Small Business Tax Preparations Tips for Next Year

Staying ahead of tax season is key for small business owners. They have enough on their plate trying to run their respective businesses, so worrying about taxes far in advance may seem like a daunting concept. Still, tax season comes up on you quickly. The IRS suggests taxpayers begin preparing for the following year’s tax season as soon as they can, as you don’t want to be that business scrambling at the last minute to find an accountant or determine your business expenses.

Tax filing is no joke, whether you’re a small business owner, self-employed (or sole proprietors), or even a large company. For the purpose of this article, we’re going to dive into how small business owners can prepare for next calendar year’s tax season.

Tax prep done this early will keep you ahead of other businesses this upcoming tax year, and you will be thankful that you didn’t wait until the last minute.

Tax Tip #1: Small business tax workshop

Filing taxes can be stressful! Filing deadlines come up quickly and entrepreneurs often feel like they just finished with the previous year when it’s suddenly it’s tax deadline time again. Of course prepping all your tax documents is key, but did you know that the IRS provides you with a tool specifically for small businesses?

Here you can find the IRS’ small business tax workshop. This workshop walks you through everything from tax planning to tax forms to schedule C and more. It’s like having a tax professional at your service.

There’s even minute details that the video covers, like if you’re working in a home office, or specifically filing your taxes electronically. Specifically, it’s broken down into eight lessons:

1. Federal taxes and your new business
2. Schedule C and other small business taxes
3. Filing and paying taxes electronically
4. Business use of your home
5. Federal taxes when hiring employees or independent contractors
6. Managing payroll to withhold the correct amount of taxes
7. Tax deposits and filing a a return to report payroll taxes
8. Hiring people who live in the U.S. who aren’t citizens

This video is a great first step to understanding your tax situation and following the rules so that you don’t get in any trouble come tax time.

Tax Tip #2: Figure out an accounting solution

Whether it’s an accounting software or working with an accountant, determining who is going to help you get your taxes done by the due date is a major step. While some people think accounting is just bookkeeping, there’s far more to it than that. Your accountant or accounting software should be keeping up with you throughout the entire tax year.

That means everything from your cash flow to your business structure to financial statements and more.

Accounting services do not just provide accounting, but they provide the peace of mind that come tax season, you will be best prepared and avoid any unexpected tax payments, or even worse, not having done your taxes correctly.

There are various accounting software companies that cater themselves specifically to small businesses. Among them include Zoho, NetSuite, Xero, and more. This Business.org article does a great job of outlining what each potential solution provides for you.

If you prefer to use a traditional certified public accountant (CPA) or accounting team, finding the right fit for your small business is key. Don’t hire the first person or company you speak to without considering your many needs and talking to different groups to see who fits best for you. There’s also the CPA.com business funding portal to consider if you need financing for your business. CPA.com can help you with your taxes as well.

Tax Tip #3: Separate business from personal

This is a concern across all businesses, not just small businesses, but it’s only heightened for small businesses. It’s essential to separate your business expenses from your personal expenses. Make sure throughout the year you do a pass-through of where you’re using your different accounts to ensure you’re not using your personal bank account when you should be using your business account.

Additionally, tax laws are very serious. If you misconstrue what was personal and what was for your business, the IRS could start looking into your personal account and further dive into your earnings from the last year.

While you likely have nothing to worry about in your personal account, it’s still a major inconvenience and puts you on the radar of the IRS, which is never ideal.

When paying for items throughout the year, separate your credit cards into business credit cards vs. personal credit cards. Make sure you remember which serves which purpose, as it will make it far easier to separate your expenses come tax season.

Tax Tip #4: Stay organized

You would be stunned by how many people have a million documents lying around on their desktop, another hundred papers with important tax information on them, and have no idea where their tax forms are. While it can be difficult to prepare for something so far out, it’s essential that you are aware of where your forms are.

While your CPA or accounting software should help you stay organized, we recommend keeping all your paperwork in one place. This way when it’s tax season, you’re not running all over the place trying to find the right documents at the right time.

It may seem stressful to plan so far in advance, but if you get a nice tax return, all will feel much better. There are many apps available for tracking business expenses and business income. Utilize an app and avoid the pitfalls that many run into.

Tax Tip #5: Understand which of your employees are 1099 workers vs. W-2 workers

It’s essential that you have the right understanding of the difference between 1099 workers and W-2 workers when it’s time to file your taxes. 1099 workers and W-2 workers are taxed differently, so if you misclassify one or the other, you’re going to run into some problems with the IRS. Your CPA should be able to help you with this as well, but we’ll break this down for you.

The most common form of a 1099 worker is the independent contractor. Freelancers and gig workers are also 1099 workers. The most important thing to know about 1099 workers is that they do not receive the benefits and salary that your typical W-2 worker would receive. Instead, they work on a project-by-project basis with your small business.

