As someone who has been self-employed for over 10 years, I can attest that discovering ways to save on my taxes is a never-ending task. To start, business-related tax deductions can change. Plus, as my content creator and financial educator business evolves, what I can write off for tax season can also shift.
Staying on top of your small business tax strategy means understanding your responsibilities as a small business owner. You can also uncover valuable tax deductions, equating to savings you can reinvest into your business.
Whether you’re a solopreneur just starting out or a seasoned entrepreneur, there’s always more to learn. Let’s take a look at ways to optimize tax savings.
Understanding Small Business Taxes
The small business taxes you owe depend on where you live and the nature and type of your business.
For instance, when I helped run a gallery in Los Angeles that sold merchandise, we were responsible for filing and paying sales and use tax, which is the case for all retailers in California. We also had to file annual business taxes with the city of Los Angeles.
For the most part, you’ll want to be mindful of your tax responsibilities, such as estimated quarterly taxes. You should also know what expenses you can write off to reduce your taxable income.
Choosing the Right Business Structure
What does a business structure have to do with how you’re taxed as a small business? Well, how you’re taxed depends on how you set up your business. While we won’t get too deep in the weeds, here are the main business structures to pick from:
Sole proprietorship. This is the most common type of business structure for solopreneurs. When you’re a sole proprietor, you pay business income taxes as part of your personal taxes.
LLC. The main draw of an LLC is that it protects you from personal liability. And within an LLC, you can be taxed as a sole proprietorship, S-corp, or C-corp. When your business is set up as a sole proprietorship or S-corp, your profits and losses show up on your individual tax returns.
S-Corp. With an S-Corp, you can split your profits as employee wages and owner distributions.
An S-Corp is considered a pass-through entity. That means income, losses, deductions, and credits flow to the members or partners. In turn, these items are reported on individual tax returns.
You may have heard that if you earn over a certain amount, you might be better off with an S-Corp. The reality is that there’s no one-size-fits-all approach to choosing a business structure, and it’s probably best to talk to a professional (which I’ll get into more in just a bit).
Luckily, you don’t have to pick one business structure and stick to it forever. For instance, I started off as a sole proprietor. Then, fast forward a few years later as my business grew, I decided to set up an LLC with an S-Corp tax election.
Keeping Organized Financial Records
Without keeping well-organized financial records, you’ll find yourself lost in a chorus of chaos when tax season rolls around.
Keeping clean and accurate books isn’t an overnight process either — trust me. While I’ve certainly let my financial housekeeping slide, especially during busy periods, I’ve aimed to reconcile transactions monthly.
Here’s what has helped me stay on top of financial records over the years:
- Keep separate business and personal checking accounts.
- Have a business credit card that I use just for business-related expenses.
- Use accounting software to keep track of cash flow, send out invoices, and reconcile transactions.
- Aim to do basic financial housekeeping for business monthly, if not weekly.
- Work with a bookkeeper to clean up accounting records (as needed).
- Snap photos of or scan business receipts.
- Reassess financial processes at least once a year.
Maximizing Deductions and Credits
You’ll also want to wrap your head around tax deductions and credits available for small businesses. When it comes to tax deductions, what’s deductible needs to be deemed “ordinary and necessary.” This depends on the particulars of your business, but here are some common tax deductions:
- Home office deduction
- Car-related deduction (if you use your vehicle for business)
- Advertising and promotion
- Office tools, supplies, and equipment
- Online tools
- Business-related travel
- Meals and entertainment
- Professional memberships and subscriptions
- Legal and professional fees
- Business interest and bank fees
- Subcontractors
- Telephone and internet
- Interest
- Depreciation of assets
- Work-related education
- Moving expenses
- Business insurance
- Health insurance
Additionally, you might scoop up specific tax credits, such as the Work Opportunity Tax Credit. This is a credit for employers who hire folks from specific, targeted groups.
The golden rule is this: maximizing deductions and credits can lower your tax liability. Pulling this off requires a one-two punch: you’ll want to stay on top of what you can deduct and keep track of expenses.
