7 Essential Tax Terms Every Small Business Owner Should Know
Running a small business involves juggling many responsibilities—marketing, customer service, product development, and, of course, finances. One area that often feels like uncharted territory is taxes. Understanding key tax terms is critical to keeping your business compliant and maximizing your savings. Below, we demystify seven essential tax terms every small business owner should know.
1. Adjusted Gross Income (AGI)
What it is:
Adjusted Gross Income, or AGI, is your total income minus certain “above‐the‐line” deductions. It serves as the starting point for calculating your taxable income.
Why it matters:
- AGI determines your eligibility for many credits and deductions (e.g., the Qualified Business Income Deduction).
- Many IRS thresholds hinge on AGI, such as phase-outs for credits.
Example:
If your business and personal income totals $120,000 and you qualify for $20,000 in deductions (e.g., retirement contributions, health insurance premiums), your AGI is $100,000.
2. Taxable Income
What it is:
Taxable income is the amount of income on which you actually pay tax. It’s calculated by taking AGI and subtracting either the standard deduction or itemized deductions.
Why it matters:
- This figure directly determines your tax liability.
- Lowering taxable income through deductions reduces the amount you owe.
Example:
With an AGI of $100,000 and a standard deduction of $27,700 (for Married Filing Jointly in 2025), your taxable income would be $72,300.
3. Deductions
What they are:
Deductions reduce your AGI or taxable income. There are two main types:
- Above-the-line deductions (adjustments to income): e.g., self-employed health insurance, retirement plan contributions.
- Below-the-line deductions (itemized or standard): e.g., mortgage interest, state taxes, charitable gifts.
Why they matter:
- Every dollar you deduct lowers the income on which you’re taxed.
- Strategic planning around deductions can save you thousands.
Top Small Business Deductions:
- Home office expenses
- Vehicle and mileage
- Depreciation on assets
- Business travel and meals (50% limit on meals)
- Professional fees (legal, accounting)
4. Tax Credits
What they are:
Tax credits are dollar-for-dollar reductions in your tax liability. Unlike deductions, which reduce your taxable income, credits reduce the actual tax due.
Why they matter:
- Credits can be more valuable than deductions because they reduce what you owe directly.
- Some credits are refundable—meaning you could receive money back if the credit exceeds your liability.
Common Small Business Tax Credits:
- Research & Development (R&D) Credit: Encourages innovation.
- Work Opportunity Credit: For hiring individuals from certain target groups.
- Small Employer Health Insurance Credit: If you offer health coverage to employees.
5. Self-Employment Tax
What it is:
The self-employment tax covers Social Security and Medicare contributions for self-employed individuals. It’s analogous to the payroll taxes withheld from wages for employees.
Why it matters:
- The rate is 15.3% on net self-employment income (12.4% Social Security + 2.9% Medicare).
- You can deduct half of this tax on your income tax return as an above-the-line deduction, lowering your AGI.
Example:
If your net self-employment income is $80,000, you owe $12,240 in self-employment tax, but you can deduct $6,120 on your Form 1040.
6. Estimated Tax Payments
What they are:
Quarterly payments of income and self-employment tax made throughout the year by those who don’t have taxes withheld (e.g., self-employed, freelancers).
Why they matter:
- Paying too little can lead to underpayment penalties.
- Paying too much ties up cash and delays your use of funds.
Key Dates (2025):
- 1st quarter: April 15, 2025
- 2nd quarter: June 17, 2025
- 3rd quarter: September 15, 2025
- 4th quarter: January 15, 2026
How to calculate:
Estimate your total annual tax, subtract any withholding, divide the remainder by four.
7. Tax Brackets and Marginal Rates
What they are:
The U.S. uses a progressive tax system with multiple “brackets.” Each bracket corresponds to a range of income and a tax rate.
Why they matter:
- Only the income within each bracket is taxed at that bracket’s rate.
- Understanding your marginal rate (the rate on the last dollar earned) can help you plan strategies like deferring income or accelerating expenses.
2025 Example (Married Filing Jointly):
| Taxable Income Range | Marginal Rate |
|---|---|
| Up to $23,200 | 10% |
| $23,201–$94,200 | 12% |
| $94,201–$190,750 | 22% |
| $190,751–$364,200 | 24% |
| $364,201–$462,500 | 32% |
| $462,501–$693,750 | 35% |
| Over $693,750 | 37% |
If your taxable income is $120,000, the first $23,200 is taxed at 10%, the next portion up to $94,200 at 12%, and the remaining $25,800 at 22%.
Putting It All Together
Keeping tabs on these seven tax terms will help you:
- Plan Ahead. Estimate your taxes throughout the year to avoid surprises.
- Maximize Savings. Leverage deductions and credits to reduce both your taxable income and your tax bill.
- Stay Compliant. Make accurate estimated payments and understand when tax liabilities are due.
As you grow your business, consider partnering with a qualified CPA who specializes in small business tax. A professional can ensure you’re taking advantage of every deduction and credit, while staying on the right side of IRS rules.
Ready to simplify your taxes and keep more of what you earn? Contact Gemini Accounting Services LLC today for personalized tax planning, bookkeeping support, and expert guidance tailored to your small business needs.
