Small Business & Self-Employment Terms

A 409A valuation is an independent appraisal of a private company's stock value, used to set a fair strike price for employee stock options and stay compliant with IRS rules.

Accrual method accounting records income when it is earned and expenses when they are incurred, regardless of when cash changes hands — required for some larger businesses and standard in formal financial statements.

Angel investing is when an individual puts their own money into a startup, usually very early on, in exchange for equity.

A for-profit company legally committed to pursuing a stated social or public benefit alongside profit, with its directors accountable to that mission.

Bonus depreciation is an accelerated write-off that lets businesses deduct most or all of the cost of qualifying equipment and property in the year it's placed in service, instead of spreading the deduction over many years.

Bootstrapping is building and growing a business using its own revenue and the founder's personal resources rather than raising money from outside investors.

Burn rate is the pace at which a business spends its cash reserves, usually measured per month, and is watched closely by startups not yet turning a profit.

A business bank account is a deposit account held in a company's name rather than the owner's, keeping business income and spending separate from personal finances for cleaner records and legal protection.

A business credit card is a card issued in a company's name for business purchases, helping separate business spending, track expenses, and build the business's credit history.

A business credit score is a rating that measures a company's creditworthiness based on how reliably it pays vendors and lenders, and it is tracked separately from the owner's personal credit.

A business emergency fund is a cash reserve a company sets aside to cover unexpected costs or revenue dips without taking on debt or missing payments.

Deductible business expenses are the ordinary and necessary costs of running a business — such as supplies, rent, and software — that can be subtracted from business income to lower the tax owed.

Business interruption insurance replaces the income a business loses while it cannot operate after a covered physical loss such as a fire. It pays for lost earnings and continuing expenses, not for the damaged property itself.

A business line of credit is a flexible loan that lets a company borrow up to a set limit, repay, and borrow again as needed, paying interest only on the amount used.

Business overhead expense insurance pays a business's fixed operating costs, such as rent, utilities, and staff wages, while the owner is disabled. It is separate from personal disability insurance, which replaces the owner's own income.

A business owner's policy bundles general liability, commercial property, and usually business interruption coverage into a single contract priced for small businesses. It is the usual starting point for an operation too small to assemble the coverages separately.

Business succession planning is the process of preparing for how a business will be transferred or continue when the owner retires, dies, or steps away.

A business valuation is the process of estimating what a company is worth, used for selling, bringing on partners, settling estates, or securing financing.

A buy-sell agreement is a contract among business co-owners that spells out what happens to an owner's share if they die, leave, or become disabled — often funded by life insurance.

A C corporation is a business structure that is taxed as its own legal entity, meaning profits are taxed at the corporate level and again when paid to shareholders as dividends — the classic double taxation.

Cash method accounting records income when money is actually received and expenses when they are paid — the simple approach most individuals and many small businesses use for taxes.

Commercial auto insurance covers vehicles used for business, including liability for accidents that happen while working. A personal auto policy excludes some business uses, most commonly delivery and ride-hailing and vehicles titled to the business.

Commercial property insurance covers the buildings, equipment, inventory, and furnishings a business owns or leases. A personal homeowners policy generally excludes property used for business, which is the gap this fills.

Cyber liability insurance covers the costs a business faces after a data breach or ransomware attack, including notifying affected customers, restoring systems, and defending the claims that follow. Standard business policies generally exclude these losses.

Digital nomad finances covers the money and tax matters of people who work remotely while traveling or living in different countries, such as banking, taxes, and health coverage.

Employment practices liability insurance covers claims by employees alleging wrongful termination, discrimination, harassment, or retaliation. General liability policies exclude these claims, so an employer without it pays defense costs out of pocket.

Startup equity is an ownership stake in a young company, often granted to early employees as stock or options in place of higher salary, in hopes the shares grow valuable.

Errors and omissions insurance, also called professional liability insurance, protects a business from claims that its professional advice or services caused a client financial harm.

A partnership family members use to hold assets together, which can aid succession and may support valuation discounts for gift and estate tax.

An arrangement where an established nonprofit lets a project operate under its tax-exempt status, so donations to it qualify as tax-deductible.

Form 1099-K reports payments you received through payment cards and third-party platforms like payment apps or online marketplaces — receiving one doesn't by itself mean the money is all taxable income.

Form 1099-NEC reports nonemployee compensation — money a business paid you as an independent contractor or freelancer — to you and the IRS.

Freelancing is working for yourself by offering services to clients on a project or contract basis, which makes you responsible for your own taxes and benefits.

The gig economy is a labor market built on short-term, flexible, or freelance jobs, often arranged through apps, where workers are usually treated as independent contractors rather than employees.

