How to Reduce Small Business Taxes: Deductions and Strategies for the 2025 Tax Year

What are small business taxes?

Small business taxes encompass all the various tax obligations your business faces at the federal, state, and local levels. Unlike personal income taxes, business taxes are more complex because they depend heavily on your business structure, location, and type of operations. Whether you operate as a sole proprietorship, LLC, S corporation, or C corporation determines how your business income is taxed and how you file your taxes.

The primary types of taxes for small businesses include federal and state business taxes, self-employment taxes, payroll taxes if you have employees, and sales taxes if you sell taxable goods or services. Understanding these different tax categories helps you plan throughout the year and avoid surprises during business tax season.

Income taxes

Most small businesses must pay federal income tax on their profits, though the specific requirements vary by business structure. Business income tax is calculated on your net profit after deducting legitimate business expenses. Sole proprietorships and single-member LLCs report business income on Schedule C of their personal tax return, while partnerships and multiple-member LLCs use Form 1065. Corporations file separate business tax returns. In addition to federal business taxes, many states charge a corporate income tax.

Most small businesses must make quarterly estimated tax payments if they expect to owe $1,000 or more in taxes for the year. These payments are due on Jan. 15, April 15, June 15, and Sept. 15 for the previous quarter's earnings.

Self-employment taxes

If you're a sole proprietor, single-member LLC owner, or partner in a partnership, you'll likely owe self-employed taxes on your business earnings. This tax covers your Social Security and Medicare contributions, similar to what employees and employers pay through payroll taxes.

For 2025, you'll pay 12.4% for Social Security on earnings up to $168,600 and 2.9% for Medicare on all earnings. High earners may also owe an additional 0.9% Medicare tax on earnings over $200,000 for single filers or $250,000 for married filing jointly.

Payroll taxes

When you hire employees, you become responsible for withholding and paying payroll taxes, including federal income tax withholding, Social Security and Medicare taxes, and federal unemployment tax. You must also comply with state payroll tax requirements, which vary but usually include state income tax withholding and state unemployment insurance.

Common small business tax deductions

Small business tax deductions can significantly reduce your tax liability and improve your bottom line. The IRS allows businesses to deduct ordinary and necessary expenses incurred in the course of operating their business, but it's important to understand the specific rules and limitations that apply to different types of expenses.

Office and operational expenses

Basic business operational costs are generally fully deductible when they're necessary for your business operations. This category includes office rent, utilities, phone and internet service, office supplies, and equipment purchases. For businesses operating from home, the home office deduction allows you to deduct a portion of your home expenses based on the percentage of your home used exclusively for business.

Software subscriptions and technology services are also usually fully deductible as operating expenses. This includes accounting software, customer relationship management systems, and cloud-based services that support your business operations.

Professional services and legal fees

Fees paid to attorneys, accountants, consultants, and other professional service providers are generally deductible business expenses. This includes costs for tax preparation, legal advice, business consulting, and professional development services.

Marketing and advertising expenses are also fully deductible, including website development, social media advertising, print materials, and promotional events. These investments in growing your business provide immediate tax benefits while potentially generating future revenue.

Travel and transportation costs

Travel expenses, including airfare, hotel accommodations, rental cars, and meals, are deductible when they are primarily for business purposes. Just make sure to maintain detailed records showing the amount and proving the business purpose of the travel.

Vehicle expenses can be deducted using either the standard mileage rate (70 cents per mile for 2025) or by tracking actual vehicle expenses and deducting the business-use percentage. If you use your personal vehicle for business, keep a detailed mileage log showing the date, destination, and business purpose of each trip.

Employee benefits: What can you deduct?

Providing benefits for your team can motivate employees and lead to valuable credits and deductions for small business taxes. Overall, a range of employee benefits may be tax deductible, as long as they are within certain limits set by the IRS. Remember to keep good records in case the IRS selects your tax return for an audit.

