Glossary

Plain-English definitions of tax and financial terms.

1031 Exchange: A tax-deferred swap of one investment property for another, allowing you to postpone paying capital gains tax.
Actuarial Value: The percentage of total average healthcare costs that a health insurance plan covers. Bronze plans cover 60%, Silver 70%, Gold 80%, and Platinum 90%.
Add-Backs: Expenses added back to net profit when calculating SDE because a new owner would not incur them. Includes owner salary, one-time costs, and personal expenses run through the business.
Additional Medicare Tax: An extra 0.9% tax on earned income above $200,000 (single) or $250,000 (married filing jointly).
Annualized Income Method: A calculation method allowing unequal quarterly payments for those with seasonal or irregular income.
Base Period: The time period used to calculate your unemployment benefits, typically the first four of the last five completed calendar quarters.
Benefit Duration: The maximum number of weeks you can collect unemployment benefits in a benefit year.
Benefit Multiplier: The percentage of final average salary you earn as pension benefit for each year of service. Typically ranges from 1.0% to 3.0%.
Billable Hours: Hours a contractor can charge a client for — typically less than total hours worked due to admin, marketing, and gaps.
COBRA: A federal law (Consolidated Omnibus Budget Reconciliation Act) that allows employees to continue their employer's group health insurance for up to 18 months after leaving a job, at 102% of the full premium cost.
COLA (Cost-of-Living Adjustment): An annual increase to your pension benefit designed to offset inflation. Public pensions typically provide 2-3% COLAs; most private pensions have no COLA.
Capital Asset: Property you own for investment or personal use that can generate a capital gain or loss when sold.
Capital Gain: The profit from selling a capital asset for more than you paid for it.
Capital Loss: The loss from selling a capital asset for less than your cost basis.
Cost Basis: The original value of an asset for tax purposes, usually the purchase price plus certain adjustments.
Cost-Sharing Reductions (CSR): Additional savings that lower your deductibles, copays, and out-of-pocket maximums on Silver marketplace plans, available to people with income between 100% and 250% of the Federal Poverty Level.
Customer Concentration: The risk created when a large percentage of revenue comes from a single customer. Buyers typically discount businesses where one customer exceeds 15-25% of revenue.
Defined Benefit Plan: A retirement plan where the employer promises a specific monthly payment for life, calculated by a formula based on salary and years of service.
EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. The valuation metric for larger, manager-run businesses (typically above ~$1M EBITDA).
EFTPS: Electronic Federal Tax Payment System. A free IRS online system for making federal tax payments.
ERISA: The Employee Retirement Income Security Act of 1974, the federal law that sets minimum standards for private sector pension and benefit plans.
Earnings Disregard: The amount of part-time earnings you can keep without reducing your unemployment benefit.
Effective Tax Rate: The average rate you actually pay across all your income — total tax divided by total income.
Employer FICA Contribution: The 7.65% of your salary that your employer pays for Social Security and Medicare — a hidden benefit contractors don't receive.
Estimated Tax: Quarterly payments of expected annual tax liability made by those without sufficient withholding.
Federal Poverty Level (FPL): An income threshold published annually by the Department of Health and Human Services, used to determine eligibility for ACA subsidies, Medicaid, and other programs. For 2026, 100% FPL is $15,960 for a single person.
Federal Unemployment Tax Act: The federal law imposing a payroll tax on employers to fund the unemployment insurance system.
Filing Status: A category that determines your tax bracket thresholds, standard deduction, and eligibility for certain credits.
Final Average Salary (FAS): The average of your highest consecutive years of earnings (typically 3 or 5 years), used as the salary component in the pension benefit formula.
Form 1040-ES: The IRS form used to calculate and submit federal estimated tax payments.
Health Savings Account (HSA): A tax-advantaged savings account available to people enrolled in a High Deductible Health Plan (HDHP), allowing pre-tax contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
Holding Period: How long you owned an asset before selling it, which determines whether gains are taxed at short-term or long-term rates.
IRS Segment Rates: Interest rates published monthly by the IRS, derived from corporate bond yields, used to calculate the minimum present value (lump sum) of pension benefits under §417(e).
Joint and Survivor Annuity: A pension payment option that provides a reduced benefit during your life but continues paying your spouse (or beneficiary) after your death.
