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Tax Basics for Individuals and Small Business Owners

  • 8 hours ago
  • 8 min read

Tax time can be daunting for both first-time filers and seasoned business owners. Having a clear understanding of essential tax documents, deadlines, deductions, and recordkeeping can simplify the process and help you avoid costly mistakes. This guide covers the fundamentals: which documents you’ll need, deciding when to hire a tax pro versus using software, key differences between W-2 and 1099 income, home-office deductions, filing deadlines and penalties, and how long to keep records. It also explains what an IRS transcript is and why a lender might request it. We make tax basics for small business owners and individuals straight forward and simple.

Tax preparer desk in the heat of tax season with papers and softwares

Essential Documents and Forms


Before you file, gather personal information and income documents. Every taxpayer needs proof of identity – your Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) – for yourself, your spouse and any dependents. You'll also need your last year’s tax return (to verify prior-year Adjusted Gross Income, if you e-file) and banking info for direct deposit.

For income, collect all relevant tax forms. Employees will receive Form W-2 from employers, which reports wages and withheld taxes. Independent contractors and freelancers get Form 1099-NEC (or 1099-MISC for some payments). Other common 1099s include 1099-INT (interest), 1099-DIV (dividends), 1099-R (retirement distributions), and 1099-G (unemployment). The IRS notes that payors must send these forms by late January or early February. If you have multiple sources of income (rent, investments, business, 1099-K for online sales, etc.), be sure to include those documents too.

For deductible expenses, gather receipts and statements. Examples include mortgage interest or rent, property tax receipts, charitable donations, medical expenses, and educational expenses. Self-employed taxpayers should have records of all business expenses: bank and credit card statements, receipts for purchases, mileage logs, and Forms 1098 (mortgage interest) or 5498 (HSA contributions). Also keep track of last year’s estimated tax payments (Form 1040-ES vouchers) if you made any. In summary, organize all paperwork that supports your income and deductions so your return is accurate and complete.

When to Hire a Tax Professional vs. DIY Software


If you have a simple return (e.g. one W-2, standard deduction, little other income), tax software can be sufficient. However, complex situations often warrant a tax pro. The IRS and experts agree: Tax Professional if you have multiple income streams, own a business, or face complicated deductions. For example, if you’re self-employed, have rental properties, sold significant investments, or experienced major life changes (marriage, divorce, inheritance), a professional can navigate complex rules and help maximize savings. QuickBooks advises that “unless you have accounting experience, hiring an accountant is recommended to stay compliant”.

Moreover, tax laws change frequently. In 2025, major tax law changes may affect deductions and credits. A pro stays up-to-date and can identify lesser-known benefits. Also, if you want to minimize audit risk, a qualified preparer can help you avoid red flags. The bottom line: if your tax situation feels overwhelming or you want peace of mind, investing in a tax professional is worthwhile.

W-2 vs. 1099 Income: Key Differences


Understanding how employees and contractors are taxed is crucial. A W-2 employee works for an employer who reports wages on Form W-2 and withholds income, Social Security and Medicare taxes on your paycheck. The employer also pays the employer’s share of payroll taxes and may provide benefits like health insurance. In contrast, a 1099 independent contractor is essentially running their own business. They receive a Form 1099-NEC (or 1099-K) reporting income, and no taxes are withheld at the source. Contractors pay both the employee and employer portion of Social Security and Medicare taxes (self-employment tax) when they file.

For example, W-2 income is usually subject to payroll withholdings and employment protections, whereas 1099 income requires the contractor to pay quarterly estimates and track business expenses. Misclassifying workers can be costly, so ensure you correctly distinguish between wages (W-2) and contract income (1099) by considering IRS guidelines on control and independence.

Home Office Deduction Basics


Small business owners and self-employed taxpayers often wonder about deducting a home office. You can deduct home office expenses only if you meet IRS criteria. The space must be used exclusively and regularly as your principal place of business or as a place to meet clients. For example, a room used 100% for your business qualifies, but if family also uses it, you cannot deduct.

If qualified, you calculate the deduction using either the regular method (allocating actual expenses) or the simplified method ($5 per square foot, up to 300 sq ft). Keep records of the home’s square footage and business-use percentage. Note that the home office deduction can’t exceed your business income, so it won’t create a loss. For detailed rules, see IRS Publication 587 on business use of your home.

Filing Deadlines and Late Penalties


For individuals, federal tax returns are generally due April 15 (or the next business day if it falls on a weekend/holiday). Small businesses follow similar deadlines (e.g. March 15 for partnerships/S-Corps, April 15 for sole proprietors and C-Corps). If you file after the due date (without a valid extension) and owe tax, the IRS imposes a failure-to-file penalty. The penalty is 5% of the unpaid tax per month, up to a maximum of 25%. If you’re more than 60 days late, a minimum penalty (hundreds of dollars) applies.

You can avoid the late-filing penalty by requesting an extension, which gives you until October 15 to file. However, an extension to file does not extend the deadline to pay any taxes due – interest and a failure-to-pay penalty (0.5% per month) still apply to unpaid balances. In short, file and pay on time if possible. If you can’t pay in full, pay as much as you can to minimize penalties, and contact the IRS about payment plans. In cases of death or serious hardship, reasonable cause relief might apply, but in general late filing triggers steep penalties.

