IRS Pub 334: Deductions, QBI, and Self-Employment Tax

IRS Publication 334, the Tax Guide for Small Business, is the federal government’s annual handbook for people who run an unincorporated business as a sole proprietor, independent contractor, or freelancer.¹ It explains how to report income on Schedule C, which expenses qualify as deductions, how self-employment tax works, and what records you have to keep. The rules below reflect the 2026 tax year and include changes made by the One, Big, Beautiful Bill Act signed in mid-2025.

Who Publication 334 Applies To

The guide is written for individuals who operate a trade or business by themselves and report profit or loss on Schedule C attached to Form 1040.² If you run a single-member LLC and haven’t filed Form 8832 to elect corporate treatment, the IRS treats that LLC as a disregarded entity, so your business taxes flow through your personal return the same way they would for a sole proprietor.³

Partnerships, S corporations, and C corporations follow different rules and use different IRS publications. Pub 334 is for the owner who personally reports the income, claims the deductions, and pays the self-employment tax.

Reporting Business Income

Gross receipts include everything your business takes in from sales and services before subtracting any expenses. You report the full amount on Schedule C no matter how the money arrived: cash, check, credit card, payment app, or barter. When you receive goods or services through barter, you include the fair market value of what you received.⁴

Less obvious income counts too. Interest earned in a business bank account, refunds of expenses you deducted in a prior year, and recovered bad debts all go into gross receipts. If you sell physical products, you subtract the cost of goods sold from gross receipts to get gross profit, and that gross profit plus any other business income becomes the total income line on Schedule C.

Form 1099-K From Payment Platforms

If you accept payments through a platform like PayPal, Venmo, Stripe, or an online marketplace, that platform may send you a Form 1099-K. Under the One, Big, Beautiful Bill Act, the reporting threshold reverted to $20,000 in gross payments and more than 200 transactions per year.⁵ For direct credit, debit, or gift card payments processed by a payment settlement entity, a 1099-K is issued regardless of the amount.⁶

Getting a 1099-K doesn’t change how much income you owe tax on. You have to report all business income whether or not a third party reports it to the IRS. What the form does is give the IRS an easy way to match its records to yours, so mismatches tend to produce notices quickly.

Which Business Expenses You Can Deduct

To deduct a business expense, it has to be both ordinary and necessary. Ordinary means common and accepted in your line of work. Necessary means helpful and appropriate for the business, not indispensable.⁷ A graphic designer buying design software passes both tests. A graphic designer buying a fishing boat does not, unless the business is fishing charters.

Common deductions include supplies, rent for business space, utilities, professional fees for legal or accounting work, business insurance, advertising, and payments to contractors. Travel costs, including lodging and transportation while away from your tax home on business, also qualify. Documentation tying the expense to a business purpose is what makes the deduction stick.

Home Office

If you use part of your home exclusively and regularly as your principal place of business, you can deduct a share of your housing costs. The IRS enforces the exclusive-use test strictly. The space must be used only for business, not as a guest room that doubles as an office. It doesn’t need to be a separate room behind a wall, but it does need to be an identifiable area you don’t use for personal purposes.⁸ Two exceptions exist: storing inventory in your home when it’s your only business location, and running a qualified daycare facility.

You can use the simplified method or actual expenses. The simplified method gives you $5 per square foot of qualified office space, up to 300 square feet, capped at $1,500 per year.⁸ The actual-expense method takes the business-use percentage of your home and applies it to real costs like mortgage interest or rent, property taxes, insurance, utilities, and repairs. The actual method involves more recordkeeping but often produces a larger deduction when the office is a meaningful share of the home.

Vehicle Expenses

You can deduct business vehicle costs using either actual expenses or the standard mileage rate. For 2026, the standard mileage rate is 72.5 cents per mile, up from 70 cents in 2025, and it applies to gasoline, diesel, hybrid, and fully electric vehicles alike.⁹

A timing rule matters. If you own the vehicle, you have to choose the standard mileage rate in the first year you use it for business; you can switch to actual expenses in later years. If you lease, you’re locked into whichever method you pick for the entire lease term, including renewals.⁹ Either way, you need a contemporaneous mileage log with date, destination, business purpose, and miles for each trip. A log reconstructed at year’s end tends to fall apart in an audit.

Section 179 and Bonus Depreciation

When you buy equipment and other long-lived assets, you normally recover the cost over several years through depreciation. Section 179 lets you deduct the full purchase price in the year you place the asset in service, up to $2,560,000 for tax years beginning in 2026. The deduction phases out dollar-for-dollar once total equipment purchases exceed $4,090,000.

Separately, the One, Big, Beautiful Bill Act restored permanent 100% bonus depreciation for qualified business property acquired after January 19, 2025.¹⁰ For most sole proprietors buying computers, furniture, tools, or vehicles, the practical result is that you can deduct the full cost now instead of spreading it over future returns.

The 20% Qualified Business Income Deduction

Section 199A gives sole proprietors a deduction of up to 20% of qualified business income. If Schedule C shows $80,000 of net profit and you qualify, you could deduct up to $16,000 before figuring your income tax. The One, Big, Beautiful Bill Act made this deduction permanent, and it’s available whether or not you itemize.¹¹

For sole proprietors with taxable income below roughly $201,750 (about $403,500 for married couples filing jointly), the calculation is just 20% of qualified business income. Above those thresholds, a phase-out range applies and the math gets more complex. You claim the deduction on Form 8995 or 8995-A. Owners of “specified service trades or businesses,” including health care, law, accounting, consulting, financial services, athletics, and performing arts, face additional restrictions once income crosses the threshold.¹² Below the threshold, the type of business doesn’t matter.