Long-Term Capital Gains: Profits from selling assets held for more than one year, taxed at preferential federal rates of 0%, 15%, or 20%.
Marginal Tax Rate: The tax rate applied to your next dollar of income — the highest bracket you've reached.
Metal Tier: The ACA classification system for marketplace health plans based on actuarial value: Catastrophic (below 60%), Bronze (60%), Silver (70%), Gold (80%), and Platinum (90%).
Modified Adjusted Gross Income: Your adjusted gross income (AGI) with certain deductions added back, used to determine eligibility for tax benefits and surtaxes like the NIIT.
Modified Adjusted Gross Income for ACA (MAGI): The income measure used to determine eligibility for ACA premium tax credits. It includes your adjusted gross income plus tax-exempt interest, non-taxable Social Security benefits, and foreign earned income.
Net Investment Income Tax: A 3.8% federal surtax on investment income for individuals with MAGI above $200,000 (single) or $250,000 (married filing jointly).
Net Self-Employment Income: Revenue minus deductible business expenses. The starting point for self-employment tax calculation.
Normal Retirement Age (NRA): The age at which you can begin receiving your full, unreduced pension benefit. Typically 65 for most plans, but can be 55-62 for public safety and some government plans.
Owner Dependency: The degree to which a business requires the current owner to maintain revenue and operations. High dependency reduces valuation.
PTO Value: The dollar value of paid time off — days you're paid without working, which contractors must fund from their hourly rate.
Partial Unemployment: Working reduced hours while collecting a portion of your unemployment benefits.
Premium Tax Credit: A federal tax credit that reduces the monthly cost of marketplace health insurance for people with household income between 100% and 400% of the Federal Poverty Level.
Present Value (Lump Sum): The single dollar amount today that is mathematically equivalent to a stream of future monthly pension payments, given discount rates and life expectancy.
Recurring Revenue: Revenue that repeats automatically through subscriptions, retainers, or contracts without requiring a new sale each period.
Safe Harbor: A threshold of estimated tax payment that, if met, protects you from underpayment penalties regardless of your actual tax liability.
Second Lowest Cost Silver Plan (SLCSP): The second-cheapest Silver tier health insurance plan available in your county, used as the benchmark for calculating your premium tax credit amount.
Self-Employment Tax: The self-employed person's equivalent of FICA, covering both Social Security and Medicare taxes.
Seller's Discretionary Earnings (SDE): The total cash an owner-operator takes from a business, calculated as net profit plus owner salary, benefits, and legitimate add-backs.
Short-Term Capital Gains: Profits from selling assets held for one year or less, taxed as ordinary income at rates up to 37%.
Social Security Wage Base: The maximum amount of earnings subject to Social Security tax ($184,500 for 2026).
Standard Deduction: A fixed amount subtracted from gross income before tax brackets are applied — used by about 90% of filers.
State Unemployment Tax Act: State-level payroll taxes on employers that fund the state unemployment insurance trust fund.
Step-Up in Basis: When an inherited asset's cost basis is reset to its fair market value at the date of the owner's death, eliminating all unrealized capital gains.
Subsidy Cliff: The abrupt loss of the entire ACA premium tax credit when household income exceeds 400% of the Federal Poverty Level. Unlike a gradual phase-out, the subsidy drops from thousands of dollars to zero at this single threshold.
Taxable Income: Your gross income minus deductions — the amount used to determine which tax bracket you fall into.
Total Compensation: The full value of an employment package including salary, benefits, employer taxes, PTO, and perks — not just base pay.
Underpayment Penalty: Interest charged by the IRS when estimated tax payments are insufficient relative to your actual liability.
Unemployment Insurance: A joint federal-state safety net program providing temporary income to workers who lose their jobs through no fault of their own.
Valuation Multiple: A ratio that translates a financial metric (SDE, EBITDA, or revenue) into a business price. Different industries trade at different multiples.
Vesting: The point at which you earn a non-forfeitable right to your employer-funded pension benefit. ERISA requires full vesting within 5-7 years for private plans.
Waiting Period: The unpaid first week after filing an unemployment claim before benefits begin.
Wash Sale Rule: An IRS rule that disallows a capital loss deduction if you buy a substantially identical security within 30 days before or after the sale.
Weekly Benefit Amount: The dollar amount you receive each week in unemployment benefits.
Work Search Requirements: Activities you must complete each week to maintain unemployment benefit eligibility.