Tax Planning for Small Businesses

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on May 30, 2023

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What Is Tax Planning for Small Businesses?

Tax planning is an essential aspect of running a successful small business. It involves understanding and managing tax obligations while maximizing deductions and credits to minimize the tax burden.

This article provides an overview of tax planning strategies for small businesses, including selecting the right business structure, maximizing deductions and credits, working with tax professionals, and staying informed about tax law changes.

Understanding Small Business Tax Obligations

Federal Taxes

Income Tax

Small businesses are subject to federal income tax based on their net income. The tax rates and filing requirements depend on the business structure, such as sole proprietorship, partnership, or corporation.

Self-Employment Tax

Small business owners, including sole proprietors and partners, are typically subject to self-employment tax, which covers Social Security and Medicare contributions.

Payroll Taxes

Businesses with employees must withhold payroll taxes, such as Social Security, Medicare, and federal income tax, from their employees' wages and remit them to the government.

State and Local Taxes

Sales Tax

Small businesses engaged in selling goods or services may be required to collect and remit state and local sales taxes.

Property Tax

Businesses that own real estate or personal property may be subject to property taxes assessed by local governments.

Franchise and Excise Taxes

Some states impose franchise and excise taxes on businesses for the privilege of operating within their jurisdiction.

Industry-Specific Taxes

Excise Taxes

Certain industries, such as alcohol, tobacco, and fuel, may be subject to federal and state excise taxes.

Environmental Taxes

Businesses involved in activities that impact the environment, such as oil production or hazardous waste disposal, may be subject to environmental taxes.

Other Industry-Specific Taxes

Some industries may have additional tax obligations specific to their line of business.

Small Business Tax Obligations

Tax Planning Strategies

Selecting the Right Business Structure

Sole Proprietorship

A sole proprietorship is the simplest business structure, where the owner and the business are considered one entity for tax purposes.


A partnership is a business structure where two or more individuals share ownership and profits. Partnerships are subject to pass-through taxation, where profits are distributed to partners and taxed at their individual income tax rates.

Limited Liability Company (LLC)

An LLC is a flexible business structure that combines the benefits of a corporation and a partnership. It offers limited liability protection and can choose to be taxed as a sole proprietorship, partnership, or corporation.

Corporation (S-Corp and C-Corp)

A corporation is a separate legal entity from its owners and can be taxed as either an S-Corporation or a C-Corporation. S-Corporations are subject to pass-through taxation, while C-Corporations are taxed separately from their owners.

Selecting the Right Business Structure

Maximizing Deductions and Credits

Common Small Business Tax Deductions

Small businesses can claim various tax deductions, such as business expenses, vehicle use, home office, and depreciation.

Tax Credits Available to Small Businesses

Tax credits, such as the Work Opportunity Tax Credit and the Research and Experimentation Tax Credit, can help reduce a small business's tax liability.

Expense Tracking and Documentation

Importance of Accurate Record-Keeping

Maintaining accurate records of business expenses is crucial for maximizing tax deductions and minimizing the risk of an audit.

Tools and Software for Expense Tracking

Accounting software and expense tracking apps can help small business owners keep track of their expenses and simplify tax preparation.

Retirement and Benefit Plans

Tax Advantages of Retirement Plans

Establishing retirement plans, such as SEP IRAs or 401(k)s, can provide tax benefits for small business owners and their employees.

Types of Retirement Plans for Small Business Owners

There are several retirement plan options available to small business owners, including SIMPLE IRAs, SEP IRAs, Solo 401(k)s, and traditional 401(k) plans. Each plan has its own eligibility requirements, contribution limits, and tax advantages.

Employee Benefit Plans and Tax Implications

Offering employee benefits, such as health insurance and educational assistance, can provide tax deductions for the business and help attract and retain talent.

Tax Planning Strategies for Small Businesses

Tax Planning Throughout the Year

Quarterly Estimated Tax Payments

Small business owners and self-employed individuals are typically required to make estimated tax payments throughout the year to avoid penalties.

Regular Financial Review and Planning

Conducting regular financial reviews and updating tax planning strategies can help small businesses stay on track and optimize their tax savings.

Tax-Loss Harvesting Strategies

Implementing tax-loss harvesting strategies, such as selling underperforming assets to offset capital gains, can help minimize tax liabilities.

Working With Tax Professionals

Benefits of Hiring a Tax Advisor or Accountant

Hiring a tax professional can help small business owners navigate complex tax laws, ensure compliance, and maximize tax savings.

Finding the Right Tax Professional for Your Business

When selecting a tax professional, consider factors such as experience, industry knowledge, and communication style to find the best fit for your business.

Collaborating With Tax Professionals for Ongoing Planning

Maintaining an ongoing relationship with a tax professional can help small business owners stay proactive in their tax planning and adapt to changes in tax laws.

Staying Updated With Tax Law Changes

Importance of Staying Informed

Tax laws are constantly changing, and staying informed about these changes is essential for effective tax planning.

Resources for Tax Law Updates

Small business owners can stay informed about tax law changes through resources such as the IRS website, professional associations, and tax newsletters.

Adjusting Tax Planning Strategies as Needed

As tax laws change, small business owners should adjust their tax planning strategies to ensure compliance and optimize tax savings.

Final Thoughts

Tax planning is essential for the success of small businesses as it involves managing tax obligations and maximizing deductions and credits to minimize the tax burden.

Small businesses have federal tax obligations that depend on their business structure, self-employment tax obligations for owners, and payroll tax obligations for employees.

Sales tax, property tax, and industry-specific taxes such as excise taxes and environmental taxes are other types of state and local tax obligations for small businesses.

Selecting the right business structure, maximizing deductions and credits, tracking expenses accurately, establishing retirement and benefit plans, and working with tax professionals are some of the tax planning strategies for small businesses.

Small business owners should stay updated with tax law changes and adjust their tax planning strategies accordingly.

Regular financial reviews and ongoing collaboration with tax professionals can help optimize tax savings for small businesses.

Tax Planning for Small Businesses FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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