7 Small Business Tax Tips That Will Save You Money

DAVID FAČKO

11 min

·

July 19, 2023

There’s no denying that taxes is one of the most dreaded fears of many small businesses.

Even though many small business owners primarily focus on keeping their business afloat, one thing remains constant; the need to eventually face all the stress that comes with taxes.

Not surprisingly, tax-related issues are among the toughest problems small businesses face. To give context, when small business owners were surveyed about their most burdensome issues, four out of the top ten were taxes!

The weight of tax matters cannot be overlooked, with federal taxes on business income taking the lead as the third most severe problem. A staggering 20% of small business owners identified it as a critical issue that demands immediate attention.

Following closely in fourth place is the burden of property taxes, which adds another layer of complexity to the tax landscape. State taxes on business income secured the seventh spot, while tax complexity emerged as the eighth most pressing problem in terms of importance.

If the sound of taxes always sends shivers down your spine as a small business owner, you’re not alone. Thankfully, numerous tax-saving strategies will help you save more money and give you peace of mind to conquer the tax season like a pro.

Let’s get started.

1. Record Keeping and Organization

Records of tax documents

Many small business owners still don’t realize how useful record keeping and organization can be regarding small business taxes.

Admittedly, they may not be the flashiest aspect of running a business, but you can be sure that they have the potential to save you a boatload of money and spare you from sleepless nights filled with tax-related anxiety.

Accurate and proper record-keeping should be a routine practice for you as a small business owner. Why? Because it grants you the power of accurate income tracking, expense categorization, and identifying possible deductions.

Without proper record keeping, you may be like a ship lost at sea, vulnerable to penalties, audits, and missed opportunities to minimize your tax burden.

Now, it’s not expected that you master the art of record-keeping all in one night, but starting one step at a time and staying consistent will put you on the right track. Here are a few things you should keep in mind while on your journey:

  • Establish a system: The first step to starting your record-keeping journey is choosing a system and sticking to it religiously. It could be as simple as organizing physical documents in labeled folders or going one step up the ladder by adopting digital solutions like accounting software or cloud-based applications.
  • Categorize with Precision: There’s a need for you to categorize your expenses painstakingly. You must create categories and assign everything in the right place – advertising costs, office supplies, or travel expenses.
    This does a lot for you, but most importantly, it makes it easier than ever for you to identify deductible expenses.
  • Embrace the digital revolution: As a small business owner, technology has come to make your life a whole lot easier, and it’s just right that you take advantage of it.
    You can use accounting software or mobile apps to automate the recording and categorizing of your expenses. These tools save you time, reduce human error, and give you a real-time snapshot of your financial health.
  • Receipts: These little slips of paper hold tremendous power, so you need to treat them right. First, you must develop a habit of meticulously collecting and organizing them.
    To make things easier, you can consider using online receipt tracking tools or snapshots of physical receipts and storing them securely. Make no mistake; receipts can be the difference between claiming deductions and leaving money on the table.
  • Bank and credit card statements: These financial statements contain many valuable insights you must notice. Hence, you should regularly review your bank and credit card statements to ensure they align with your recorded transactions.
    This practice will act as a safety net for you, helping you promptly catch any discrepancies and rectify them.

2. Maximizing Deductions

tax deducation

im Pendergast, Senior Vice President at altLINE Sobanco, states, “As a small business owner looking to save money on taxes, deductions are your best friends! They are the golden ticket to reducing your taxable income. But you need to be able to identify deductions you are eligible for and claim them.”

With so many different deductions, figuring out where to start can take time. You should remember a few important tax deductions as a small business owner.

  • Business expenses: Legitimate business expenses can be deducted from your taxable income. These include anything from office supplies and equipment to travel and advertising.
    So, ensure that you keep those receipts, invoices, and documentation intact so you don’t miss out on any expense that can be deducted from your taxable income.
  • Home office expenses: If you have a dedicated space in your home for business expenses, this one’s for you! Home office deduction allows you to claim some of your rent or mortgages, utilities, and other home-related expenses as business deductions.
    Keep one thing in mind, though. You must meet the IRS criteria and maintain proper records to support your claim.
  • Vehicle expenses: If you use your vehicle for business, buckle up for potential deductions. Keep track of your mileage and vehicle-related expenses like gas, repairs, and insurance.
    You can deduct the expenses or opt for the mileage deduction using the standard IRS rate. Whichever method you choose, be diligent in your record-keeping to support your claims.
  • Employee Benefits: Offering benefits to your employees not only boosts morale but can also be a win-win regarding deductions.
    Contributions to retirement plans, health insurance premiums, and other employee benefits are often deductible, so explore these opportunities to save money while caring for your team.
  • Professional Services: Remember that superhero accountant or tax professional you hired? Well, their fees are deductible too!
    The cost of hiring professionals to help with your taxes, bookkeeping, legal matters, and other business-related services can be claimed as deductions. So, remember to include those expenses when tallying up your deductions.
    Remember, maximizing deductions is not about bending the rules or playing a game of cat and mouse with the IRS. It’s about being diligent, organized, and knowledgeable. 

