Small Business & Self-Employment Terms

An accrual method of accounting reports income when the all-events test is met and deducts an expense when the liability is fixed, determinable and economically performed. For a business with formal financial statements the trigger for income can be book recognition, which is where "income when earned" stops being the whole rule.

Angel investing is an individual using their own money to back a very early startup, usually in exchange for equity or a note that later converts to equity. Angels invest before venture funds do, in smaller amounts, and accept that most of their companies will fail.

Bonus depreciation lets a business deduct the full cost of qualifying equipment and other short-lived property in the year it is placed in service, instead of spreading the deduction over the property's recovery period.

Bookkeeping is the ongoing recording of a business's income and expenses. The tax code treats the books as the thing that determines your method of accounting, so how you keep them is a legal choice rather than an administrative one.

Bootstrapping is funding a business from the owner's own money and the business's own revenue instead of from outside investors or lenders. The Small Business Administration calls it self-funding, and its defining trade-off is that the owner keeps all the control and carries all the risk.

Burn rate is the pace at which a business spends its cash, almost always stated per month. The SEC defines it as "the rate at which a company spends its cash over time," and the number is read off cash actually moving rather than off the profit and loss statement.

A business bank account is a deposit account held in a business's name and used only for business money, kept separate from the owner's personal accounts. The separation protects clean bookkeeping and, for an LLC or corporation, the liability shield.

A business credit card is a revolving credit card issued for business spending. It usually requires the owner's personal guarantee, and many of the consumer protections that apply to personal cards do not fully apply to it.

A business credit score is a commercial bureau's rating of how reliably a business pays its suppliers and lenders. There is no single score and no single scale, and the legal protections that surround a personal credit report mostly do not apply to a business one.

A business emergency fund is cash the business holds in its own accounts, deliberately not spent on operations, to absorb a shock such as losing a large customer or a slow collection cycle. It is sized against fixed costs, payroll and how concentrated the revenue is, not against household expenses.

Business expenses are the costs of running a business, and the deductible ones are those the tax code treats as "ordinary and necessary" for that trade or business. They reduce taxable profit, but several common costs are limited or disallowed.

Business interruption insurance replaces the income a business loses and pays its continuing expenses while it is shut down by a covered property loss. In standard policies it pays only when the shutdown follows direct physical damage to property, which is why it usually did not cover pandemic closures.

Business liability insurance, written formally as commercial general liability, covers claims that your operations caused bodily injury or property damage to somebody else, plus a closed list of personal and advertising injury offenses. It does not cover claims that your professional work was wrong, and the reason is the coverage grant rather than an exclusion.

A business line of credit is a revolving facility a business can draw on repeatedly up to a limit, paying interest only on what is drawn. Unlike a term loan it can be repaid and redrawn, and unlike consumer credit it carries almost none of the federal disclosure protections.

Business overhead expense insurance reimburses a business for its continuing operating costs while the owner is disabled and cannot work. It pays rent, utilities and staff wages so the doors stay open, and it deliberately does not pay the owner's own salary.

Business succession planning is the process of deciding, in advance, how ownership and leadership of a business will pass to someone else, whether through a family transfer, a sale, an employee buyout, or another route, so the business survives the owner's departure.

Business valuation is the process of estimating what a business or an ownership interest in it is worth, using recognized methods grouped into asset, income, and market approaches. There is no single correct number; the answer depends on the method, the purpose, and the standard of value.

A businessowners policy (BOP) is a packaged insurance policy for small and mid-sized businesses that bundles commercial property coverage and general liability, and often business income coverage, into a single contract at a lower cost than buying each separately.

A buy-sell agreement is a contract among the owners of a business that sets in advance what happens to an owner's share when a triggering event such as death, disability, or departure occurs, including who may buy it and at what price. It is often funded with life insurance.

A C corporation is any corporation that has not elected S status. It is a tax classification rather than a way of forming a business, and its defining feature is that the corporation pays its own income tax before anything reaches the shareholders.

A cash balance plan is a defined benefit plan that expresses each participant's benefit as a hypothetical account balance growing by annual pay credits and interest credits. It looks like a 401(k) from the outside, but the assets are pooled, the employer bears the investment risk, and the interest credit is the employer's promise.

The cash method of accounting reports income when it is actually or constructively received and deducts expenses when they are paid. It is the default for individuals and most small businesses, and the entity-level bar in section 448 does not reach a sole proprietor, a single-member LLC or an S corporation at all.

Commercial auto insurance covers liability and physical damage for vehicles a business uses. Its most under-appreciated feature is that it can reach vehicles the business does not own, including an employee's own car driven on company business, which a personal policy may not cover.

Commercial property insurance pays to repair or replace a business's building and its contents after a covered event. How much it covers depends on which of three causes-of-loss forms the policy uses, and how much it pays depends on whether the property is insured at replacement cost or actual cash value.