Planning for Quarterly Estimated Taxes
As a small business owner, you’ll also be on the hook for quarterly estimated taxes. As the name implies, these are due every three months — April 15, June 15, September 15, and January 15.
True story: I’ve known fellow small business owners who were unaware of these quarterly estimated taxes and ended up owing (gulp) seven years of back taxes.
From my interviews with tax professionals, it’s recommended to set aside at least 25% of what you bring in. In some cases, you’ll want to save up to 50%. The exact percentage you’ll want to save varies, but it’s better to err on the side of caution and save more than you anticipate needing for taxes.
The beauty of being self-employed is that business tax deductions will likely lower your tax liability. However, there’s a chance you might need to use all the funds you stashed aside for taxes. That said, it’s better to overestimate how much you owe than underestimate — which can have you in a pinch.
It’s far easier to calculate exactly how much you owe for tax payments after you’ve been in business for several years. That’s because you’ll have a historical record of how much you’ve owed in the past. If your income hasn’t changed significantly, you can use that as a jumping-off point.
Leveraging Retirement Accounts and Health Savings Accounts
Another perk of being self-employed is enjoying the tax advantages of Health Savings Accounts (HSAs) and retirement accounts available for small business owners. The basics and contribution limits for 2025 are as follows:
Health Savings Accounts (HSAs). HSAs are available to you if you have a high-deductible health plan (HDHP). The majority have triple-tax benefits. You don’t owe taxes on your purchases made with an HSA account, contributions are tax-deductible, and growth in your account is tax-deferred. The contribution limits in 2025 for HSAs are $4,300 for individuals and $8,550 for families.
Individual retirement accounts (IRAs). The main difference between a Roth IRA and a traditional IRA is when you enjoy the tax benefits. With a Roth IRA, you’ll owe taxes on the contributions upfront, so your withdrawals are tax-free. By contrast, a traditional IRA means you owe taxes when you take out the money down the line. In 2025, the contribution limit for IRAs is $7,000.
Solo 401(k). Solo 401(k)s or individual 401(k)s are only available for businesses of one. With Solo 401(k)s, you can make contributions to your account as both an employer and an employee. In 2025, you can contribute up to $23,500 on the employee side. You can contribute an additional 25% of your compensation on the employer end.
Throughout the years, I’ve aimed to maximize my HSA and IRA contributions. I contribute weekly to my HSA and monthly to my IRA. As for my solo 401(k) contributions, I am to stash aside a bit each month. But as I’m prone to variable income, it’s okay if I skip a month or contribute quarterly instead.
Simplified Employee Pension (SEP) IRA. Unlike a Solo 401(k), you can only contribute to an SEP IRA as an employer. In 2025, you can contribute up to 25% of an employee’s compensation or up to $70,000 — whichever is less.
Hiring a Tax Professional
You might cringe at the thought of hiring a tax expert to help with your small business tax strategy and planning. (We get it, it’s another expense.)
That said, having a tax professional who understands the ins and outs of your business and can answer all your tax-related questions — from business structures to tax deductions to financial housekeeping — can save you time, money, and headaches. Plus, they can help you gather the information you need to make critical decisions for your business. (Bonus: tax professional fees are tax deductible.)
To find the right tax professional for your business, figure out your needs and the general direction of your business. You can also talk to your colleagues — such as fellow business owners who work in similar industries — for recommendations. I’ve mainly reached out to my peers for their recommendations and firsthand experiences on tax pros. Look for those with professional designations, such as enrolled agents and certified public accountants. The IRS has a directory of federal tax return preparers1, which can jumpstart your search.
Small Business Tax Strategy: An Evolving Process
As you can see, creating a tax strategy requires a multi-pronged approach: keeping on top of your financial housekeeping, staying clued in on valuable business tax deductions and credits, figuring out what business structure (and its tax implications) is best for you, and making the most of tax-advantaged accounts.
If you want someone in your corner to guide you through the process and answer your questions, consider working with a tax professional. Why not start optimizing tax savings today?
- https://irs.treasury.gov/rpo/rpo.jsf ↩︎