Small Business Tax Strategy Handbook - 2025

Small business owners have to juggle a lot at once, and if there is room for freeing up some time or reducing that workload, many would jump at the opportunity. One way to do this is by implementing a tax planning strategy. This isn’t something that can be done on a whim in the weeks leading up to tax season and must take place over the course of the year so you can streamline your finances and modify your tax obligations. Here are some ways to do exactly that.

Set Up a Retirement Plan

Setting up a retirement plan for your employees gives you multiple tax advantages. For example, you are able to deduct matching contributions and admin fees that are related to the retirement plan. The two most common tax-advantaged retirement accounts for small businesses are the SEP-IRA and Solo 401(k).

Stay on Top of Your Bookkeeping 

Staying organized throughout the year will save you hours upon hours of time when it comes to filing your taxes. Using programs like QuickBooks will help you keep on top of it so you don’t have to slow down come tax season. 

Defer or Accelerate Income

Depending on your revenue, you may be placed in different tax brackets for different years. One way to manage this turbulence is by deferring or accelerating your income. This can be done by delaying or fast-tracking the timeline for sending out invoices and collecting income to keep you within certain brackets. 

Consider a Tax Status Change

Your business’s structure plays a major role in determining your tax obligations. The most common structures are:

Sole Proprietorship

As a pass-through entity, the owner (sole proprietor) doesn’t pay themselves wages, instead, all the profits are regarded as personal taxable income. 

Partnership

Partnerships are also a pass-through entity but instead of one owner, there are multiple.

LLC

An LLC is a legal term and can take the form of a C corporation or an S corporation.

S Corporation

An s corporation is also a pass-through entity.

C Corporation

C corps are more common for larger or complex businesses. These are not pass-through entities and they must pay corporate tax. 

For a deeper understanding of potential tax status changes, you can make, read this helpful guide. 

The structure of your business will impact how much you pay in taxes, your ability to raise money, the paperwork you file, and the personal liability you the business owner will take on. This choice will shape your future financial plans and operational strategies, so it’s important to make the right decision now. 

Characteristics of a C Corporation

C Corporations are named after their IRS internal revenue code. C corps have a separate tax structure from the owners which means the business earns revenue and pays taxes on it. While the owners need to make sure those taxes get paid, they aren’t personally liable for owing those taxes. 

Characteristics of an S Corporation

S corporations are also known as flow-through entities and are named after the IRS revenue subchapter that governs them. This structure receives some tax benefits but you have to file a specific form to be characterized as an S corp.

S Corp vs. C Corp

There are quite a few similarities and differences between S corps and C corps. Here we will dive into them.

The Similarities

In both s corps and c corps, owners are known as shareholders. Profits are given to shareholders and those profits are called dividends. Shareholders receive dividends based on the amount of the business they own. 

Both types of corporations are formed when the shareholders prepare articles of incorporation which legally documents the creation of a corporation. Corporations are automatically filed as a C corp, but shareholders can also file a Form 2553 to change to an S corp. 

Both structures also offer shareholders limited liability protection. This means that if the corporation was sued, the shareholders are protected. The shareholders are also considered separate legal entities from the corporation which provides shareholders with protection. 

Both corporations have the same structure with directors and officers who run the business and an elected board of directors. They also have formal obligations including adopting bylaws, paying annual fees, and issuing stock. 

The Differences

The differences between the two structures are important to understand before choosing one or the other. 

The main difference between the two are taxation requirements. C corps file as a separate entity from shareholders and as a result, dividends that are paid out will be taxed twice (once at the corporate level and again at the shareholder level). S corps on the other hand are pass-through entities which means only the corporation files a tax return. 

While states treat the two types of corporations the same, the IRS puts more demands on who can and can’t be a shareholder of an S corp. S corps can’t have more than 100 shareholders total and can only have one type of stock class. They also cannot be owned by another corporation. 

For more information about the similarities and differences between S Corporations and C Corporations, take a look at this in-depth article.

Audits are unfortunately part of the job when you are a small business owner. On average, 2.5% are selected for an audit compared to only 1% of the general public. These can be triggered by mistakes in your filling. If you do get selected, there are some things you’ll want to know and be prepared for ahead of time. 

What is a Business Audit?

A business audit is the examination of your business’s accounting records and tax returns. This is done to ensure they are accurate and compliant with local and federal laws. Having up-to-date records of your finances can benefit your business. 

Audits aren’t only conducted when mistakes happen. Businesses can choose to audit themselves to discover any gaps and keep themselves in check and staying organized throughout the entire year will help eliminate the stress that typically comes with business audits. 

Types of Audit

There are three primary types of audits that take place. These are:

Internal Audit

Internal audits are conducted by the company itself. These can be used for development purposes and simply to keep themselves in check. Internal audits help owners take a closer look at how the business operated. 