Cyber insurance covers a business's losses from a cyber attack or data breach. Roughly half of what it pays for is the business's own response cost, which is why "cyber liability insurance" describes only part of the product, and the policies are deliberately not standardized.

Digital nomad finances are the money and tax questions facing people who work remotely while moving between locations: keeping or shedding state residency, paying self-employment tax that living abroad does not erase, banking, and health coverage.

An Employer Identification Number, or EIN, is the nine-digit number the IRS uses to identify a business, estate, or trust on its filings. It is an identifier rather than a license or a legal status, and once issued it brings filing expectations and an ongoing duty to keep the IRS informed of who controls the entity.

Employment practices liability insurance covers claims by employees and applicants that the employer treated them unlawfully: wrongful termination, discrimination, harassment, failure to hire or promote. A general liability policy cannot reach these claims, and the reason is the coverage grant rather than an exclusion.

Equity compensation for startups is the stock, options, or restricted stock units a private, early-stage company grants employees in place of, or on top of, cash pay. What sets it apart from public-company equity is that the shares have no market to sell into, their value is set by appraisal rather than a stock price, and the outcome is highly uncertain.

Estimated taxes are the payments you make directly to the IRS on income nobody withholds tax from, in four installments during the year. Skipping them produces an addition to tax computed like interest, and the way to make that impossible is the prior-year safe harbor.

A family limited partnership is a state-law limited partnership among family members, used to hold assets while the senior generation keeps management control through a small general partner interest and transfers the limited partner interests down. It is an ordinary entity carrying an unusual amount of tax attention.

Financial runway is how long a business can keep operating on the cash it already has, found by dividing available cash by the rate at which it is consuming cash. It is stated in months, and it is only as reliable as the assumption that the rate will hold.

Fiscal sponsorship is an arrangement in which an existing charity receives and administers money for a project that has no tax exemption of its own. Whether the donor's gift is deductible turns on whether the charity holds real discretion over the money or is merely passing it along.

Form 1099-K reports money settled to you through a payment card or an online platform. Its official title is "Payment Card and Third Party Network Transactions", and those are two separate reporting paths with two very different thresholds.

Form 1099-NEC is the return a business files to report what it paid for services performed by someone who is not its employee. Its official title is "Nonemployee Compensation", and it is the only Form 1099 due to the recipient and the IRS on the same date.

Form W-9 is the IRS form on which a U.S. person gives their taxpayer identification number to someone who has to file an information return about a transaction with them. It is never filed with the IRS: the form goes to the requester, who keeps it, and the signature on it is made under penalties of perjury.

A Form 1099 is a return a payer files with the IRS reporting money it paid you, with a copy sent to you. It is one of a family of information returns, each with its own threshold, and receiving one is not what makes the income taxable.

Freelancing is earning a living by providing a skilled service to multiple clients as an independent worker rather than an employee. The financial reality that defines it is irregular income, no employer-provided benefits, and responsibility for setting rates, invoicing, and paying your own taxes.

The gig economy is the market for short-term, on-demand, and platform-based work, where people are paid per task or per project rather than in a salaried job. For taxes, gig workers are usually treated as self-employed, which changes what they owe and who withholds it.

Hobby income is money earned from an activity the tax code treats as a hobby rather than a business, meaning one not carried on to make a profit. The income is fully taxable, but the expenses of the activity are not deductible.

The home office deduction lets a self-employed person deduct part of the cost of their home when a specific area of it is used exclusively and regularly for business. Employees cannot claim it at all, and that exclusion is now permanent rather than temporary.

Home-based business insurance is the coverage that fills the gap between a homeowners or renters policy and what a business run from home actually needs. NAIC's assessment is that personal policies are "rarely adequate" for it, and the two routes to closing the gap are an endorsement or a separate business policy.

An independent contractor is a worker who is in business for themselves rather than employed by whoever pays them. It is a conclusion reached under whichever body of law is asking rather than a status anyone elects, and the same worker can be a contractor for one purpose and an employee for another.

An individual coverage HRA is an employer arrangement that reimburses employees for individual health insurance premiums and other medical expenses instead of offering a group health plan. The employee has to be enrolled in individual coverage or Medicare every month the arrangement covers them.

An installment sale is a sale of property in which the seller receives at least one payment after the year of the sale and reports the gain as the payments come in, rather than all at once. It spreads the tax over time but comes with several traps written into Internal Revenue Code section 453.

Invoice factoring is the sale of a business's unpaid invoices to a third party at a discount, in exchange for most of the money now. California's statute defines it as the purchase of "a legally enforceable claim for payment" for work already delivered, which is what separates it from an advance against future sales.

