Paying more taxes than necessary is a common pitfall for many small business owners. However, following the right tax tips for a small business can help you keep more of your hard-earned money.
Unfortunately, year after year, you may unknowingly miss out on opportunities to reduce your tax burden.
For this reason, we created a guide to help you discover nine tax tips for small business owners to minimize your tax liability legally and effectively.
Table of Contents
#1: Keep Good Records
The IRS says keeping good records helps you track business expenses. This allows you to claim more deductions and pay less in taxes.
Inadequate record-keeping can significantly increase your tax costs, as taxes are calculated on your income after subtracting allowable deductions.
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Surprisingly, almost half of all small business owners do not use any system to track their business expenses and income.
Simply put, you cannot deduct expenses if you do not record them in the first place, and missed deductions mean you pay more taxes than required.
#2: Maximize Tax Deductions
While maintaining good bookkeeping records can reveal obvious business expense deductions, some deductible expenses can be more challenging to identify.
Generally, you can deduct the business portion of personal expenses.
However, around 90% of business owners overlook these write-offs every year.
Here are some of the most commonly missed deductions:
- Home office deduction: Deduct a portion of home expenses for your business space.
- Business meals: Deduct meals where you discussed business with a client or contact.
- Business travel: Deduct a portion of travel costs for trips that have a business purpose.
- Health insurance: Deduct your family’s health insurance premiums through your business.
- Depreciation: Deduct part of the cost of business assets you own each year.
It does not matter if it is a personal vehicle, home, rental, cell phone, etc. If you use a portion for your business, it is possible to deduct that portion as an expense.
To avoid overpaying taxes, closely review all your costs that have any business purposes.
Identifying these expenses maximizes your legitimate deductions.
#3: Create Tax Deductions
Smart business owners do not just find missing deductions—they actively create new deductions to reduce their tax burden, following key tax tips for a small business.
The easiest way is to reinvest profits back into growing your business.
Some common deduction strategies include:
- Advertising spend: Money spent on promoting your business is 100% deductible as long as they are ordinary and necessary.
- Educational expenses: Costs to improve your business skills and knowledge can be deducted.
These types of investments can help grow your business while legitimately lowering your taxable income.
But reinvesting is not the only path to creating deductions.
You can also consider:
- Hiring family members: Payments made to employ relatives are deductible.
- Renting personal property: Deduct rent for business use of your home/assets for 14 days yearly.
- Retirement accounts: Contributions to self-employed retirement plans are deductible.
The trick is understanding the rules and properly documenting to create tax deductions while staying compliant.
With careful planning, you can significantly reduce your tax obligations.
#4: Set Up Retirement plans
Saving for the future through retirement plans can lower your taxes.
Every dollar you put into an eligible retirement account can reduce the amount of income you pay taxes on. It can be one of the smartest tax tips for small business owners to take advantage of.
There are a variety of retirement plan accounts you can take advantage of, such as the SEP IRA, Solo 401K, or Defined Benefit Plan.
Usually, the money you contribute to a traditional retirement account, and any earnings from investments, will not be taxed until you withdraw it when you retire.
And if you are in a lower tax bracket at retirement, you may pay lower taxes on those withdrawals.
However, in some cases, your retirement plan contributions may not reduce your current taxable income.
For example, contributing to a Roth IRA or Roth 401(k) retirement plan would not lower your taxes in the year you made the contribution. Instead, Roth plans are designed to reduce your taxes when you withdraw funds during retirement.
Therefore, it is advisable to carefully weigh your options with a skilled tax CPA to determine the best option.
#5: Choose the Best Business Structure
Some business structures are taxed differently than others. This means you could be paying more taxes than needed if you have the wrong setup.
Most small businesses like sole proprietorships, LLCs, and partnerships pay what is called “self-employment tax” on top of regular income tax.
This self-employment tax is a hefty 15.3% on all your business profits.
For example, if your profits were $100,000, you would owe $15,300 in self-employment taxes alone.