Salary and wages

One of the most obvious perks of working for a living is getting paid, and the salaries and wages you pay your employees are deductible. Salaries, wages, and bonuses paid to employees are fully deductible business expenses, provided the compensation is reasonable for the services performed. Paying wages while employees are out sick or on vacation is also tax-deductible.

This is particularly important for business owners who are also employees of their companies, as the IRS scrutinizes owner compensation to ensure it's not excessive. If your business is structured as a limited liability company (LLC) or S corporation, make sure you pay yourself and other shareholders reasonable compensation to avoid IRS scrutiny.

Health and life insurance benefits

Other health benefits, including premiums for health, vision, and dental insurance, contributions to an employee's health savings account (HSA), and long-term care insurance, are also tax-deductible. However, health insurance premiums for the business owner and their spouse and dependents may not be deductible. In addition, if you offer group term life insurance for employees, you can deduct the premiums for up to $50,000 of coverage per employee.

S corporations can't deduct premiums paid for more than 2% of shareholders. Instead, the premiums paid by the company are treated as a draw and reported on the shareholder's W-2. The shareholder can deduct those premiums as self-employed health insurance premiums on their individual tax return.

Educational and assistance programs

Educational assistance programs that help employees maintain or improve job-related skills are generally deductible, though there may be limits on certain programs. To qualify for the deduction, the educational program should maintain or improve the employee's skills in their existing career—you can't deduct educational expenses to prepare employees for a different line of work.

Employee Assistance Programs (EAPs) are generally fully deductible for tax purposes. EAPs take various forms and may include counseling programs related to substance abuse, family issues, and other similar issues negatively affecting employees' productivity.

Retirement plan contributions

Setting up a 401(k) or another qualified retirement plan can result in some valuable tax deductions. This includes the expenses you pay to set up and administer the program and contributions you make to employee accounts. Small businesses can also establish SEP-IRAs or SIMPLE IRAs, which often have lower administrative costs while still providing tax benefits.

Fringe benefits and discounts

Fringe benefits that are occasionally provided to employees are typically tax deductible. Tax-free fringe benefits include long-term care insurance, group term life insurance, disability insurance, dependent care assistance, and transportation benefits. They also include "working condition fringe benefits," which cover anything employees need to be able to do their jobs, such as traveling for business, business-related meals, and subscriptions to professional publications.

In addition, discounts given to employees on business products or services can be deductible. The general rule is that the product or service has to be offered for sale to customers in the ordinary course of business in which the employee performs substantial services.

Strategies to reduce small business tax liabilities

Minimizing your tax burden requires proactive planning throughout the year, not just scrambling at tax time. The most effective tax reduction strategies involve timing income and expenses strategically, maximizing available credits and deductions for small businesses, and structuring your business operations to take advantage of favorable tax provisions. We'll explore proven strategies that can help you legally reduce your tax liability while maintaining compliance with IRS requirements.

Timing income and expense recognition

One of the most powerful tax planning strategies involves controlling when you recognize income and expenses. If you expect to be in a lower tax bracket next year, you might delay invoicing clients until late December so payment arrives in January. Conversely, if you expect a higher income next year, you might accelerate income recognition into the current year.

On the expense side, you can often accelerate deductible expenses by making purchases before year-end or prepaying certain business expenses. This might include buying equipment, paying for professional services, or prepaying rent or insurance premiums. However, be careful not to make unnecessary purchases just for tax benefits, as this can hurt your cash flow.

Maximizing retirement plan contributions

Contributing to retirement plans provides immediate tax deductions while building long-term wealth. Business owners can often contribute more to retirement plans than employees, especially through SEP-IRAs or solo 401(k) plans. For the 2025 tax year, SEP-IRA contributions can be up to 25% of compensation or $70,000, whichever is less.

If you have employees, establishing a company retirement plan can provide tax deductions for both your contributions and the administrative costs. Many employees highly value retirement benefits, making this a tax-efficient way to provide valuable compensation.

Leveraging available tax credits

Tax credits provide dollar-for-dollar reductions in your tax liability, making them more valuable than deductions. The Research and Development Credit can benefit businesses that develop new products, processes, or software, even if the development efforts aren't successful.