Irregular income budgeting is a set of techniques for managing money when your pay varies month to month (freelancing, commissions, seasonal work, or self-employment) usually by paying yourself a steady "salary" from a buffer account.

Key person insurance is a policy a business buys on the life or health of someone whose loss would damage it, with the business as owner, premium payer and beneficiary. Its purpose is to give the company cash to survive the gap, not to provide for the insured's family.

A limited liability company is a business entity created under a state statute that separates the owners from the business's debts. It is not a tax classification, so forming one leaves a second and entirely separate question open, which is how the IRS will tax it.

Material participation is the standard that decides whether a business activity is passive, and it is met by satisfying any one of seven tests in 26 CFR 1.469-5T(a). Meeting it does not make a rental non-passive, because rentals are passive by a separate rule.

A merchant cash advance is a lump sum a business receives in exchange for the right to a percentage of its future sales, up to a fixed ceiling. It is priced as a total amount owed rather than as an interest rate, and federal consumer credit disclosure rules do not reach it.

A money purchase pension plan is a defined contribution plan whose document fixes the employer contribution by formula, so the employer must fund it every year. Because it is legally a pension plan, it carries minimum funding rules, survivor annuity requirements, and a bar on in-service withdrawals that a profit-sharing plan does not.

Multi-level marketing is a way of distributing products or services through a network of independent participants who are paid both for what they sell and for what the people they recruit sell. It is lawful, and whether a particular company's compensation structure has crossed into an unlawful pyramid is a fact-intensive question with no percentage test behind it.

A non-compete agreement is a contract term restricting where and for whom someone may work after an employment relationship ends. As of September 2026 there is no federal rule banning them: the Federal Trade Commission's 2024 rule was set aside by a court and removed from the Code of Federal Regulations in February 2026, so state law governs.

An owner's draw is money a business owner takes out of the business for personal use. It is not a wage, not a deductible business expense, and has no tax withheld, and the owner is taxed on the business's profit whether or not any of it is drawn.

A partnership is a business with more than one owner that pays no income tax of its own. It reports its results to the IRS and hands each partner a share to report on their own return, whether or not any money was actually distributed.

Pay transparency is the body of state and local law that requires an employer to disclose what a job pays, most often as a pay range in the job posting. A salary-history ban is a different duty that frequently sits in the same statute, and the two are worth keeping apart.

Payroll is the employer function of paying employees and meeting the obligations that attach to doing so. Beyond issuing the paychecks it is a calendar: taxes have to be deposited on a schedule the government sets, and the penalty for missing a deposit rises with the delay.

A per diem allowance is a flat daily payment an employer makes to cover an employee's lodging, meals and incidental expenses on business travel. Paid at or below the applicable federal per diem rate under an accountable plan, it satisfies the tax law's substantiation requirement without anyone collecting receipts.

Professional liability insurance covers claims that a business's professional work was wrong: bad advice, a missed deadline, a flawed design. It exists because a general liability policy insures bodily injury and property damage, and a client's purely financial loss is neither.

Profit is what a business has left after subtracting its costs from its revenue. It is the bottom line, the number that says whether the business actually made money, and it is not the same as the cash in its account.

A profit and loss statement, also called an income statement, is a report that lists a business's revenue and expenses over a period and shows the profit or loss left at the bottom. It is how a business, or its lender, sees whether the operation made money.

A profit-sharing plan is a defined contribution plan in which the employer decides each year how much to contribute, including nothing, and the plan document specifies how that amount is divided among participants. Despite the name, the contribution does not have to come out of profits.

A public benefit corporation is a for-profit company that is legally bound to pursue a stated public benefit alongside profit, and to balance the interests of shareholders, those affected by its conduct, and that public purpose.

The qualified business income deduction lets the owner of a sole proprietorship, partnership, S corporation or rental business deduct up to 20 percent of that business's profit from taxable income. It is claimed by the owner rather than the business, and above an income threshold it is restricted or, for certain service businesses, removed altogether.

Qualified small business stock is stock in a domestic C corporation that meets a specific set of tests in Internal Revenue Code section 1202. On a qualifying sale, a noncorporate shareholder can exclude some or all of the gain from federal income tax.

A qualified small employer health reimbursement arrangement, or QSEHRA, lets a business that is not an applicable large employer and offers no group health plan reimburse employees tax-free for individual health insurance and other medical expenses, up to a dollar limit set by statute and indexed each year.

Reasonable compensation is the amount a business may deduct for what it pays someone for their work: what a similar business would ordinarily pay for similar services. The standard runs in both directions, and which direction bites depends on how the business is taxed.

Revenue is the total money a business brings in from selling its goods or services over a period, before any costs are subtracted. It is the top line of a business's income, not what the business gets to keep.

