Common Business, Finance, and Tax Terms Explained
Accrual (Accounting Method)
Income and expenses are recorded when they are earned or incurred, not when money actually changes hands.
Cash (Accounting Method)
Income and expenses are recorded only when money is received or paid.
Bookkeeping
The process of recording daily financial transactions, such as sales, expenses, and payments.
Accounting
The broader process of organizing, interpreting, and reporting financial information for decision-making and tax compliance.
Audit
An official examination of financial records, usually by an outside party, to verify accuracy and compliance.
Capital Gains
The profit earned from selling an asset (like stocks, real estate, or a business) for more than its purchase price.
Credit
An entry that increases liabilities or equity, or decreases assets. In business, it also refers to borrowing funds or extending payment terms.
Deduction
An expense that reduces taxable income, such as office supplies, rent, or certain travel costs.
Earned Income
Wages, salaries, tips, and self-employment income — essentially money you earn by working.
Estimated Tax Payments
Quarterly payments made to the IRS (and sometimes state) to cover income tax, self-employment tax, and other obligations for those not subject to withholding.
W-2 Employee
A worker who receives a W-2 form from their employer, showing wages earned and taxes withheld.
Subcontractor
An independent worker or business hired to perform services under a contract, not considered an employee.
1099-NEC
A tax form issued to independent contractors and freelancers to report payments of $600 or more for services.
W-9 Form
A form businesses request from contractors to collect taxpayer identification information (used to issue 1099s).
Gross Income
Total income before taxes and deductions.
Net Income
Profit left after subtracting expenses, taxes, and deductions from gross income.
Operating Income
The profit from business operations after operating expenses are deducted but before taxes and interest.
Business Expenses
Ordinary and necessary costs of running a business, such as rent, supplies, marketing, and payroll.
Self-Employment Tax
Taxes self-employed individuals pay to cover Social Security and Medicare contributions (similar to payroll taxes for employees).
Sole Proprietor
A business owned by one person with no legal separation between the owner and the business.
Single Member LLC
A limited liability company with one owner, offering liability protection but taxed similarly to a sole proprietor (unless elected otherwise).
Limited Liability Company (LLC)
A flexible business structure that offers liability protection for owners while allowing pass-through taxation.
Partnership
A business owned by two or more people who share profits, losses, and responsibilities.
S-Corporation (S-Corp)
A corporation that elects special tax treatment allowing profits (and some losses) to pass through to shareholders’ personal tax returns.
Corporation (C-Corp)
A legal entity separate from its owners, providing liability protection but subject to corporate-level taxation.
Pass-Through Entity
A business structure (like an LLC, partnership, or S-Corp) where income “passes through” to owners’ personal tax returns.
Reasonable Compensation
A tax rule requiring S-Corp owners who work in the business to pay themselves a fair wage before taking additional profits as distributions.
Qualified Business Income Deduction (QBI Deduction)
A tax deduction (up to 20%) available to certain business owners on qualified income from pass-through entities.
Specified Service Trade or Business (SSTB)
A business in certain fields (like law, accounting, consulting, health, or financial services) where QBI deduction eligibility may be limited if income exceeds certain thresholds.