A financial statement showing a business's assets, liabilities, and owner's equity at a specific point in time. Required on the tax return for larger partnerships and certain corporations.
A partner's allocated portion of partnership income, losses, deductions, and credits. Taxed to the partner whether or not the money is actually distributed.
An accounting method where every transaction is recorded as both a debit and a credit, keeping the books in balance. Required for businesses that must file a balance sheet with their tax return.
The salary an S corporation must pay to shareholder-employees who perform services. Must be comparable to what a similarly qualified employee would earn at arm's length. Underpaying to avoid payroll taxes is a common audit trigger.
A taxpayer's investment in an asset or business interest for tax purposes. Determines gain or loss on a sale and limits how much loss a partner or S corp shareholder can deduct. Must be tracked carefully in partnerships and S corps.
Amounts the business owes to vendors or suppliers for goods or services received but not yet paid. On a cash-basis return, expenses are deducted when paid, not when incurred. Tracking payables helps manage cash flow and ensures vendor obligations don't fall through the cracks.
Amounts owed to the business by customers for goods or services already delivered but not yet paid for. On a cash-basis return, accounts receivable are not recognized as income until payment is received. Tracking outstanding receivables is essential for understanding cash flow and following up on unpaid invoices.
An accounting method where income is recorded when cash is received and expenses are recorded when cash is paid. The most common method for small businesses. Simpler than accrual-basis accounting. For tax purposes, most small businesses are permitted to use cash basis unless they carry inventory or exceed certain gross receipts thresholds.
The systematic deduction of a fixed asset's cost over its useful life, as defined by IRS rules. Rather than deducting the full cost in the year of purchase, depreciation spreads the deduction across multiple years. The IRS assigns recovery periods by asset class (e.g., 5 years for vehicles, 7 years for most equipment, 39 years for commercial real estate).
Cash paid out to S corporation shareholders or partners beyond wages or guaranteed payments. Generally not subject to self-employment tax at the time of payment. In an S corp, distributions must be made proportionally to all shareholders based on ownership percentage — unequal distributions can trigger a second class of stock issue and jeopardize the S election.
Long-term tangible assets used in the business over multiple years — equipment, vehicles, computers, furniture, and buildings. Unlike regular expenses, fixed assets are capitalized (recorded as an asset on the balance sheet) and the cost is recovered through depreciation over time, unless an immediate expensing election applies.
A transfer of money from a sole proprietorship or partnership to the owner. No taxes are withheld at the time of the draw — the owner pays income and self-employment tax on the business's net profit, not on the amount actually drawn out.
An election under IRC §179 that allows businesses to deduct the full cost of qualifying property in the year it's placed in service, rather than depreciating it over time. The 2025 limit is $1,220,000, subject to phase-out for high-asset years. Cannot create a tax loss (limited to business taxable income). Subject to recapture rules if the property is later sold or the business use drops below 50%.
A standard corporation taxed as its own legal entity at the 21% corporate rate. Profits distributed as dividends are taxed again on the shareholder's return — this is double taxation. No restrictions on ownership type or number of shareholders.
Two or more owners operating an unincorporated business. All partners share management and carry unlimited personal liability for business debts and lawsuits.
A limited liability company with two or more owners (called members). Taxed as a partnership by default. Combines liability protection with pass-through taxation and flexible ownership.
A C corporation whose principal activity is the performance of personal services (accounting, law, health, consulting, etc.) substantially by owner-employees. Subject to special tax year restrictions.
A business owned solely by two spouses who both materially participate. Can elect not to be treated as a partnership and instead file as two sole proprietorships. Not available to LLCs except in community property states.
A corporation that has elected pass-through tax treatment by filing Form 2553. Profits and losses flow to shareholders' personal returns. Limited to 100 shareholders; one class of stock only.
A limited liability company with one owner. Taxed as a sole proprietorship by default (Schedule C), but treated as a separate legal entity for liability purposes. Can elect to be taxed as a corporation.
An unincorporated business owned and operated by one person. No separate legal entity, no separate tax return. The owner and the business are the same in the eyes of the law.
An S corporation shareholder who owns more than 2% of the company's stock at any time during the year. The IRS treats 2% shareholders like partners for fringe benefit purposes — many benefits that are excluded from a regular employee's income (health insurance, group term life, HSA contributions) must instead be included in the 2% shareholder's W-2 wages
Benefits so small in value that accounting for them would be unreasonable or impractical — occasional meal money, nominal holiday gifts. Available to sole proprietorship owners.