An S corporation is a federal tax classification, not a type of business entity. A corporation or an eligible LLC elects it, and the effect is that profits are taxed on the owners' returns rather than at the entity level, and an owner-employee's pay splits into wages and distributions.

An S corporation election is the filing a corporation or eligible LLC makes, on Form 2553, to be taxed under Subchapter S so its profits pass through to the owners instead of being taxed at the entity level. It has a deadline, eligibility rules, and a cost to reverse.

A safe harbor 401(k) is a plan design in which the employer commits to a required contribution, a set matching formula or a nonelective contribution for everyone eligible, in exchange for an exemption from certain annual nondiscrimination tests. It buys predictability, not a blanket pass.

An SBA loan is a small-business loan made by a private lender and partly guaranteed by the U.S. Small Business Administration. The guarantee lowers the lender's risk, which lets small businesses borrow on terms they might not get otherwise. The main programs are the 7(a), the 504, and microloans.

Schedule C is the form that turns a business's receipts and expenses into one number, its net profit or loss, and carries that number onto the owner's personal tax return. Its full title is "Profit or Loss From Business (Sole Proprietorship)", though several filers who are not sole proprietors use it.

The Section 179 deduction is an election that lets a business write off the cost of qualifying equipment and software in the year it is placed in service, up to an annual dollar ceiling and never beyond the income the business actually earned.

A Section 409A valuation is an appraisal of the fair market value of a private company's common stock, obtained so the company can set option strike prices without triggering the penalties in Internal Revenue Code section 409A. The regulation does not require an appraisal, but it gives one a presumption of reasonableness that is hard to dislodge.

The self-employed health insurance deduction lets self-employed people deduct the premiums they pay for medical, dental, and qualifying long-term care coverage directly against income, without having to itemize.

Self-employment means working for yourself rather than for an employer. Three things change as a result: you owe both halves of Social Security and Medicare tax on the business earnings, nobody withholds tax from what you are paid, and you may deduct the genuine costs of running the business.

Self-employment tax is the Social Security and Medicare tax paid by people who work for themselves, covering both the employee and the employer share. It is 15.3 percent, but it is charged on 92.35 percent of business profit rather than on the whole of it, and half of the resulting tax is deductible.

Seller's discretionary earnings is a small business's pretax profit with interest, depreciation, amortization, nonrecurring items and one owner's whole compensation package added back. It estimates the total annual financial benefit the business delivered to a single owner-operator.

A SEP IRA is a retirement arrangement funded entirely by employer contributions into a traditional IRA opened for each eligible employee. SEP stands for Simplified Employee Pension. Employees cannot defer their own salary into it, and whatever percentage the owner contributes for themselves has to be contributed for everyone eligible.

Separating business and personal finances means keeping a business's money, accounts, and records entirely apart from the owner's own. It is not just tidy bookkeeping: commingling the two can erode the liability protection of an LLC or corporation and undermine the records that support tax deductions.

A side hustle is income-earning work done alongside a main job. The money is self-employment income from the first dollar, nobody withholds tax on it, and four obligations switch on the moment it starts.

A SIMPLE IRA is a small-employer retirement plan in which employees defer part of their pay and the employer is required to contribute, either a dollar-for-dollar match up to 3% of pay or 2% of pay for everyone eligible. It is limited to employers with 100 or fewer employees and must generally be the only plan they maintain.

The Small Business Administration (SBA) is the federal agency that supports small businesses. It is best known for guaranteeing loans made by private lenders, but it also runs disaster loans, government-contracting set-asides, free counseling, and other programs.

A sole proprietorship is an unincorporated business owned by one person, with no legal existence separate from that person. It is what a business is by default, since nothing has to be filed to create one, and it is the reason the owner's personal assets stand behind the business's obligations.

A solo 401(k) is an ordinary 401(k) plan covering a business owner who has no employees other than a spouse. The IRS calls it a one-participant 401(k) plan and is explicit that it is not a separate type of plan, so the rules are the same as any other 401(k). What makes it distinctive is the absence of employees.

The standard mileage deduction lets a self-employed person deduct the cost of driving for business using a set rate per mile, instead of adding up the actual costs of running the vehicle. The IRS publishes the rate, and choosing a method in the first year has lasting consequences.

A retirement plan is top-heavy for a plan year when more than 60% of its account balances or accrued benefits belong to key employees, measured on the last day of the previous year. The consequence is a required minimum employer contribution for everyone who is not a key employee.

Worker misclassification is treating someone who is legally an employee as an independent contractor. The classification itself is decided under whichever body of law is asking; misclassification is the name for getting it wrong, and it carries its own machinery of taxes, penalties and remedies.

Workers' compensation is state-mandated insurance that pays an employee's medical bills and part of their lost wages for a job-related injury or illness, regardless of fault, in exchange for the employee giving up the right to sue the employer.