Recordkeeping and IRS Transcripts


Good recordkeeping simplifies taxes and protects you if audited. The IRS advises keeping tax records at least as long as they’re “material” to the tax return. In practice, this means at least 10 years from the filing date (the period during which the IRS can audit most returns). If you omit more than 25% of income, that extends to 6 years. Keep records showing income, deductions, credits and assets until those periods expire. For employment taxes (if you have payroll), IRS Pub. 583 recommends keeping records for 10 years after the due date or payment date, whichever is later. Always keep copies of filed tax returns to help prepare future returns or amend if needed.

Sometimes you may need an IRS tax transcript – a summary of your return data. Lenders commonly request a transcript (rather than a full copy) to verify income and filing status when you apply for mortgages or loans. A transcript shows line-by-line return data and tax account details without revealing sensitive personal information (like full Social Security numbers). You can request your own transcripts for free from IRS Online Account or by Form 4506-T, which can facilitate lenders’ verification needs. In short, keep records organized, and know that transcripts provide a safe way for lenders or tax pros to confirm your reported income.

Conclusion and Next Steps


Tax preparation is a critical part of running your personal and small business finances. By understanding what documents to gather, the key differences between W-2 and 1099 income, eligible deductions like home office, and the importance of deadlines and records, you’ll file more confidently. If the process ever feels complex or you want expert guidance, JR Shelton Bookkeeping & Consulting Services is here to help. Our team specializes in tax planning, bookkeeping (QuickBooks Online), S-Corp strategy, and resolving IRS issues. Contact us today for personalized assistance to make tax season stress-free and ensure you stay compliant.


FAQ: Tax Basics for Small Business Owners & Individuals


What documents do I need to file my taxes?

Gather your personal IDs (Social Security/ITINs) and income records. This includes Form W-2 for wages and various Form 1099s (1099-NEC, 1099-INT, etc.) for other income. Also collect deduction support – mortgage interest (Form 1098), tuition (1098-T), healthcare statements (1095-A), investment sales records (1099-B), and receipts for charity, medical, etc. Keep last year’s tax return handy (it has your prior AGI and info). Essentially, assemble everything that reports income or backs up deductions so you (or your preparer) can file an accurate return.


When should I hire a tax professional instead of using software?

If your taxes are simple (one W-2, standard deduction, no complicated situations), DIY software may suffice. But consider a pro when your return is complex. For example, if you have multiple income sources, run a business or rental property, had life changes (marriage, divorce, inheritance), or want to maximize deductions, a Tax Professional can be worth it. Professionals also stay updated on tax laws and can help avoid audit triggers. As QuickBooks notes, “unless you have accounting experience, hiring an accountant is recommended to stay compliant”.


What is the difference between a W-2 and a 1099?

W-2 income comes from being an employee. Your employer reports wages on Form W-2 and withholds income, Social Security and Medicare taxes for you. 1099 income is paid to independent contractors or self-employed people (Form 1099-NEC/MISC). No taxes are withheld from those payments; the contractor must report the income and pay self-employment (SE) taxes on it. In short, W-2 workers have taxes taken out of paychecks and get employer benefits, while 1099 contractors run their own business, pay both halves of payroll taxes, and handle their own deductions.


Can I deduct my home office?

You can only deduct a home office if you meet IRS rules. The space must be used exclusively and regularly as your principal place of business or for meeting clients. For example, a spare room set aside 100% for your business would qualify. Common areas or part-time use (e.g. family also uses it) do not qualify. If eligible, you can use either the regular method (calculating actual home expenses prorated for business use) or the simplified method (up to $5/sq ft, max 300 sq ft) on Schedule C. Check IRS Publication 587 for full criteria.


What happens if I file my taxes late?

Filing after the deadline without an extension usually incurs penalties. The failure-to-file penalty is 5% of any unpaid tax per month (or part of a month) late, up to 25%. If your return is more than 60 days late, there’s a minimum penalty (currently over $525). Interest on the unpaid tax accrues from the due date. If you owe tax, also remember the failure-to-pay penalty (0.5% per month) applies. To avoid these, file an extension if needed (extensions only apply to filing, not to payment). In short, file and pay on time to prevent fees – and pay as much as you can to reduce penalties and interest.


How long should I keep tax records?

Keep records as long as they might be needed for tax administration. Generally, the IRS recommends at least 10 years from the date you filed your return (the period they can audit you). If you underreported income by more than 25%, keep records 6 years. If you have employee payroll, keep those records 4 years from the tax date. Also keep documents relating to property (for depreciation or sale) until the year you dispose of it. Once records are no longer needed for tax purposes, don’t discard them if another law (like state rules or lenders) requires you to keep them longer.


What is an IRS transcript and why would a lender request it?

An IRS tax transcript is a summary of your filed return information. It includes line-by-line data from your return and key tax account figures, but it omits sensitive details like full Social Security numbers. Lenders often request a tax return transcript (especially for mortgages or refinancing) to verify your income and filing status. Transcripts are a convenient, free way for third parties (or tax professionals) to confirm your reported income without needing a full copy of your return. Tax transcripts can be obtained through the IRS online account, by phone or by filing Form 4506-T, and they help speed up loan processing or IRS inquiries.

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