External Audit

External audits are similar to internal audits but are done by third-party organizations which bring more trust to the process. These are usually used when a company is interested in bringing on new stakeholders or board members. 

IRS Audit 

An IRS audit is what most business owners think of when they think of an audit. These are completed by the IRS and it is not a company decision. 

How to Prepare for an Audit

No matter what type of audit you are preparing for, there are simple ways you can prepare. 

1. Update and review financial statements throughout the year
2. Keep all financial records in a secure and accessible place
3. Have an expert on your side 

To learn more about how to properly prepare for an audit, read this comprehensive guide.

One of the most common mistakes small businesses make is messing up their taxes. While it is easy to brush preparation off to the side, once tax season rolls around, stress and anxiety set in. Instead, use this tax preparation list to properly prepare so when tax season does hit, you’ll be ready. 

Understand the Types of Business Taxes

Taxes become increasingly complex for a business owner. It’s important to understand the types of taxes you may encounter. These include:

1. Income Tax
2. Estimated Taxes
3. Self Employment Taxes
4. Employment Payroll Taxes
5. Excise Taxes

Utilize the Correct Forms

Once you understand the different kinds of taxes you may come across, it’s just as important to know what kind of forms you’ll need to file these taxes. These are the most common forms you will use for different business structures:

1. Sole Proprietorship: Schedule C
2. Partnership: Form 1065 and Schedule K-1
3. Corporation: Form 1120
4. S Corporation: Form 1120-S

Keep Track of Important Dates and Deadlines

Keeping track of important dates and deadlines will help you stay on top of taxes and properly prepare rather than rushing because you didn’t realize it was already time to file. These dates include the annual tax deadline as well as quarterly tax deadlines. 

Organize Documents

Keeping your documents organized throughout the year will make your taxes a breeze. These documents you’ll need include:

1. Federal Tax ID Number
2. Social Security Number
3. Balance Sheet and Income Statement
4. Invoice Received and Paid
5. Credit Card Statements
6. Receipts Grouped
7. Insurance Details
8. Employment Tax Documentation

Research Tax Deductions

Lastly, you’ll want to research tax deductions to save you money on your tax return. Some tax deductions for small businesses can include:

1. Rent
2. Interest
3. Home Office Expenses
4. Legal Services
5. Mileage
6. Depreciation

To learn more about how to prepare for tax season, take a look at this article. 

Being your own boss is a dream come true for many, however it comes with a lot of responsibilities as well, one of which being filing self-employment taxes. Here is a helpful guide to help you file self-employment taxes on your own. 

Self-Employment Classification

The IRS classifies you as self-employed if you meet one of the following:

1. You carry on a business as a sole proprietor or independent contractor.
2. You are a member of a partnership that carries a business.
3. You are otherwise in business for yourself including a part-time business. 

What is Self-Employment Tax?

As a self-employed business, you are required to pay tax if you earn $400 or more. Taxes on self-employment include social security and medicare tax. It is important to note this may not include all the taxes you may file, only social security and medicare. 

How to File Self-Employment Tax

You are required to have taxes filed by Tax Day every year. To do so, follow these steps:

1. Know the entity your business falls under
2. Collect necessary documents.
3. Figure out your deductions like vehicle expenses, office supplies, and reference material.
4. Calculate your taxes by using a software or hiring a tax professional. 

For a deeper look at filing self-employment taxes, head over to this in-depth guide.

Payroll tax is a phrase every small business owner knows well. Issues often arise in this area due to accidents or plain ignorance. To help solve these problems, you have to understand what a tax form 941 is. 

What is an IRS Form 941?

Form 941 is an employer's quarterly federal tax return form. It is how businesses are able to report the income and payroll taxes they withhold from their employee’s wages as well as their own medicare and social security tax obligations. 

This form highlights all of the information businesses need to report and calculate including:

• Wages paid to employees
• Tips
• Federal income tax you withheld from your employee’s
• And more

Who Needs to File a Form 941?

Most businesses that pay wages to their employees are required by law to file their tax returns quarterly and therefore, will use a form 941. Even if you don’t have employees in some quarters, you still must file the form. 

The IRS tax form 941 is filed quarterly and is due one month from the last day of the reporting period. When the due date falls on a weekend or holiday, the form is due the next business day.

How to File a Form 941

Having an organized tax preparation process is key to ensuring you are compliant with tax laws. Here are steps to follow to make sure of this:

1. Gather necessary information like the number of employees you paid that quarter, the total wages you paid, and adjustments for sick pay or tips. 
2. Complete each section of the form like your general information, taxable social wages, and tax contributions.
3. Submit the form, payments, and any supporting evidence.

Filing a tax form 941 can be confusing. For more information, take a look at this informative blog.