Employee benefits excluded from the employee's taxable income under the tax code. Examples: health insurance, dependent care assistance, educational assistance, group-term life insurance up to $50,000. Availability varies significantly by entity type and ownership percentage.
Payments made to a partner for services or use of capital, without regard to the partnership's income. Treated as ordinary income and subject to self-employment tax. Used in place of W-2 wages for partners.
A health insurance plan with higher deductibles and out-of-pocket maximums than traditional plans, but with lower premiums. The IRS sets minimum deductible thresholds that a plan must meet to qualify as an HDHP. Enrollment in an HDHP is required to contribute to an HSA.
A tax-advantaged account for medical expenses, available only to individuals covered by a High-Deductible Health Plan (HDHP). Contributions are deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. Employer contributions are generally excluded from employee income for regular employees, but for S corporation 2% shareholders, employer HSA contributions must be included in W-2 wages.
IRS rules requiring that certain benefit plans not favor highly compensated employees. C corporations must comply; violations can make the benefits taxable.
A retirement plan available to self-employed individuals and small businesses. Contributions are employer-only (no employee deferrals). Limit is 25% of compensation up to $70,000 for 2025. Easy to set up and administer. If you have employees, contribution rules require you to contribute the same percentage of compensation for eligible employees as you contribute for yourself.
Savings Incentive Match Plan for Employees. A retirement plan available to businesses with 100 or fewer employees. Allows employee salary deferrals up to $16,500 in 2025, with employer matching or non-elective contributions required. Less administratively complex than a 401(k) but with lower contribution limits.
A 401(k) plan designed for self-employed individuals or business owners with no employees other than themselves (and a spouse). Allows both employee deferrals and employer contributions, with a combined limit of up to $70,000 in 2025. Higher contribution potential than a SEP-IRA for many self-employed individuals. Not available to partners in a partnership.
Items an employer provides that an employee could have deducted as a business expense if they had paid for them personally — business use of a company car, professional subscriptions, job-related training.
The legal requirements that keep an LLC or corporation in good standing and preserve liability protection — holding meetings, keeping minutes, maintaining a separate business bank account, and not mixing personal and business funds.
The legal separation between a corporation or LLC and its owners that protects personal assets from business liabilities. Courts can pierce it if personal and business finances are commingled, the business is undercapitalized, or required formalities aren't followed.
A self-employed worker hired for specific work or a project. The hiring business pays the agreed amount and issues a 1099-NEC if total payments are $600 or more, but does not withhold taxes or pay payroll taxes. The contractor is responsible for their own self-employment tax.
A partner whose liability is limited to their investment. Generally does not manage day-to-day operations. Not subject to SE tax on their share of profits unless paid as guaranteed payments.
Treating a worker as an independent contractor when the relationship legally qualifies as employment. The business can be held liable for back payroll taxes (both employer and employee shares), penalties, and interest. States may impose additional penalties, and workers can file claims for benefits they were denied.
A shareholder of an S corporation who also performs services for the business. Required to receive reasonable W-2 wages for those services — distributions alone are not sufficient. The reasonable salary requirement is one of the most scrutinized aspects of S Corp compliance.
A characteristic of corporations meaning the entity continues regardless of changes in ownership or death of shareholders. LLCs may have limited existence under some state laws.
An owner of a corporation who holds shares of stock. In an S corp, limited to individuals, estates, certain trusts, and certain charities. In a C corp, no restrictions on who or what can be a shareholder.
A worker whose relationship with a business meets the IRS standard for employment. The employer withholds income taxes and the employee's share of payroll taxes, pays a matching employer share, and issues a W-2 at year-end.
The IRS determination of whether a worker is an employee or an independent contractor. Based on a multi-factor test examining behavioral control (how work is done), financial control (financial independence), and type of relationship (permanency, benefits, contracts). What you call the arrangement doesn't control the outcome — the IRS looks at the substance.
Records income when earned and expenses when incurred, regardless of when cash moves. Required for C corporations with average annual gross receipts exceeding $32 million.
Rules that limit deductible losses to the amount the taxpayer actually has at risk — generally their cash investment plus amounts for which they are personally liable.
What happens in a C corporation when profits are taxed twice: once at the corporate level (21%), and again when distributed to shareholders as dividends.
A 12-month accounting period that doesn't follow the calendar year. Partnerships, S corps, and personal service corporations face restrictions on using a fiscal year unless a business purpose exists or an IRC §444 election is made.
