Question 1

Do I need to collect sales tax on what I sell?

Accepted Answer

It depends on what you sell and where your customers are. Sales tax is a state and local matter, and rules vary widely. Generally, tangible goods are taxable and many professional services are not — but some states tax certain services and digital products, so don't assume. You collect tax in states where you have "nexus": a physical presence like an office or inventory, or "economic nexus" from exceeding a sales threshold in that state (commonly $100,000 in sales or 200 transactions, though the

Question 2

Can I hire my own kids in my business to save on taxes?

Accepted Answer

Yes, and it can be legitimately tax-smart if done correctly. When you pay your children for real work in your business, those wages are a deductible business expense, and the child can earn up to the standard deduction ($15,000 for 2025) with little or no federal income tax. If your business is a sole proprietorship or a partnership owned only by both parents, wages paid to a child under 18 are also exempt from Social Security and Medicare taxes — a meaningful saving. The catch is the work must

Question 3

How much of my phone, internet, and software can I deduct?

Accepted Answer

You deduct the business-use percentage, not the whole bill, for mixed personal-and-business items. For a cell phone you use 60% for work, deduct 60% of the bill; same logic for home internet. Software and subscriptions used purely for business — accounting tools, design apps, project management, cloud storage — are typically 100% deductible. The cleanest approach is to make the line bright where you can: a second phone line or device used only for business is fully deductible and far easier to d

Question 4

What is the Augusta rule, and can I rent my home to my own business?

Accepted Answer

The Augusta rule (Section 280A) lets you rent your personal residence to your business for up to 14 days a year and receive that rent completely tax-free, while the business deducts it as an expense. It's named for Augusta, Georgia, where Masters golf attendees rent out homes. To use it legitimately, the rental must be for a genuine business purpose — say, hosting quarterly strategy meetings or a board session at your home — at a rate comparable to what a local venue would charge. You need real

Question 5

What is an accountable plan and why would my S-corp need one?

Accepted Answer

An accountable plan is a formal arrangement that lets your business reimburse you (or employees) for business expenses you paid personally — like a home office, mileage, or supplies — without that reimbursement being treated as taxable income. It matters most for S-corp owners, because once you're an employee of your own S-corp, you generally can't deduct unreimbursed employee business expenses on your personal return the way a sole proprietor can on Schedule C. The accountable plan fixes that:

Question 6

What records do I need to keep for the IRS as a self-employed person?

Accepted Answer

Keep enough to prove both your income and every deduction. That means receipts and invoices, bank and credit-card statements for business accounts, a mileage log, records of asset purchases (for depreciation), proof of estimated tax payments, and 1099s you receive. For each deductible expense, the amount, date, and business purpose should be documented — a receipt plus a quick note. The general rule is to keep records for at least three years after filing (the normal audit window), but six years

Question 7

What is the estimated-tax safe harbor and how does it protect a self-employed person?

Accepted Answer

The safe harbor is a set of payment levels that protect you from underpayment penalties even if you end up owing more at filing. You're generally safe if your quarterly estimated payments total at least 90% of this year's tax, or 100% of last year's total tax — whichever is smaller. If your prior-year adjusted gross income exceeded $150,000, the second figure rises to 110% of last year's tax. The beauty of the safe harbor is certainty: pay the right amount based on last year's known number and y

Question 8

What payroll requirements come with running an S-corp?

Accepted Answer

Once you elect S-corp treatment and take a reasonable salary, you become an employer with real obligations — even as a one-person business. You must run formal payroll: withhold federal income tax, Social Security, and Medicare from your paycheck, pay the employer share, and deposit those taxes on the IRS schedule. You'll file quarterly Form 941 (or annual 944), issue yourself a W-2 each January, file federal and state unemployment returns, and handle any state withholding. Miss deposits and the

Question 9

What is the self-employment tax deduction for half of the tax?