However, two business structures do not get hit with this big self-employment tax bill – C Corporations and S Corporations.
There is no one-size-fits-all solution. The best structure depends on your specific situation.
Though, being aware that entities like S Corps can provide major tax advantages is important for minimizing what you owe.
It all boils down to understanding the potential pros and cons of your situation to avoid overpaying taxes.
To identify which structure is suited for you, working with a reliable CPA is essential.
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#6: Hire a Great CPA
If you are not an expert on tax laws yourself, then ideally your tax advisor should be.
Otherwise, you could end up overpaying a painful amount in taxes.
For most people, their tax professional falls into one of two categories:
- A money-draining expense that ends up costing more than they save you.
- A worthwhile investment that provides a return by reducing your tax bill.
The goal is for your tax advisor to pay for themselves (and then some) by identifying enough legitimate deductions and strategies to cut what you owe.
Unfortunately, due to the state of the tax industry today, most tax pros are in that first bucket – a costly expense rather than a money-saver.
To avoid this, make sure to:
- Verify their credentials and experience with small business taxes.
- Ask for references/examples of the tax savings they’ve provided clients.
- Inquire whether they provide any tax savings guarantees.
- Understand their fee structure (e.g. hourly vs percentage of savings).
A qualified tax expert can uncover deductions and strategies you would easily miss on your own.
Do your research and vet tax professionals like any other service provider you hire and pay good money for expertise.
By hiring the right tax advisor, you can potentially save thousands of dollars in the long run.
#7: Tax Plan in Advance
Tax planning means carefully looking at your income sources, investments, expenses, and potential deductions.
By planning your taxes ahead of time, you can make strategic decisions that lower your taxes and get the most benefits allowed by tax laws.
Tax planning and following smart tax tips for small business owners can make a big difference in how much you save and how quickly you reach your financial goals.
No matter what your aims are, having a tax strategy in place is important for achieving financial stability and success.
#8: Pay Your Estimated Taxes
If you are a small business owner, you should pay estimated taxes quarterly on any income that doesn’t have taxes automatically deducted.
Generally, you are required to make these payments if you expect to owe more than $1,000 in taxes.
The IRS expects you to pay taxes as you earn throughout the year, following a pay-as-you-go model. Usually, estimated tax payments are due each quarter.
While overpaying can result in a refund, underpaying any of your quarterly estimated tax installments could lead to penalties, despite overpaying for the entire year.
Make sure to calculate and pay your estimated taxes regularly to keep your business in good financial shape and avoid penalties.
#9: File on Time (Avoid Late Penalties)
As a small business owner, you should file your tax return by the deadline each year to avoid substantial penalties and serious repercussions, even if you obtain a filing extension.
Most business returns are typically due around March 15, such as partnership and S Corporation returns.
Businesses filing as a C Corporation, Sole Proprietor, or Single-Member LLC will generally file their taxes around April 15.
If you have self-employment income or other income without tax withholding, you may need to make quarterly estimated tax payments.
Interest and penalties start accruing immediately after the deadline, until the balance is paid in full.
The government can eventually take your wages, seize your property, or even revoke your passport if you fail to pay.
Always consider consulting a CPA to meet these deadlines effectively.
Bottom Line
At the end of the day, paying more taxes than you should is just throwing away hard-earned money.
And as a small business owner, you know how valuable every dollar is.
The good news is, with a little effort and the right guidance, you can avoid these costly tax mistakes and keep more profits in your pocket.
Start by getting organized and tracking all your income and expenses throughout the year. This simple step alone can uncover tons of deductions you might have missed.
From there, educate yourself on the deductions and strategies available to small businesses.
Things like the home office deduction, business travel write-offs, and retirement contributions can easily add up.
Of course, if tax laws make your head spin, hiring a qualified tax professional is a good idea.
We have a team of CPAs who are qualified to assist you.
My CPA Coach helps you understand complex tax laws, maximize deductions, and ensure that you are in compliance with all regulations.
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