Q 01Why do some owners pay tax on money they never took home?
In a sole proprietorship, partnership, LLC or S corporation, the profit flows through to the owners' returns whether or not it was withdrawn. Cash left in the business can still be taxed to you, so plan for tax before you plan distributions.
Read more →Q 02Can paying yourself too little hurt you in an S corporation?
Yes. The IRS expects an owner who works in an S corporation to be paid reasonable compensation as wages. Very low pay with large distributions can lead to the distributions being treated as wages, with payroll tax, interest and penalties.
Read more →Q 03Is it a business or a hobby in the eyes of the IRS?
The IRS looks at facts such as a profit motive, how you run the activity, your records, time spent and expertise. Hobby income is generally taxable, while hobby expenses are generally not deductible under current rules.
Read more →Q 04What happens to a deduction you cannot prove?
It can be disallowed. Business deductions generally need records showing the amount, date and business purpose, and travel, vehicle and gift expenses face stricter substantiation rules. A receipt without the purpose written down is often not enough.
Read more →Q 05Does a business loss always reduce your other income?
No. Losses can be limited by your basis in the business, at-risk rules, passive activity rules and an overall limit on large business losses for individuals. A loss on paper does not always turn into a deduction this year.
Read more →Q 06Can a self-employed owner deduct health insurance?
Often, yes, as a deduction on the personal return, if the business shows a profit and you are not eligible for a subsidized employer plan. S corporation owners with more than 2% of the stock have special reporting rules for premiums.
Read more →Q 07Is the 20% pass-through deduction automatic?
No. The qualified business income deduction is calculated on your return, and its limits depend on your income, the type of business, wages paid and property owned. Planning how you pay yourself can change the result.
Read more →Q 08What is the payroll tax trap that makes owners personally liable?
Taxes withheld from employees' pay are held in trust for the government. If they are not paid over, the IRS can assess the Trust Fund Recovery Penalty against the responsible people personally, even if the business is a corporation or LLC.
Read more →Q 09Can you put your child on the payroll?
Wages for real, age-appropriate work can be deductible. In a sole proprietorship or a partnership owned only by the child's parents, a child under 18 is generally exempt from Social Security and Medicare tax. The pay must be reasonable and documented.
Read more →Q 10How much can an owner save for retirement through the business?
More than most employees can. Plans such as a solo 401(k), SEP IRA or SIMPLE IRA allow contributions that reduce taxable income, and the limits change every year. Check the IRS limits for the year before setting a contribution.
Read more →Q 11How do you avoid the underpayment penalty on estimated tax?
Generally by paying at least 90% of this year's tax or 100% of last year's tax, whichever is smaller. The prior-year safe harbor rises to 110% if last year's adjusted gross income was over $150,000.
Read more →Q 12How much of a business meal can you deduct?
Generally 50% of the cost of a business meal that is not lavish and has a clear business purpose, with the people and topic recorded. Entertainment, such as tickets and club dues, is generally not deductible.
Read more →Q 13Do you have to send 1099s to your contractors?
Often, yes. The reporting threshold for most payments to contractors has been $600, and recent legislation raises it for payments made after 2025. Confirm the threshold for your year, and collect a Form W-9 before you pay.
Read more →Q 14Does it matter when you buy equipment, or when you start using it?
Both. Depreciation and expensing rules generally depend on when an asset is placed in service, meaning ready and available for use, not just when you pay. A purchase made in December but not used until January may fall in the wrong year.
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