Glossary
The words, defined
Every term Contha uses and most tax software assumes you already know. 25 of them, each one a sentence first and an explanation after.
Tax
What you owe, and when
Qualified business income deduction
A deduction of up to 20% of qualified business income, available to owners of pass-through businesses.
Quarterly estimated tax
Tax paid in four instalments during the year by people whose income is not subject to withholding.
Safe harbor
A payment level that protects you from an underpayment penalty even if you end up owing more.
Schedule C
The form a sole proprietor files with their personal return to report a business’s income and expenses.
Self-employment tax
Social Security and Medicare tax paid by someone who works for themselves, covering both the employee and employer halves.
Social Security wage base
The annual cap on earnings subject to Social Security tax, above which only Medicare tax applies.
Business
How the business is treated
Basis
What you have invested in a business for tax purposes, adjusted each year for profit, loss and distributions.
Disregarded entity
A business that exists legally but is ignored for federal tax purposes, its activity reported on the owner’s own return.
Guaranteed payment
A payment a partnership makes to a partner for services or capital, regardless of whether it made a profit.
LLC
A legal structure that separates a business’s liabilities from its owners, formed with a state.
Material participation
Whether an owner is genuinely involved in running a business, which decides how their share is taxed.
Partnership
A business with more than one owner that files its own information return and passes profit through to the partners.
Pass-through entity
A business that pays no income tax itself and passes its profit to its owners to report.
Reasonable compensation
The salary an S-corporation owner must pay themselves for the work they do before taking profit as distributions.
S-corporation
A tax election under which a business pays its owner a salary and passes the remaining profit through to them without self-employment tax.
Schedule K-1
The statement a partnership or S-corporation issues to each owner reporting their share of its income, deductions and credits.
Sole proprietorship
A business owned by one person that is not legally separate from that person.
Records
What you have to be able to show
Accountable plan
An arrangement under which a business reimburses an owner or employee for business expenses without the reimbursement being taxable pay.
Form 1099-NEC
The form a business files to report what it paid an independent contractor during the year.
Form W-9
The form a contractor gives a business stating their legal name and taxpayer identification number.
Standard mileage deduction
A per-mile rate that stands in for the actual cost of operating a vehicle for business.
Substantiation
The evidence that a claimed deduction actually happened and was for business.