Small Business Taxes Explained

Beginner: How Business Taxes Actually Work

You are taxed on profit, not sales

This is the piece that calms most people down. You do not pay tax on every dollar that comes in. You pay tax on your profit, which is what is left after your legitimate business expenses.

So if you brought in money but spent a chunk on real business costs, you are taxed on the difference, not the whole top line.

Pass-through, in plain words

Most small businesses (sole props and typical LLCs) are "pass-through." That means the business itself does not pay income tax. The profit passes through to you and shows up on your personal tax return.

So your business profit and your personal taxes are connected. There is not some separate business tax bill floating out in space.

The surprise: self-employment tax

When you have a regular job, your employer quietly pays half of your Social Security and Medicare taxes. When you work for yourself, you cover both halves. That combined piece is called self-employment tax.

This is the number that shocks new owners. It is on top of regular income tax. Knowing it exists now means you can set money aside instead of panicking in April.