent if your prior-year income was high. Hit the safe harbor and the penalty cannot touch you even if you owe more at filing, which is why we anchor payments to it.

Work a full example. You project 80,000 dollars of net profit this year. Self-employment tax runs about 15.3 percent on roughly 92.35 percent of that, which lands near 11,300 dollars, and you get to deduct half of it above the line. Income tax depends on your bracket, but say it adds another 9,000 dollars after that deduction and your standard deduction. Total federal is roughly 20,300 dollars, so each quarterly payment is about 5,075 dollars. If last year your total tax was 16,000 dollars, the safe harbor lets you pay 4,000 dollars a quarter and stay penalty-proof, then settle the difference at filing. You can send each payment through IRS Direct Pay, or set up scheduled payments through the broader options at IRS payments. That is the arithmetic a small business cpa runs each spring so your cash flow is predictable rather than a scramble.

Income that arrives unevenly gets its own treatment. If most of your profit lands in the fourth quarter, paying four equal installments can leave you technically underpaid in the early quarters even though the year totals out. The annualized income installment method, laid out in Publication 505 at about Publication 505, lets you match each payment to the income actually earned by that point, which can cut the penalty for a seasonal business. A retailer who makes most of the year in November and December, or a contractor whose big job closes late, both benefit from this. There is also a withholding trick: tax withheld from a spouse paycheck or a retirement distribution counts as paid evenly across the year no matter when it happens, so a late-year withholding bump can patch an early-year shortfall. We choose whichever method leaves you paying the least penalty, and we check that choice against your actual cash timing rather than assuming even quarters fit. For a business that earns 60,000 dollars of its 80,000 dollars profit after October, the annualized method can cut the early-quarter penalty to almost nothing.

The common mistake is treating estimated tax as optional or as a single April event. Owners often pay nothing until the return is due, then owe the tax plus an underpayment penalty computed as if they should have paid all along. The penalty is figured on Form 2210, described at about Form 2210. The opposite mistake is overpaying wildly out of fear and handing the government an interest-free loan all year when that cash could have covered payroll or inventory. A third error is forgetting to bump payments when a big month lands, so a strong summer leaves you short by September. A fourth is ignoring that self-employment tax exists at all, budgeting only for income tax, and getting blindsided by the extra 15.3 percent layer. The fix for all of these is a mid-year check-in where we re-forecast profit and adjust the last two payments.

We manage this as a running process, not a once-a-year scramble. Our bookkeeping service keeps profit current so the estimate reflects reality, and our tax strategy consulting service sets the safe-harbor target and revises it after a strong or weak quarter. Estimated tax is federal, but most states run their own parallel quarterly system, and we serve owners in Austin, Chicago, Los Angeles, Miami, and New York City who face very different state pieces on top. Austin owners, for instance, skip a state personal income payment while a New York City owner has a heavy state and city layer on the same schedule. A small business cpa keeps both moving together so you are never surprised by either. As your profit grows next year, we plan to raise your quarterly payments in step so you never carry a large balance into filing season and never overpay just to feel safe.