As a small business owner, tax season can feel like walking a tightrope. But with the right strategies in place, it can become an opportunity. Staying compliant with IRS regulations is crucial. Smart planning, however, can also help reduce your overall tax liability.
From entity structure to tax deductions, here’s how to take control of your taxes and keep more of what you earn.
1. Choose the Right Business Structure
The structure of your business plays a major role in how you're taxed, what deductions you're eligible for, and how much personal liability you carry. The three most common structures for small business owners are sole proprietorships, limited liability companies (LLCs), and S corporations (S corps). Understanding the differences can help you make smarter tax decisions.
Sole Proprietorship
This is the simplest and most common structure for new businesses. You and the business are legally the same, which means:
Tax simplicity – Business income is reported directly on your personal tax return (Schedule C).
No separate business taxes – You pay personal income tax and self-employment tax on your profits.
Fewer deductions – You're limited in how you can structure payroll or retirement contributions.
Full liability – You are personally liable for business debts and lawsuits.
Limited Liability Company (LLC)
An LLC is a flexible structure that protects your personal assets while offering pass-through taxation. You can form an LLC with one or more owners (called members).
Tax flexibility – By default, LLCs are taxed like sole proprietorships (for single-member LLCs) or partnerships (for multi-member LLCs), but you can also elect S corp status.
Pass-through taxation – Income is taxed only once, on your personal return.
Liability protection – Your personal assets are shielded from business debts or legal claims.
Option to reduce self-employment taxes – See below.
S Corporation (S Corp)
An S corp isn’t a separate legal entity but a tax election you can make for your LLC or corporation. It’s often used by growing businesses looking to reduce self-employment taxes.
Split income strategy – You can pay yourself a “reasonable salary” (subject to payroll taxes) and take the remaining profits as distributions (which aren’t subject to self-employment tax).
Potential tax savings – Especially helpful for businesses with consistent profits.
More requirements – You must run payroll, file additional tax forms, and meet IRS compliance standards.
Choosing the best structure depends on your goals, income level, and growth plans. For some, a sole proprietorship is enough to get started. For others, the long-term tax advantages of an S corp can make a significant difference. A tax advisor can help you assess your situation and choose the most efficient path forward.
2. Maximize Deductible Expenses
Everyday business costs are often tax-deductible. Make sure you’re tracking and claiming any tax deductions available to you.
Home office expenses
Business mileage and travel
Office supplies and software
Marketing and advertising costs
Health insurance premiums (if self-employed)
Retirement plan contributions
Careful documentation is key—always keep receipts and detailed records to back up your deductions.
3. Take Advantage of Section 179 and Bonus Depreciation
If you purchase equipment, machinery, or qualifying software, Section 179 allows you to deduct the full purchase price in the year it’s placed in service. Bonus depreciation offers an additional write-off on certain new and used assets. These tools can significantly reduce your taxable income in high-revenue years.
4. Set Up a Retirement Plan
Contributing to a retirement plan isn’t just good for your future—it can significantly reduce your taxable income right now. Fortunately, small business owners have several retirement plan options that offer generous tax advantages and flexibility based on business size and income. Here are three of the most popular:
SEP IRA (Simplified Employee Pension)
Best for self-employed individuals or business owners with few or no employees
Easy to set up and maintain
Contributions are tax-deductible as a business expense
Employer-only contributions (no employee contributions allowed)
You can contribute up to 25% of compensation, up to a maximum of $69,000 in 2024
Contributions must be made equally for all eligible employees
Solo 401(k)
Best for self-employed business owners with no employees (except a spouse)
Allows both employee and employer contributions
Employee deferral limit: up to $23,000 in 2024 (or $30,500 if age 50+)
Employer profit-sharing contribution: up to 25% of compensation
Total potential contribution: up to $69,000 (or $76,500 if age 50+)
Can take out a loan against the plan if needed
More complex to administer than a SEP IRA, but it offers greater savings potential
SIMPLE IRA (Savings Incentive Match Plan for Employees)
Best for businesses with 100 or fewer employees
Designed for small businesses looking for a lower-cost plan than a 401(k)
Employees can contribute up to $16,000 in 2024 (or $19,500 if age 50+)
Employers must either match up to 3% of salary or contribute 2% to all eligible employees
Less paperwork and lower costs than a traditional 401(k)
Mandatory employer contributions mean it’s important to budget accordingly
5. Hire Family Members (Legally)
If you employ your spouse or children, you may be able to deduct their wages as a business expense. In some cases, hiring your children can reduce overall family tax liability, especially if they are under 18 and you operate as a sole proprietorship or partnership. Just be sure the work is legitimate and the pay is reasonable.
6. Keep Estimated Taxes on Track
Avoid IRS penalties by making timely quarterly estimated tax payments. Small business owners are typically required to pay taxes as they earn income, so staying on schedule helps ensure compliance and prevents unpleasant surprises at year-end.
7. Work with a Tax Professional
Tax laws change frequently, and small business finances can be complex. A qualified tax advisor can help you:
Identify missed deductions.
Navigate audits.
Plan ahead for big purchases or expansions.
Develop year-round tax strategies, not just seasonal fixes.
Key Takeaways
Smart tax planning is about more than just avoiding penalties. It’s about positioning your business for long-term success. With the right strategy, you can stay compliant, save money, and reinvest more of what you earn into your business. If you're ready to optimize your approach, AMG Finance is here to help.
