Best practices for managing taxes for small and medium-sized businesses

Running a business isn't easy, especially when it comes to managing and filing taxes. But mid-sized and small business tax management is one of your most important responsibilities.

Doing it right can help your business stay compliant with tax laws, minimize liabilities, avoid penalties, and improve profitability. And doing it wrong can result in missed deductions and harm to your business.

The good news is that taxes don't have to be a big headache. A few practical, easy-to-implement best practices for small business tax management will help you organize your financial records, meet your tax obligations, and plan for tax season. Here are six best practices and tax tips for SMBs to consider.

1. Stay organized throughout the year

Scrambling to gather receipts, invoices, and financial statements at tax time is stressful and increases the chance of errors. Instead, focus on year-round organization to make it easier to file your taxes.

Keep a detailed record of your business’s income, expenses, and receipts. Every dollar coming in and going out matters, so make it a habit to track everything. Meal receipts from client meetings? Store them in your records. Business vehicle expenses? Log them. These documents not only help during tax preparation but also increase awareness of your business expenses.

Accounting software, such as QuickBooks, Xero, or FreshBooks, can simplify financial record-keeping. Software programs like these automate tracking your income, expenses, and sales tax. Plus, they often generate easy-to-understand financial reports that can make tax preparation much simpler.

Keeping personal and business finances separate is an important business tax management best practice for staying organized. A dedicated business bank account and business credit card will make record-keeping easier. And separating your finances may help you avoid potential tax complications and make identifying deductible expenses simpler.

2. Understand your tax obligations

Different businesses have different tax responsibilities. Knowing what taxes your business owes and when to pay them is the first step to meeting your specific obligations.

Identify applicable taxes for your small business, which often include income tax for businesses, sales tax, payroll taxes, and corporate taxes if your business is incorporated. For example, if you sell products, you will likely need to collect and remit sales tax in the state or states where you operate.

Know your tax filing deadlines, which are non-negotiable. Missing them can lead to penalties and interest charges. The IRS has important information for small businesses, including tax calendars. Consider setting reminders for filing key forms. If your business collects sales tax or withholds payroll taxes, don’t forget about those deadlines either.

To avoid a large tax bill at the end of the year, many businesses make estimated tax payments each quarter. Paying quarterly taxes can keep you on track and help you avoid surprises when tax season rolls around.

3. Learn how to stay compliant with payroll taxes

Payroll taxes are a significant part of many SMBs’ tax responsibilities. Mishandling them can lead to penalties, so it’s essential to get it right.

It starts with properly classifying employees and independent contractors. Review the IRS worker classification guidelines to ensure each worker is properly classified as an employee or independent contractor based on their roles and relationships with your business.

Once employees are classified correctly, it’s your responsibility to withhold and remit federal, state, and local taxes from their paychecks. These taxes include Social Security, Medicare, and federal income taxes. Failing to remit payroll taxes on time can lead to unfortunate consequences.

Because managing payroll taxes manually can be difficult, many businesses use payroll software like Gusto or ADP to simplify the process and help ensure compliance. Outsourcing payroll to a professional service provider is also an option to help ensure calculations and submissions are done accurately – and so you can focus on running your business day-to-day.

4. Plan for tax payments

Effective tax management isn’t just about filing forms. It’s also about being financially prepared to cover tax obligations. Planning ahead can help you avoid cash flow problems and help ensure you’re not caught off guard.

One way to ensure you can pay your taxes is to consistently set aside a portion of your income. Many experts suggest setting aside 30% of your net income for taxes, depending on your effective tax rate. This helps you have available funds when payments are due.

To make payments simpler and more stress-free, automate them wherever possible. Many SMBs use tools that schedule estimated quarterly payments or payroll tax submissions. Automation reduces the risk of forgetting deadlines, minimizes human error, and gives you one less thing to worry about.

5. Seek help from a tax professional

Even for seasoned business owners, the tax code can be complex. Laws change regularly, and it's easy to overlook available deductions or credits. That’s why many businesses choose to work with a tax professional.

Certified Public Accountants (CPAs) and tax advisors are experts in helping businesses with their taxes and tax strategies. They can identify deductions you might not be aware of, help you plan for quarterly payments, and advise you on strategies to legally reduce your taxable income.

Tax laws change frequently, and a tax professional or CPA services can help you stay informed about new tax credits or filing requirements, for example. Working with a professional can help your business stay compliant and can benefit from tax law updates that may reduce your tax burden.

6. Take advantage of available resources

Looking for tax management support and resources for small businesses? A good place to start is the IRS website, which provides tools and information specifically for businesses, such as the Small Business and Self-Employed Tax Center. This resource offers guides, tax tips, and detailed information on deductions and credits that may apply to your business. For in-person help from the IRS, including answers to specific tax questions or help with forms and filings, you can visit an IRS Taxpayer Assistance Center.

Here are other resources that may also be helpful to you:

• The Small Business Administration (SBA) provides resources and guides on tax planning, compliance, and financial management for small businesses. Check out their Learning Center for free courses on tax basics and record-keeping.
• Local Small Business Development Centers provide free or low-cost consulting and training on tax compliance, financial management, and other topics through partnerships with the SBA and local educational institutions.
• Each state has its tax agency and website where you can find information on state-specific taxes, including filing deadlines, forms, and more.

Taking advantage of these resources can help answer your tax filing questions and help you make informed financial decisions for your business.

Take on tax season with less stress

Keeping up with tax obligations can feel overwhelming at times, especially when day-to-day obligations of running your business demand attention. But it doesn't have to be overwhelming. Staying organized, knowing your obligations, making a plan, and seeking professional advice can make tax season far less stressful. By implementing a few tax management best practices, you can free up time and energy to focus on growing your business.

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