Accepted Answer

When you're self-employed you pay both the employee and employer halves of Social Security and Medicare — about 15.3% — through self-employment tax. To partly offset that, the IRS lets you deduct half of your self-employment tax as an above-the-line adjustment to income. This mirrors how an employer's share isn't taxable to a W-2 worker. The deduction reduces your income tax (not the self-employment tax itself), and you get it whether or not you itemize. It's calculated automatically on Schedule

Question 10

Should I incorporate my business or stay a sole proprietor?

Accepted Answer

For most solo service providers, the more useful first move is forming an LLC rather than incorporating, because an LLC delivers liability protection with far less complexity than a corporation. Stay a plain sole proprietor only while you're testing an idea with little risk and little income — it costs nothing and is simplest. Move to an LLC once you have real clients, assets to protect, or liability exposure (clients on your property, products, contracts). Consider the S-corp tax election on to

Question 11

What's the tax difference between an LLC taxed as a sole proprietor and one taxed as an S-corp?

Accepted Answer

The legal entity is identical — the difference is purely how profit is taxed. An LLC taxed as a sole proprietorship (the default for a single owner) reports all profit on Schedule C, and the entire net profit is subject to ~15.3% self-employment tax plus income tax. An LLC that elects S-corp treatment instead splits profit into a reasonable W-2 salary (subject to payroll tax) and distributions (not subject to self-employment tax), which can cut your total payroll-type tax. The trade-off: the S-c

Question 12

How do I deduct business travel correctly?

Accepted Answer

Travel away from your tax home overnight for business is deductible, and the rules are generous if you follow them. You can deduct airfare, lodging, 50% of meals, rental cars, taxis, baggage, and other ordinary trip costs. The trip's primary purpose must be business, judged largely by how many days are business versus personal. On a trip that's mostly business, transportation to and from is fully deductible even if you tack on a weekend, but personal days' lodging and meals are not. Mixing in fa

Question 13

What's the difference between depreciating an asset and expensing it?

Accepted Answer

Expensing means deducting the full cost in the year you buy something; depreciating means spreading the deduction across the asset's useful life. By default, the tax code makes you depreciate larger, long-lived business assets — equipment, machinery, furniture, vehicles — over several years rather than all at once. But two provisions let you accelerate: Section 179 and bonus depreciation can let you expense much or all of qualifying purchases immediately. Smaller items and supplies are simply ex

Question 14

When should I hire a bookkeeper or CPA instead of doing it myself?

Accepted Answer

Doing your own books is fine when you're a low-volume sole proprietor with simple income and a handful of expenses — software plus a dedicated business account may be enough. Consider a bookkeeper once transactions pile up, you're behind on categorizing, or you can't quickly answer "how much did I make this month?" — bookkeeping is ongoing recordkeeping. Bring in a CPA or tax pro when your situation gets layered: an S-corp election, employees or contractors, multi-state sales tax, large equipmen

Question 15

What percentage of my income should I set aside for taxes as a freelancer?

Accepted Answer

A common starting rule is to set aside 25–30% of your net self-employment income for federal taxes, bumping toward 35–40% if you're in a higher bracket or a high-tax state. The figure is higher than many expect because you owe both income tax and the full ~15.3% self-employment tax, with nothing withheld for you. The cleanest habit is to move that percentage into a separate savings account the moment each payment lands, then pay quarterly estimates from it — so the money is never "yours" to acci

Question 16

How do taxes work if I have both a W-2 job and 1099 side income?

Accepted Answer

You combine them on one return, but they're taxed differently along the way. Your W-2 job has income, Social Security, and Medicare taxes withheld automatically. Your 1099 side income has nothing withheld, and it owes both income tax and self-employment tax on its net profit (after business deductions). The two add together to set your overall bracket. A handy trick: instead of making separate quarterly estimated payments on the side income, you can increase the withholding on your W-2 paycheck

Question 17

Do I have to issue 1099s to people my business pays?