W-2 workers, on the other hand, are full or part time employees that receive benefits, salary, and have their working hours controlled by your small business. While it costs you less in the long run to hire 1099 workers, the level of control is not the same as if you hire W-2 workers.

Additionally, there are differences in taxes between the two types of workers. This is the most important part for when you’re considering your taxes for the next year.

1099 and W-2 refer to the tax forms that are expected to be completed. You must use form 1099-MISC to report payments made to 1099 workers. It’s entirely your responsibility to send a 1099-MISC form to 1099 workers who made $600 or more in a calendar year. All of your employees must fill out their 1099 forms, which you can then compile into your 1096 form.

As for W-2 workers, an employee’s paychecks will see the employee’s wages with the taxes, such as state income taxes and federal taxes, taken out. This form will inform employees about specific taxes as well, such as Medicare taxes and Social Security taxes. From the small business side of things, it’s more than anything essential that you ensure your employees receive the W-2 form in a timely fashion so that you can collect and compile them all.

All in all, it’s crucial that you understand the separation between 1099 and W-2 employees so that you don’t make any mistakes and run into any issues with the IRS.

Tax Tip #6: Classify your business correctly

Is your company a c-corporation? A sole proprietorship? Or how about a single-member LLC? There are many ways that you can classify your small business, and understanding which way fits your business correctly will have a major impact on your business come time for your tax bill.

We mentioned a few types of classifications, but let’s break them down individually:

1. Sole proprietorship: Simply put, this is a business owned and operated by a single person. For federal taxes, the business and the owner are the same person. Sole proprietorships are considered self-employed, so they are subject to self-employment taxes.
2. Partnership: Your business is a partnership if two or more people manage the business. Partnerships are subject to fewer regulations, as partners face income taxes rather than business taxes.
3. C corporation: C corporations face income taxes, as the business is separate from the owners. While the business owners do not face self-employment taxes, they do face income taxes. While this is most often used by large businesses, some small businesses opt to classify as c corporations as well.
4. S corporation: The big difference between c and s corporations is that s corporations do not typically pay income taxes. S corporations must be a domestic company operating in the US, and all shareholders must be US citizens or permanent residents. An S corporation can have no more than 100 shareholders, and those shareholders must be actual people. If your business fits into this specific realm, it’s worth considering classifying as an s corporation.
5. Limited liability company: The most common classification for small business owners, LLCs are broken down between sole proprietorships and partnerships. If there’s one owner it defaults to sole proprietorship, while if there’s more than one it defaults to partnership. LLCs do not have to worry about their personal assets being impacted by the business.
6. Nonprofit: Nonprofits do not have a tax rate because they have been granted tax-exempt status by the IRS. The reasoning is that they are beneficial to society. It’s definitely worth looking into whether or not your small business can count as a nonprofit, but the IRS takes which small businesses get classified as a nonprofit very seriously.

Takeaways

Following these six tax tips will help you stay ahead of things for next tax season. It may seem early to get everything done, but you’ll be thankful when tax season prepares and you’re far more ready than everyone else. Make sure to understand the ins and outs of finding an accounting solution, separating your business and personal accounts, staying organized, understanding the classification of your employees, and understanding the classification of your business.

Tax season is going to be a breeze!

FAQs

What is tax planning for new business?

Tax planning for businesses is all about structuring finances to minimize tax liability while staying fully compliant with the law. It involves strategically analyzing costs, profits, operations, investments, assets, and liabilities to ensure the business is tax-efficient. By planning, businesses can take advantage of deductions, credits, and incentives that reduce their overall tax burden, allowing them to reinvest more into growth and success.

What type of business is best for taxes?

An S corporation, or S corp, is a business structure that helps owners avoid the double taxation that regular C corporations face. Instead of paying corporate taxes, an S corporation passes its profits—and certain losses—directly to the owners, who report them on their personal tax returns. This setup allows business owners to benefit from corporate protections while keeping taxes simpler and potentially lower.

What are the 5 D's of tax planning?

The 5 D’s of tax planning Dodge, Defer, Divide, Deduct, and Disguise—represent key strategies for legally minimizing tax liabilities. These methods help businesses and individuals structure their finances smartly, allowing them to reduce, delay, or distribute tax burdens in a way that keeps more money in their pockets while staying within the law.

What type of LLC pays the least taxes?

By default, an LLC is taxed like a sole proprietorship, meaning the owner pays self-employment tax on the entire profit. However, an LLC can be taxed as an S Corp, which changes how income is taxed—typically lowering the amount subject to self-employment tax and reducing the overall tax bill. This election can be a smart move for business owners looking to keep more of their earnings.

What should I look for in a tax planner?

New regulations now require all paid tax return preparers to have a Preparer Tax Identification Number (PTIN). When choosing a tax professional, be sure to ask if they have a PTIN, are part of a professional organization, and stay up to date with continuing education. This helps ensure you're working with a knowledgeable and trustworthy expert.