Commonly Overlooked Areas When Considering Starting a Business
At various points in our lives, many people will consider starting their own business as a sole proprietor or an LLC in pursuit of change. Changing up the monotony of the 9-to-5. Changing daily focus to something you’re passionate about. Changing your income ceiling to something more desirable. Creating a business can be a path that leads to many benefits:
- Continued pursuit of your passion – and earning a living from it
- Customizing your workload to work within your desired schedule
- Possibilities for continued scaling and growth
- Realizing the direct benefits of your own efforts
Still, starting a business requires a lot of hard work and careful consideration before you open your doors. The beginning can be full of long hours, administrative work, bookkeeping, and scheduling. These are the common areas that many consider when creating a business. However, there are some commonly overlooked factors to keep in mind as you start planning.
Self-Employment Tax
As a W-2 employee, you pay Medicare Tax on 1.45% of your total wages and Social Security Tax on 6.2% of your wages up to $184,500 (2026). However, what many don’t know is that employers must also match these amounts for their side of these taxes. When a person starts their own business as a pass-through entity and becomes self-employed, a 15.3% self-employment tax is imposed on net earnings from self-employment. This covers both the employee and employer sides of Medicare and Social Security taxes for W-2 employees.
Self-Employment Tax Deduction
As an aid to taxpayers who are self-employed as a pass-through entity, the “employer portion” of the self-employment tax (7.65%) can be deducted from adjusted gross income (AGI) when calculating income tax owed, but still must be paid as self-employment tax.
Qualified Business Income Deduction (Section 199A Deduction)
Qualified Business Income (QBI) is the net self-employment earnings from qualified domestic trades or businesses. A taxpayer is allowed to deduct up to 20% of their QBI to reduce taxable income. However, there are phaseouts for this deduction that differ from those for Single and Married Filing Jointly filers, which adjust each year for inflation (starting at $201,750 and $403,500 for 2026, respectively).
Resources That Provide General Guidance
A good starting point for research would be irs.gov. This will help provide general guidance on self-employment tax, the related deduction, and the Section 199A deduction. This is also a useful resource for determining what qualifies as a business or a specified service trade or business (SSTB).
Contact a local CPA firm with specifics. When starting a business, it is important to establish a relationship with a tax preparer early to receive guidance and support on this subject. Tax planning is an important tool that business owners can use. Sit down and meet with a local CPA to discuss your business, personal tax outlooks, and growth opportunities in the future.
