A Quick Guide to Reducing Your Small Business Taxes [2021]

Ines Zemelman, EA

• 03.09.21 • 5 min read

If there's one thing that's certain in business, it's taxes. All businesses, from small mom-and-pop stores to billion-dollar conglomerates, have to pay taxes. As a small business owner, it's your job to stay on top of your tax responsibilities: which taxes you need to pay, how much you owe, and the filing deadlines.

A single mistake can be costly. But if you make the necessary preparations, take advantage of all the business tax deductions available to you, and file your tax returns on time, you can reduce your taxes.

Here is a quick guide to small business taxes to get you started.

Which taxes do I need to pay?

Filing taxes correctly also means knowing which ones to pay. The following are the main federal business taxes you need to stay on top of:

• Income taxes: You are required to pay federal income tax, and depending on where your business is incorporated, state income tax.
• Employment taxes: For starters, employers are required to withhold income taxes and Social Security and Medicare taxes (FICA) from their employees. You must also pay state and federal unemployment taxes.
• Sales taxes: Depending on the state, businesses that sell goods and services may need to collect sales taxes from their customers. Failure to collect and remit the taxes can lead to fines and penalties.
• Excise taxes: Certain types of business, such as alcohol, tobacco, and gambling, are subject to additional taxes.

What are some ways a business owner can minimize taxes?

You can take advantage of numerous small business tax deductions to minimize your tax liability. Subtracting tax-deductible business expenses allows you to reduce your taxable income, which translates to a smaller tax bill. Here are a few deductions and general strategies you may have overlooked:

Home office deduction

If you work from home, you can also deduct the cost of your home office space, as well as its upkeep, whether you rent or own the property. 

Business expenses (e.g. utilities, cellphone bills, office supplies, new equipment) can be deducted from your taxes as well. For instance, if your home office takes up half of your home, then half of your power bill becomes tax-deductible. You might need to prepare a detailed floor plan for your home office in the event of an audit.

To qualify for the home office deduction, you need to meet two requirements:

• Your home office must be your primary place of business. If you have another office elsewhere, you cannot take a home office deduction.
• Your home office must be used exclusively for business purposes. If your office also doubles as a guest bedroom, then that space is not eligible for the deduction.

Deduction for motor vehicle expenses

If you use your personal vehicle (car or truck) for business, you can deduct the cost of operation and maintenance from your taxes. You can claim the actual costs, or use the IRS standard mileage rates. Just make sure to keep good records to maximize your deduction.

Set up a retirement plan

One of the trade-offs of becoming a small business owner is you give up an employer-matched 401(k). However, you can set up a retirement plan for yourself and your employees to reduce your tax liability.

Consult a finance expert and make sure you choose a contribution plan that is recognized by the IRS to take advantage of the savings.

Make debt work for you

Many small businesses borrow capital to finance growth. While loans are not taxed like business income, interest payments are taxable. You may be able to deduct interest payments to reduce your tax liability. Make sure to talk to a tax specialist to check.

You can also write off bad debts (i.e. debts that are owed to your business that you have not been able to collect) against your income, reducing your tax bill.

Stay up to date on tax laws

You must stay up to date on tax laws. Federal and state tax laws change all the time, and any deductions and benefits you enjoyed today may not be applicable in the future. In a similar vein, you may also want to take advantage of any new tax benefits.