How To Reduce Tax Liability For Small Businesses

Tax liability is something that affects all small businesses. For small businesses, several factors play into tax liability, such as business entity type, due dates, and specific taxes owed.

Small businesses can reduce their tax liability by implementing tax-saving strategies. There are ways to save money for yourself and your employees for almost every business entity. Continue reading to learn more about how to reduce tax liability as a small business owner.

What Is Business Tax Liability?

Small business tax liability is the tax owed on your business income, and your business entity type determines your tax liability at the federal and state levels. 

Federally, all businesses will pay taxes based on their business entity. Some federal payments require payments throughout the year. You may also have federal tax payment requirements if your small business has employees. However, for those businesses functioning as pass-through entities, the tax liability is carried by the S Corporation shareholder or by the partner in a partnership at the federal level. State rules can differ for business entities. 

Your tax liability can be for employment and income taxes at the state level. Your business entity will also determine your tax liability for state taxes. For businesses with employees, you can expect to pay different taxes. 

Although this differs by state, you can expect to pay these business state taxes:

• Temporary disability insurance
• Unemployment insurance tax
• Workers’ compensation insurance

Different Types of Business Taxes?

Many business taxes apply to small businesses:

• Employment tax
• Estimated tax
• Excise tax 
• Income tax
• Property tax
• Sales and use tax
• Self-employment tax 

Employment taxes apply to employers who have employees. There are four employment taxes: 

• Federal income tax withholding
• Federal unemployment insurance tax (FUTA) 
• State unemployment insurance tax (SUI)
• Medicare and Social Security taxes

Estimated taxes are another business tax from income not subject to tax withholding. You can pay estimated taxes if you don't withhold taxes voluntarily. 

Estimated taxes include income from: 

• Dividends
• Interest 
• Self-employment

Excise taxes are taxes you'll pay for using certain goods or services. You’ll pay excise taxes if your small business: 

• Manufactures or sells certain products
• Operates certain kinds of businesses 
• Receives payment for specific services
• Uses various types of equipment, facilities, or products

Income tax is another business tax. Most business entities will pay federal income tax, except partnerships. Instead, those individuals within a partnership will report their profits and losses on their individual tax returns.

States also charge income tax on businesses. Not every state charges businesses income tax, so this portion of income tax can vary depending on where your small business operates.

Property tax is a business tax that affects business owners. States have different categories on which properties are taxable. 

Some states collect property tax for businesses based in commercial real estate locations. Other states can collect property tax based on the following, which are referred to as tangible personal property taxes: 

• Business assets 
• Business vehicles
• Computer equipment

Sales and use tax is another tax that states may charge small businesses taxes for their use of goods and services whenever sales taxes aren't collected. 

• When this occurs, it may apply to goods and services purchased out of state. 
• There are exclusions to what states can charge sales tax, including food, medicine, and utilities.

Self-employment tax is the last business tax that business owners may be subject to, which applies to those who own their business. 

4 Ways To Reduce Small Business Tax Liability 

There are four ways to reduce the tax burden for small business owners:

Set Up and Fund Your Retirement Plan

The first way to reduce taxable income is to set up a retirement plan. Small business owners can set up a retirement plan for themselves and their employees if their business entity has employees.

If you set your retirement plan as a qualified plan, you may qualify for additional tax savings. 

Qualified Busines Income Tax Deduction

The second way to reduce taxable income is to use the Qualified Business Income Tax Deduction. The Qualified Business Income Tax deduction allows three pass-through business entities to deduct 20% of their qualifying business income: 

• A partnership
• A sole proprietorship
• An S Corporation

You can claim this deduction on top of claiming other business tax deductions, and you can claim this deduction whether you’re a single filer or if you’re married and filing jointly. For most businesses, there are income limits for this deduction.

Take Tax Credits

The third way to reduce the taxes you owe is to take tax credits. Small businesses may qualify for various business tax credits related to: 

• Hiring employees
• Providing health coverage to employees
• The environment
• Work opportunities 

Tax Deductions

The fourth way small businesses can reduce their taxes is by using tax deductions. There are deductions beyond The Qualified Business Income deduction, which can help your small business and its tax liability. These deductions apply to:

• Business equipment
• Real estate
• Machinery
• Vehicles

Working with a tax professional will help you know which tax credits and deductions you qualify for.

When Are Business Taxes Due?

Business taxes have different due dates based on the type of business entity and when its year ends. 

• C corporations can choose a fiscal year-end date
• Partnerships mostly use the calendar year for business tax payments
• S corporations use the calendar year to establish their due date

Business Entity Due Dates

Please note that for single-member LLCs and sole proprietorships, the due date aligns with the individual tax filing due date (Form 1040).

LLCs Filing As Due Dates

LLCs with multiple members can elect to pay business taxes as a corporation, partnership, or S Corporation, which presents three due date options depending on the chosen entity type: 

Quarterly Estimated Tax Due Dates

If you’re subject to estimated taxes, there are additional deadlines. Estimated taxes are due quarterly on: 

However, in practice, estimated tax payments are credited when paid.

Reduce Your Tax Liability by Partnering With an Expert

Determining your tax liability can help you, your employees, and your small business. Given how many variables there are to determine tax liability, you’ll want to work with tax professionals.

Small business owners may have several taxes to pay, but you have options available. When you need help with small business taxes, you’ll want to ensure you get the help you need. Work with the small business tax accountants at 1-800Accountant for your small business tax needs.