Self-Employment Tax

Employees split Social Security and Medicare taxes with their employer. As a sole proprietor, you pay both halves. The self-employment tax rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare.¹³ You owe the tax if net self-employment earnings reach $400 for the year.¹⁴

The tax applies to 92.35% of net earnings, not the full amount, which mirrors the fact that employees don’t pay Social Security and Medicare on the employer’s share of those taxes. For 2026, the Social Security portion applies only to the first $184,500 of net self-employment earnings.¹⁵ The Medicare portion has no cap. If self-employment income tops $200,000 ($250,000 for married couples filing jointly), an additional 0.9% Medicare tax applies to the excess.¹⁶

You calculate self-employment tax on Schedule SE and attach it to Form 1040. You get to deduct half of the tax as an above-the-line adjustment to income, which reduces your adjusted gross income even without itemizing. That deduction sits on Form 1040, not Schedule C.

Self-Employed Health Insurance Deduction

If you pay your own health insurance, you can deduct 100% of the premiums for medical, dental, vision, and qualifying long-term care coverage for yourself, your spouse, your dependents, and your children under age 27, even if they aren’t claimed as dependents.¹⁷ Medicare premiums you pay voluntarily for coverage similar to private insurance also count.

Two conditions apply. The deduction can’t exceed your net self-employment income, and you can’t claim it for any month you were eligible for a subsidized health plan through an employer, including your spouse’s employer.¹⁷ Like the SE tax deduction, this one is above-the-line and reduces AGI.

Quarterly Estimated Tax Payments

Without an employer withholding tax from each paycheck, you’re expected to pay as you go through quarterly estimated payments. You generally have to make them if you expect to owe at least $1,000 for the year after subtracting withholding and refundable credits.¹⁸ These payments cover both income tax and self-employment tax.

For the 2026 tax year, the quarterly due dates are:¹⁹

April 15, 2026, for income earned January through March
June 15, 2026, for income earned April and May
September 15, 2026, for income earned June through August
January 15, 2027, for income earned September through December

If a due date lands on a weekend or legal holiday, payment is timely if made the next business day. Form 1040-ES has a worksheet for projecting expected income, deductions, and credits.

Safe Harbors That Prevent an Underpayment Penalty

Missing or underpaying estimated tax triggers a penalty based on how much you underpaid and how long it went unpaid, with interest recalculated each quarter. You avoid the penalty entirely if your return shows less than $1,000 owed, or if you paid at least 90% of the current year’s tax or 100% of last year’s tax, whichever is smaller. If your prior-year AGI exceeded $150,000 ($75,000 for married filing separately), the prior-year safe harbor rises to 110%.²⁰ That prior-year figure is worth knowing about in a year when income jumps: basing payments on last year’s smaller tax bill protects you from a penalty even if you owe a large balance at filing.

Records You Have to Keep

You need records that show the source and amount of every item of income and that support every deduction you claim. In practice, that means receipts, invoices, bank and credit card statements, mileage logs, and contracts related to business transactions.²¹

Keep records at least three years from the date you filed the return they support, which is the normal window for the IRS to assess additional tax.²² Longer applies in some cases: six years if you underreported income by more than 25%, and indefinitely if you never filed. When in doubt, keep records longer.

Paper isn’t required. Under Revenue Procedure 97-22, the IRS accepts electronic storage as a substitute for paper records as long as the digital copies are complete, legible, and retrievable on request.²³ Scanning receipts into cloud storage or using a receipt-tracking app is fine, provided images stay clear and accessible for the full retention period.

Filing Deadline and Late Penalties

Form 1040 with Schedule C and Schedule SE is due April 15 following the end of the tax year. Form 4868 gets you an automatic six-month extension to file, but not to pay. Tax owed is still due April 15, and interest runs on unpaid balances from that date.

The IRS charges separate penalties for filing late and paying late, and they can stack:

Failure to file: 5% of unpaid tax for each month or partial month the return is late, up to 25%. If you’re more than 60 days late, the minimum penalty is $525 or the total tax owed, whichever is less.²⁴
Failure to pay: 0.5% of unpaid tax for each month or partial month, up to 25%.²⁵

When both penalties apply in the same month, the failure-to-file penalty drops by the failure-to-pay amount, so the combined rate isn’t a full 5.5%. Still, failure to file costs ten times what failure to pay costs. If you can’t pay, file anyway and set up a payment plan; that almost always costs less than skipping the deadline.²⁵

1
Internal Revenue Service. Publication 334 – Tax Guide for Small Business
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Internal Revenue Service. About Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship)
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Internal Revenue Service. Single Member Limited Liability Companies
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Internal Revenue Service. Topic No. 420, Bartering Income
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Internal Revenue Service. IRS Issues FAQs on Form 1099-K Threshold Under the One, Big, Beautiful Bill
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Internal Revenue Service. Understanding Your Form 1099-K
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Office of the Law Revision Counsel. 26 U.S. Code 162 – Trade or Business Expenses
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Internal Revenue Service. Publication 587 (2025), Business Use of Your Home
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Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents per Mile, Up 2.5 Cents
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Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
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Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income
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Internal Revenue Service. Instructions for Form 8995 (2025)
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Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
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Internal Revenue Service. Topic No. 554, Self-Employment Tax
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Social Security Administration. Contribution and Benefit Base
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Internal Revenue Service. Questions and Answers for the Additional Medicare Tax
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Internal Revenue Service. Instructions for Form 7206 (2025)
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Internal Revenue Service. Form 1040-ES – Estimated Tax for Individuals
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Internal Revenue Service. Estimated Tax
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Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty
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Internal Revenue Service. Topic No. 305, Recordkeeping
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Internal Revenue Service. How Long Should I Keep Records
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Internal Revenue Service. Rev. Proc. 97-22
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Internal Revenue Service. Failure to File Penalty
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Internal Revenue Service. Failure to Pay Penalty