You can uncover hidden savings and keep more money in your business’s pocket by staying informed, maintaining impeccable records, and exploring every legitimate avenue.

3. Small Business Tax Credits

Small Business Tax Credits

If you liked the idea of tax deductions, you’d want to know more about tax credits. While tax deductions take it upon themselves to help you reduce your taxable income, tax credits directly reduce the amount of tax you owe.

So, how do you uncover these elusive tax credits? Let’s dive into some practical and easily understandable examples:

  • Research and development (R&D) credit: Innovation is the life of every industry, and this credit was created to support and reward small businesses that are taking the initiative and pushing the boundaries of the industry in terms of innovation.
    Suppose your business actively invests in research and developmental activities, such as creating new products, improving existing ones, or developing innovative processes. In that case, you should be excited about the R&D credit for your tax savings!
  • Work Opportunity Tax Credit (WOTC): If you’re passionate about giving back to the community and helping certain targeted groups find employment, then the WOTC is for you!
    When you hire individuals from specific target groups, such as veterans, ex-felons, or individuals receiving government assistance, you are not only contributing to society but also liable to earn valuable tax credits.
  • Health Insurance Credit: Businesses that provide health insurance to their employees may be eligible for this credit. It’s like a small reward for prioritizing the well-being of your team while saving you some serious dough in the process.
  • Energy Efficiency Incentives: Are you committed to reducing your environmental footprint and embracing sustainable practices? Well, guess what? The government wants to reward you for your green efforts.
    Various energy efficiency incentives are available to businesses that invest in eco-friendly improvements, such as installing energy-efficient lighting, upgrading HVAC systems, or using renewable energy sources.
  • Employer-Provided Childcare Credit: As a small business owner, you understand the value of supporting your employees and helping them achieve work-life balance.
    The Employer-Provided Childcare Credit recognizes your commitment to creating a family-friendly workplace. Discover inspiration from top-tier inclusive workplace strategies. You may qualify for this credit if you provide childcare facilities or assistance to your employees. 

Remember, tax laws are ever-changing, and new credits may be introduced while existing ones may expire. So, consult with a tax professional or stay updated with reliable sources to ensure you take full advantage of the available credits.

4. Retirement Plans

Retirement Plans

Retirement plans and contributions go beyond just helping you save money on taxes. They also help secure your financial future. You’re probably already saying that retirement is still far away, right?

Well, it may feel like a distant dream, but the sooner you start planning and contributing, the brighter your golden years will be.

Anthony Martin, Founder and CEO of Choice Mutual, says, “So, why should you consider retirement plans as a small business owner? Besides the obvious reason for ensuring your financial security, there’s a little something called tax advantages. They offer benefits that help you save more on taxes.”

Now, let’s look at the different retirement plans available for small business owners. Here are a few options you should keep in mind:

  • Simplified Employee Pension (SEP) IRA: This plan provides a simplified method to contribute to your retirement and employee accounts.
    The contributions are tax-deductible, and the best part? You have flexibility in determining the amount you want to contribute each year.
  • Solo 401(k) Plan: If you’re a one-person show or have a spouse as your only employee, this plan could be your golden ticket. With a Solo 401(k), you can contribute as both the employer and the employee, allowing for higher contribution limits and potential tax savings.
    Plus, you can choose from various investment options to grow your retirement funds.
  • SIMPLE IRA: As the name suggests, this plan offers simplicity and ease of administration. It allows both you and your employees to contribute, with the contributions being tax-deductible.
    While the contribution limits are lower than some other plans, it’s still a solid option for small businesses looking to provide retirement benefits.
  • Defined Benefit Plan: This plan might be worth exploring if you dream of retirement with a steady income stream. With a defined benefit plan, you can set up a pension-like arrangement that promises a specific benefit amount upon retirement.

Contributions to this plan are tax-deductible but keep in mind that it involves more complex administration and potentially higher costs.

5. Monitor Estimated Tax Payments

Monitor Tax Payments

Now, first things first. What are estimated tax payments? Let’s break it down. As a small business owner, you must pay taxes on your income throughout the year, not just during tax season alone.

Estimated tax payments are those periodic payments you make to the IRS to stay current with your tax obligations. Think of it as a way to prevent a tax tsunami from hitting you when you least expect it.

Now, you must comprehend why monitoring your tax payments is crucial. Top of the list is that it helps you avoid penalties and surprises. Nobody likes penalties, right? Not just that, you’ll also be able to plan your finances more effectively. 

