8 Tips for Navigating the World of Small Business Taxes

Many dissatisfied employees eventually become entrepreneurs who make the leap to running their own small businesses. The freedom of being your own boss comes with significant stress, though, especially during tax season. 

Doing your taxes is one of the most challenging aspects of running a small business. Quite frankly, the stakes are high. Filing your taxes incorrectly or incompletely could invite IRS scrutiny, a full audit, or serious financial penalties.

Nailing your taxes could save you thousands — or tens of thousands — and give you significant peace of mind. Here are eight tips to effectively file your taxes as a small-business owner.

1. Consider Using an Accountant and a Tax Professional

If your small business is even moderately sized or complex, you’re probably better off using a professional accountant to keep a close eye on your cash flow and track your income, spending, and profit. Accountants can also advise you on property tax assessments and long-term strategic planning.

Paying for an accountant is worth it when tax season rolls around. Although there is some software that can help business owners do their own taxes, working with a professional saves a lot of time and stress, and they can recommend tax-reduction strategies that you likely don’t know about.

2. Establish a System

If you’re a new business, it can be tempting to hit the ground running and worry about getting your documents together when tax season rolls around. This is a recipe for chaos.

Make sure you have a system in place for tracking expenses and receipts from the very first day.  Any paperwork you lose could cost you real money in the form of tax deductions. 

Plus, handing a box full of jumbled receipts to your accountant may result in a higher bill because they’ll have to laboriously sort and organize the documents. Many experts recommend staying on top of your tax planning by using software that tracks and categorizes your tax documents so you can easily transfer them to the software. 

3. Use Business Accounts

Using dedicated business accounts will keep your business expenses segregated from your personal ones and save you a lot of trouble at tax time. 

Business accounts will also help clarify your situation to the IRS, which will have to consider whether you’re running your business for profit or as a hobby if it decides to take a closer look at your finances. 

Dedicated business accounts will make your business look much more serious. 

4. Don’t Overlook New and Expiring Deductions

The Inflation Reduction Act of 2022 includes an expansion of the research and development tax credit, as well as almost $400 billion in green tax credits, which cover the purchase of new or used hybrid vehicles, the installation of solar power systems, and energy-efficiency improvements.

Another great option for small businesses is to deduct new or used equipment purchases up to $3.78 million — although the percentage you’re allowed to deduct does gradually start to reduce starting at $2.7 million. This benefit will be annually adjusted for inflation, so if you intend to take advantage, the sooner the better.

5. Don’t Forget About Remote Workers

In many ways, remote work has revolutionized employer-employee relations, allowing employers to tap into an expanded pool of talent while enabling workers to have an unprecedented degree of independence and mobility. However, as workforces spread around the country, or even around the globe, the tax implications can become exponentially more complicated.

Ensure you’re in full compliance with national and state tax obligations. For example, if you offer a bonus to help your employees with long-distance moving expenses, make sure you both understand the tax implications of that. 

With many workers adopting a “digital nomad” lifestyle and heading overseas, you’ll want to keep in mind that many countries impose specific obligations on employers. Overlooking these obligations could put you and your employee in a difficult position.

6. Have a Plan to Pay Your Taxes

Paying your taxes as a small-business owner isn’t as easy as paying them as an individual. Your business bill will likely be pretty large, and having to write a huge check to pay your taxes could create serious liquidity problems. Smart business owners set aside money throughout the year for their tax bills or open a line of credit to use to pay their taxes.

If you’re working with an accountant or tax professional, ask them for an estimate of your tax bill, and make sure you’re prepared to pay your taxes when they're due.

7. Classify Your Small Business Accurately 

How you decide to classify your business will have a huge effect on your tax liability. Consult with a tax professional or an attorney to determine if you’re better off as a sole proprietor, a C corporation, an S corporation, a limited liability corporation, a limited liability partnership, or something else entirely. Each of these classifications offers unique tax and legal protections, although some come with specific downsides. 

8. Consider Outsourcing Your Payroll

Many small businesses outsource their payroll to an outside company. As with any vendor handling a major aspect of your business, do your due diligence before you sign a deal. If your payroll company, for example, overlooks submitting payroll taxes on your behalf, you could find yourself in trouble with the IRS.