Accepted Answer

Often, yes. If your business pays an unincorporated contractor, freelancer, or service provider $600 or more in a year for business services, you generally must issue them a Form 1099-NEC by January 31 and file a copy with the IRS. The smart move is to collect a Form W-9 from every contractor before you pay them, so you have their legal name, address, and tax ID on hand at year-end. Payments to corporations are usually exempt (with some exceptions like attorneys), and payments made through credi

Question 18

I'm just starting out self-employed — what tax setup should I get right first?

Accepted Answer

Get a few foundations in place and the rest gets much easier. First, open a dedicated business bank account and card so personal and business money never mix — this protects deductions and any liability shield. Second, get a free EIN so you're not handing your SSN to clients. Third, decide on a tax set-aside habit: move roughly 25–30% of each payment into a separate account for taxes from day one. Fourth, learn the quarterly estimated-payment calendar so you're never blindsided in April. Fifth,

Question 19

How do Solo 401(k) contributions work — the employee plus employer math?

Accepted Answer

A Solo 401(k) lets you wear two hats: employee and employer. As the employee you can defer up to $23,500 in 2025 ($31,000 if you're 50+ with the $7,500 catch-up). As the employer you can add a profit-sharing contribution of up to 25% of your compensation. The combined total can't exceed $70,000 in 2025 ($77,500 with the catch-up). For a sole proprietor, the employer percentage is calculated on net self-employment income after the self-employment-tax deduction, which works out to roughly 20% of n

Question 20

Should I use a Solo 401(k) or a SEP-IRA?

Accepted Answer

For most one-person businesses with no employees, the Solo 401(k) wins because it adds an employee deferral on top of the employer contribution. A SEP-IRA only allows the employer piece — up to about 20% of net self-employment income — so to hit the $70,000 cap in 2025 you'd need roughly $350,000 of profit. A Solo 401(k) lets you contribute the full $23,500 employee deferral first, then layer the profit-sharing on top, so you can save far more at modest income. Solo 401(k)s also allow Roth contr

Question 21

What is a SIMPLE IRA and when does it make sense for a small business?

Accepted Answer

A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a retirement plan built for businesses with 100 or fewer employees that want something easier than a 401(k). In 2025 employees can defer up to $16,500, plus a $3,500 catch-up at 50+, and the employer must either match up to 3% of pay or contribute a flat 2% for everyone. It's cheap to run and has no annual 5500 filing, which is its main appeal. The downsides: contribution limits are lower than a Solo or regular 401(k), and early withdr

Question 22

Can a high-earning solo use a defined-benefit or cash-balance plan to save more?

Accepted Answer

Yes, and it's one of the most powerful tools for a high-income solo who wants to shelter far more than a Solo 401(k) allows. A defined-benefit or cash-balance pension plan can permit contributions well into the six figures depending on your age and income, because the limit is based on funding a future retirement benefit rather than a fixed annual cap. The older you are and the higher your stable profit, the larger the deductible contribution. These plans require an actuary, annual filings, and

Question 23

Can I add a Roth option to my Solo 401(k)?

Accepted Answer

Yes — most Solo 401(k) providers now offer a Roth bucket for the employee deferral. You can put up to the full $23,500 employee portion in 2025 ($31,000 if 50+) into Roth, where it grows tax-free and comes out tax-free in retirement, with no income limit blocking you the way a Roth IRA has. The employer profit-sharing piece has traditionally been pre-tax, though recent rules now allow designating it as Roth too if your plan document permits. Roth deferrals make sense if you expect to be in a sim

Question 24

Can my spouse contribute to my Solo 401(k)?

Accepted Answer

Yes, if your spouse genuinely works in the business and is paid for it, they can participate in the same Solo 401(k) — this is one of the plan's hidden advantages. A spouse who earns compensation from the business can make their own employee deferral of up to $23,500 in 2025 (plus catch-up if 50+) and receive an employer profit-sharing contribution, effectively doubling the household's tax-advantaged saving. For a sole proprietor, this usually means putting the spouse on payroll or paying them a

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