Here are a few actionable steps to guide you on your journey to monitoring those estimated tax payments like a pro.

  • Know Your Tax Obligation: First, you must clearly understand your tax obligation as a small business owner. It’s best to consider consulting a tax professional or using online sources to determine your approximate tax liability.
    This is based on your business income, deductions, and applicable tax credits. With this, you have laid a very strong foundation to work from.
  • Determine the Payment Schedule: It’s common practice to make quarterly estimated payments. It would be best if you kept in mind that the IRS has specific deadlines throughout the year for these payments.
    Grab a calendar and mark those dates to ensure you stay on track. You don’t want to miss any payments, which can lead to penalties. Hence, you must be diligent and stay organized.
  • Estimate Your Income Accurately: You need to be able to make an accurate estimation based on your current business performance and any anticipated changes. This will help you calculate the right amount and avoid overpaying or underpaying.
  • Calculate Your Payments: The fun part is calculating your estimated tax payments. Take your estimated tax liability and divide it by the number of payment periods in the year (usually four). Voila! You’ve got your target payment amount.
    If your income fluctuates throughout the year, you may need to recalculate your payments periodically to stay on track.
  • Monitor Your Cash Flow: You must closely monitor and manage your cash flow and adjust your estimated tax payments if necessary. If your business experiences significant changes in income or expenses, you should reassess your payment amounts.
  • Document, Document, Document: There’s one thing you should always remember, documentation is key. Always keep detailed records of your estimated tax payments, including payment dates, amounts, and supporting documentation.

This will be useful when you file your annual tax return, providing a clear trail of your tax payments throughout the year.

6. Utilizing Technology for Tax Efficiency

Technology for tax efficiency

Without a doubt, technology has revolutionized many aspects of your life as a small business owner, including your tax game! Harnessing the power of technology can be your ultimate tool for tax efficiency.

You should consider leveraging technology for your tax processes for a thousand and one reasons. Not only will it save you money, but it will also give you a competitive edge in the small business world.

The next step is to look at practical ways by which you can leverage the massive potential of technology to optimize your tax efficiency.

  • Use of Accounting Software: The days of manual bookkeeping are long gone! There are intuitive accounting software solutions like QuickBooks, Xero, and FreshBooks that can effortlessly track your income, expenses, and deductions.
  • Digital Receipts: With digital receipts, you can finally say goodbye to the never-ending pile of paper receipts. You can leverage apps like Expensify to take snap photos of your receipts with your smartphone and let the software extract all the relevant information.
  • Cloud Storage: If you’ve always been battling the fear of losing important tax documents, you are not alone! 

Services like Google Drive, Dropbox, or OneDrive allow you to securely store all your digital records, from bank statements and invoices to contracts and expense reports. With cloud storage, you can access your files anywhere, anytime.

Employing Billdu’s sophisticated invoicing software also serves as an excellent strategy for refining your income monitoring, subsequently enhancing the efficiency of your financial management processes.

7. Engaging Professional Help

Professional Tax Help

You might be thinking, “Why do I need professional help? Can’t I just figure it out on my own?” 

While it’s true that some people can navigate the tax landscape on their own, enlisting the aid of a tax professional can be a game-changer. Here’s why:

  • Expertise Amplified: Tax professionals are like tax wizards. They eat, sleep, and breathe taxes (well, not literally, but you get the idea). They deeply understand the intricate tax laws, regulations, and loopholes many of us may struggle to comprehend. 
  • Time is Money: As a small business owner, your time is precious. You have a million tasks on your plate, from managing operations to nurturing client relationships.
    Mark Pierce, CEO of Cloud Peak Law Group, further emphasizes hiring a professional, “Spending countless hours deciphering tax codes and wrestling with spreadsheets is not the best use of your valuable time. By delegating your tax matters to a professional, you free up time to focus on more crucial matters.”
  • Avoid Costly Mistakes: Let’s be honest; taxes are unforgiving. One innocent slip-up, a missed deadline, or an improperly claimed deduction can land you in hot water with the tax authorities.

The following penalties and headaches can affect your business’s financial health and sanity. By engaging a tax pro, you gain an ally who can guide and help you navigate the pitfalls and steer clear of costly mistakes.

Conclusion

Navigating the world of taxes doesn’t have to be a nightmare. By implementing these tax tips, you can save money, stay compliant, and pave the way for financial success. With these tips in your arsenal, you’ll conquer taxes like a pro and keep more money in your pocket. Cheers to your small business success!

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DAVID FAČKO

SEO Specialist at Billdu

David Fačko is an SEO specialist at Billdu, one of the best-rated invoicing software for freelancers in the world.

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