The Work Opportunity Tax Credit provides credits for hiring employees from certain targeted groups, including veterans, ex-felons, and long-term unemployment recipients. Small businesses may also qualify for credits related to providing employee benefits, making energy-efficient improvements, or operating in certain geographic areas.

Optimizing your business structure

Your business structure significantly impacts your tax liability, and it may make sense to change structures as your business grows. S corporation election can help reduce self-employment taxes for profitable businesses, while LLC structures provide flexibility in how profits and losses are allocated among owners.

Consider whether your current structure still makes sense given your business's current size, profitability, and growth plans. Changes in tax laws or your business circumstances might make a different structure more advantageous.

Maintaining thorough documentation

Proper record-keeping is essential for maximizing deductions and defending them if questioned by the IRS. Develop systems for tracking business expenses throughout the year, including digital receipt storage and detailed expense categorization. Many businesses find that investing in good accounting software pays for itself through better expense tracking and tax preparation efficiency.

Keep detailed records of business mileage, entertainment expenses, and home office use, as these are commonly scrutinized deductions. The better your documentation, the more confident you can be in claiming legitimate deductions.

Small business taxes FAQs

How much can a small business write off on taxes?

There's no overall limit on how much a small business can deduct, as long as the expenses are ordinary, necessary, and properly documented. However, the IRS does scrutinize businesses that claim unusually high deductions relative to their income. Also, some specific deductions do have limits, such as the 50% limit on business meal expenses.

What receipts should I keep for small business taxes?

Keep receipts for all business expenses, including office supplies, equipment purchases, professional services, travel expenses, and business meals. The receipt should show the amount, date, vendor, and business purpose of the expense. Digital receipts are acceptable, and many businesses photograph receipts and store them in cloud-based systems for easy access and organization.

When are small business tax deadlines in 2026?

Tax deadlines in 2026 vary by business structure. Partnerships and S corporations must file by March 15, 2026, for their 2025 tax year. Sole proprietorships file with their personal returns by April 15, 2026. C corporations also have an April 15 deadline unless they've elected a different tax year.

Do I need to pay quarterly taxes as a small business owner?

Most small business owners must make quarterly estimated tax payments if they expect to owe $1,000 or more in taxes for the year. This includes both income tax and self-employment tax obligations. The payments are based on either 100% of the previous year's tax liability or 90% of the current year's expected liability. Quarterly estimated tax payments are typically due on Jan. 15, April 15, June 15, and Sept. 15.

What happens if I miss a small business tax deadline?

Missing tax deadlines can result in penalties and interest charges that add up quickly. The failure-to-file penalty is typically 5% of unpaid taxes per month, while the failure-to-pay penalty is 0.5% per month. Interest accrues on both unpaid taxes and penalties. If you can't meet a deadline, file for an extension to avoid the failure-to-file penalty. Contact the IRS to discuss payment plan options if you can't pay your full tax liability.

Can I deduct home office expenses for my small business?

Yes, if you use part of your home exclusively for business purposes, you can deduct home office expenses using either the simplified method ($5 per square foot up to 300 square feet) or the actual expense method (calculating the percentage of home expenses attributable to business use). The space must be used regularly and exclusively for business to qualify.

How LegalZoom can help with small business taxes

Remember that tax laws change frequently, and strategies that work well for one business may not be appropriate for another. Consider working with a qualified tax professional who can help you implement these strategies effectively while ensuring you remain compliant with current tax regulations.

LegalZoom's business formation services help you establish the optimal structure for your specific situation, whether that's an LLC for flexibility, an S corporation for potential tax savings, or another structure that meets your unique needs. Once you’re established, our compliance services help you understand your ongoing obligations and establish systems to meet them efficiently and accurately.

What about small business tax filing? You may be able to handle your own bookkeeping with user-friendly tools like LZ Books. Track income and expenses, send invoices, record payments, and get everything ready for tax season. When it’s time to file, contact our partners at 1-800Accountant for help with your business taxes.

Janet Berry-Johnson contributed to this article.