Common Tax Terms Explained
Tax terminology can be confusing, especially for small business owners, self-employed individuals, S corporation shareholders, and taxpayers dealing with IRS notices or year-round tax planning.
This tax glossary explains common tax, accounting, bookkeeping, and business finance terms in plain English. Succentrix Business Advisors provides tax preparation, bookkeeping, accounting, and fractional CFO services for individuals and small businesses throughout Boise, Meridian, Eagle, and the Treasure Valley.
Adjusted Gross Income
Adjusted gross income, often called AGI, is your total income after certain adjustments are subtracted. AGI can affect deductions, credits, tax rates, and eligibility for certain tax benefits.
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Bookkeeping
Bookkeeping is the process of recording and organizing business financial transactions, including income, expenses, payments, deposits, and account reconciliations. Accurate bookkeeping helps business owners prepare tax returns, review profitability, monitor cash flow, and make informed business decisions.
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Business Expense
A business expense is a cost paid or incurred in operating a business. Common examples may include rent, software, supplies, advertising, insurance, professional fees, mileage, and contractor payments. Proper expense tracking is important for accurate tax preparation and financial reporting.
Cash Basis Accounting
Cash basis accounting records income when money is received and expenses when money is paid. Many small businesses use cash basis accounting because it is simple, but it may not always provide the clearest picture of business performance.
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Accrual Basis Accounting
Accrual basis accounting records income when it is earned and expenses when they are incurred, even if cash has not yet changed hands. This method can provide a more accurate view of profitability, especially for growing businesses with receivables, payables, inventory, or complex reporting needs.
Deduction
A tax deduction reduces taxable income. Common deductions may include business expenses, retirement contributions, mortgage interest, charitable contributions, and certain state and local taxes, depending on the taxpayer’s situation.
Tax Credit
A tax credit directly reduces the amount of tax owed. Tax credits can be more valuable than deductions because they reduce tax liability dollar for dollar, subject to eligibility rules and limitations.
Estimated Tax Payments
Estimated tax payments are payments made during the year toward expected tax liability. They are commonly used by self-employed individuals, small business owners, S corporation shareholders, landlords, and taxpayers with income not subject to enough withholding.
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Tax Withholding
Tax withholding is money taken out of wages, pensions, or other payments and sent to the government on the taxpayer’s behalf. Employees usually manage withholding through Form W-4.
Use the IRS Tax Withholding Estimator resource
Form W-2
Form W-2 reports wages paid to an employee and taxes withheld during the year. Employees receive Form W-2 from their employer and use it to prepare their individual income tax return.
Form 1099
Form 1099 is used to report many types of income that are not traditional employee wages. This may include independent contractor payments, interest, dividends, retirement distributions, and other income.
Independent Contractor
An independent contractor is a worker who provides services to a business but is not treated as an employee. Independent contractors are generally responsible for their own income taxes and self-employment taxes.
Self-Employment Tax
Self-employment tax generally covers Social Security and Medicare taxes for self-employed individuals. Business owners, sole proprietors, and independent contractors often need to plan for self-employment tax in addition to federal and state income taxes.
Sole Proprietor
A sole proprietor is an individual who owns and operates a business without forming a separate legal business entity. Sole proprietors typically report business income and expenses on Schedule C with their individual tax return.
LLC
A limited liability company, or LLC, is a business structure created under state law. For tax purposes, an LLC may be treated in different ways depending on ownership and elections made with the IRS.
S Corporation
An S corporation is a tax election that may allow certain business owners to pay themselves wages and receive additional business profits as distributions. S corporation tax planning often requires payroll, reasonable compensation, accurate bookkeeping, and year-round tax guidance.
Partnership
A partnership is a business structure with two or more owners. Partnerships generally file an informational tax return and provide owners with Schedule K-1 forms reporting their share of income, deductions, and other tax items.
Schedule C
Schedule C is used by sole proprietors and many self-employed taxpayers to report business income and expenses on an individual tax return.
Schedule K-1
Schedule K-1 reports a taxpayer’s share of income, deductions, credits, and other items from a partnership, S corporation, estate, or trust. K-1 income can affect estimated taxes and overall tax planning.
Payroll
Payroll is the process of paying employees, withholding taxes, reporting wages, and remitting payroll taxes. Payroll is especially important for businesses with employees and S corporation owners who must pay reasonable compensation.
Reasonable Compensation
Reasonable compensation refers to wages that an S corporation owner-employee should be paid for services performed for the business. This is an important tax planning and compliance issue for S corporation shareholders.
Financial Statements
Financial statements are reports that summarize business financial activity and position. Common financial statements include the profit and loss statement, balance sheet, and cash flow statement.
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Profit and Loss Statement
A profit and loss statement, also called an income statement, shows business revenue, expenses, and net income over a specific period. Business owners use this report to understand profitability.
Balance Sheet
A balance sheet shows a business’s assets, liabilities, and equity at a specific point in time. It helps business owners understand financial position and overall business health.
Cash Flow
Cash flow refers to money moving in and out of a business. A business can be profitable on paper and still struggle with cash flow if timing, collections, expenses, debt payments, or growth are not managed carefully.
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Fractional CFO
A fractional CFO provides high-level financial guidance without the cost of hiring a full-time chief financial officer. Services may include cash flow forecasting, KPI reporting, profitability analysis, budgeting, and strategic business planning.
KPI
KPI stands for key performance indicator. KPIs are measurable business metrics used to track performance, profitability, efficiency, cash flow, sales trends, or operational goals.
IRS Notice
An IRS notice is a letter sent by the IRS regarding a tax return, balance due, refund adjustment, missing information, identity verification, or other tax matter. Notices should be reviewed carefully and addressed by the deadline.
Tax Refund
A tax refund is money returned to a taxpayer when payments and credits exceed the final tax liability. Refund timing can vary depending on filing method, direct deposit, errors, identity checks, and IRS processing.
Check our Where Is My Refund resource
Tax Planning
Tax planning is the process of reviewing income, deductions, credits, entity structure, estimated tax payments, and financial decisions before tax season. Proactive tax planning can help reduce surprises and support better business decisions.
Why Tax Terms Matter for Small Business Owners
Understanding tax and accounting terminology can help business owners ask better questions, review financial reports more confidently, and make stronger planning decisions.
Succentrix Business Advisors helps Boise-area small businesses with tax preparation, bookkeeping, accounting, tax planning, and fractional CFO advisory services.
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Need Help Understanding a Tax Question?
If you have questions about tax terms, IRS notices, bookkeeping, estimated taxes, S corporation planning, or small business tax preparation, Succentrix Business Advisors can help.