Hobby income is money earned from an activity done mainly for enjoyment rather than profit, and unlike a business it does not allow you to deduct losses against other income.

The hobby loss rule prevents deducting losses from an activity carried on without a genuine profit motive — income from a hobby is taxable, but its expenses generally are not deductible.

A home-based business is a company run primarily from the owner's home, which may allow a tax deduction for the portion of the home used regularly and exclusively for the business.

An ICHRA, or individual coverage health reimbursement arrangement, lets employers give workers tax-free money to buy their own individual health insurance instead of a group plan.

An installment sale is a sale in which the seller receives at least one payment after the year of the sale, letting the gain be reported as the payments arrive rather than all at once.

Invoice factoring is a financing method where a business sells its unpaid customer invoices to a third party at a discount to get cash immediately instead of waiting for customers to pay.

Key person insurance is a life insurance policy a business buys on an essential owner or employee, so the company receives funds to stay afloat if that person dies unexpectedly.

Material participation is the IRS standard for being genuinely involved in running a business or rental activity on a regular, continuous, and substantial basis — it determines whether the activity's losses are passive or fully deductible.

A merchant cash advance is a lump sum a business receives in exchange for a share of its future sales, repaid daily from card revenue — often at very high effective costs.

The mileage deduction lets self-employed people and businesses deduct the cost of driving for work, usually by multiplying business miles by the standard mileage rate the IRS sets each year.

Multi-level marketing is a business model where sellers earn from their own sales and from recruiting other sellers, and most participants earn little or lose money.

A non-compete agreement is a contract that limits an employee from working for a competitor or starting a rival business for a set time after leaving, though its enforceability varies by state.

An owner's draw is money a business owner takes out of the company for personal use, common in sole proprietorships and partnerships where it is not treated as a taxable wage.

A partnership is a business owned by two or more people who share profits, losses, and management, with the income passing through to each partner's personal tax return rather than being taxed at the business level.

Payroll is the system a business uses to pay its employees, including calculating wages, withholding taxes, and sending those withheld amounts to the government.

A per diem is a fixed daily allowance a business pays or deducts to cover an employee's travel costs like lodging and meals, instead of tracking every individual receipt.

Profit is what remains of a business's revenue once its costs are subtracted, and the figure changes depending on which costs you subtract, so gross, operating and net profit each answer a different question.

A profit and loss statement is a financial report that summarizes a business's revenue, expenses, and resulting profit or loss over a period of time.

A QSEHRA is a health reimbursement arrangement for small employers that repays workers tax-free for individual insurance and medical costs up to an annual IRS limit.

Qualified small business stock is stock in certain small C corporations that, if held long enough, can let investors exclude a large share of the gain from federal tax when they sell.

Quarterly estimated taxes are the tax payments freelancers and other self-employed people send to the IRS four times a year, since no employer withholds tax from their income.

Quarterly tax payments are the four estimated-tax installments self-employed people and others without withholding send the IRS across the year to keep pace with what they'll owe.

Reasonable compensation is the fair-market salary an S corporation owner-employee must pay themselves for the work they do before taking additional profit as distributions — the IRS scrutinizes owners who set it too low to dodge payroll taxes.

Revenue is the total amount a business takes in from sales before any costs are subtracted. It measures how much activity a business generates, not how much of it the owner gets to keep.

Runway is how long a business can keep operating on its current cash before it runs out, found by dividing available cash by the monthly burn rate.

An S Corp election is a tax choice that lets an eligible corporation or LLC pass its income through to owners' personal tax returns, and it can reduce self-employment tax by splitting pay between salary and distributions.

An SBA loan is a business loan made by a bank but partly guaranteed by the Small Business Administration, which lowers the lender's risk and often means better terms for the borrower.

The Section 179 deduction lets small businesses elect to expense the full cost of qualifying equipment and software in the year of purchase, up to an annual limit, rather than depreciating it over time.

The self-employed health insurance deduction lets qualifying self-employed people deduct premiums they pay for medical, dental, and long-term care coverage from taxable income.

Self-employed people pay both the employee and employer share of Social Security tax through self-employment tax, which also builds their record toward future benefits.

Seller's discretionary earnings is a measure of a small business's true profit to a single owner-operator, adding back the owner's salary and perks to show what the business really generates.

Separation of business and personal finances is the practice of keeping company money in its own accounts, which simplifies taxes, tracks true performance, and helps protect the owner's personal liability shield.

The Small Business Administration is a federal agency that supports small businesses through loan guarantees, counseling, and disaster assistance.

Worker misclassification is when a business incorrectly labels an employee as an independent contractor, often to avoid taxes and benefits, which can deprive the worker of legal protections.

Workers' compensation is insurance that pays for medical care and lost wages when an employee is injured or becomes ill on the job, and most states require employers to carry it.