Rules that disallow loss deductions for activities the IRS determines are not engaged in for profit. If an activity doesn't show a profit in at least 3 of 5 consecutive years, it may be reclassified as a hobby.
An election that allows certain partnerships, S corporations, and personal service corporations to use a fiscal year that differs from their required tax year. Results in a required deposit under IRC §7519 to compensate for the income deferral.
A structure where business income is not taxed at the entity level. Profits and losses pass through to the owners' personal tax returns. Applies to sole proprietorships, partnerships, and S corporations.
Rules that limit deductions from activities in which the taxpayer does not materially participate. Excess passive losses carry forward to future years.
Social Security and Medicare taxes paid on wages. The total rate is 15.3% — split evenly between employer and employee at 7.65% each. Self-employed individuals pay both halves as self-employment tax but can deduct half on their return.
A deduction of up to 20% of qualified business income available to owners of pass-through entities. Subject to income limits and phase-outs depending on business type and the taxpayer's income.
Prepayments of income and self-employment tax made four times per year by self-employed owners, partners, and others who don't have taxes withheld from a paycheck. Due in April, June, September, and January. Underpaying can result in an IRS penalty.
The tax sole proprietors, general partners, and certain LLC members pay on net business income — covering Social Security and Medicare. In 2026, the rate is 15.3% on the first $176,100 of net earnings, and 2.9% above that. Half is deductible on the owner's return.
The IRS system for making federal tax deposits online, including payroll tax deposits. Required for businesses making federal payroll tax payments. Enrollment takes a few business days, so setup should happen before the first payroll. Available at eftps.gov.
A nine-digit number assigned by the IRS to identify a business entity for tax purposes — the business equivalent of a Social Security number. Required for businesses with employees, those that file certain tax returns, and many other business situations. Free to obtain at IRS.gov.
The U.S. Return of Partnership Income. Filed by partnerships and multi-member LLCs. The entity pays no income tax — income is allocated to partners via Schedule K-1.
Nonemployee Compensation form. Issued to independent contractors paid $600 or more during the year. No taxes are withheld — the contractor is responsible for reporting the income and paying self-employment tax. Replaced 1099-MISC for nonemployee compensation starting in 2020.
The election form filed with the IRS to be treated as an S corporation. Must generally be filed by March 15 of the tax year the election is to take effect.
Employer's Annual Federal Unemployment Tax Return. Filed once per year to report and pay Federal Unemployment Tax (FUTA), which funds unemployment insurance. Paid entirely by the employer — not withheld from employee wages.
Employer's Quarterly Federal Tax Return. Filed four times per year by businesses with employees, reporting wages paid, income taxes withheld, and Social Security and Medicare taxes. Also used to reconcile payroll tax deposits made during the quarter.
Employment Eligibility Verification form. Required by federal law for every new hire. The employee completes Section 1 on or before their first day; the employer reviews original identity and work authorization documents and completes Section 2 within three business days of the start date. Kept on file by the employer — not submitted to the government — but subject to inspection.
Wage and Tax Statement. Issued by employers to employees at year-end, showing total wages paid, income taxes withheld, and payroll taxes withheld. Must be provided to employees by January 31 and filed with the Social Security Administration.
Transmittal of Wage and Tax Statements. A summary cover form submitted to the Social Security Administration along with all W-2s at year-end. Totals the wages and withholding reported across all employee W-2s.
Employee's Withholding Certificate. Completed by an employee to tell the employer how much federal income tax to withhold from each paycheck. Employers must have a completed W-4 on file for every employee; without one, they withhold at the single/no-adjustments rate. Does not get filed with the IRS.
Federal Unemployment Tax Act tax, paid entirely by the employer (not withheld from employee wages). Funds the federal portion of unemployment insurance. Rate is 6% on the first $7,000 of each employee's wages per year, reduced to 0.6% if state unemployment taxes are paid on time. Reported on Form 940.
Used by sole proprietors and single-member LLCs to report business income and expenses on their personal tax return. Net profit is subject to both income tax and self-employment tax.
A form issued to each owner of a partnership, S corporation, or estate/trust showing their share of income, deductions, and credits to report on their individual return.
State Unemployment Tax Act tax, paid by the employer to the state to fund state unemployment insurance benefits. Rate varies by state and by the employer's experience rating — employers with fewer unemployment claims typically pay a lower rate. Wage base thresholds differ by state.
