Are Your Business Decisions Costing You More in Taxes? Here’s What You Need to Know

Running a business isn’t just about making money—it’s about keeping as much of it as possible. The way a business is structured, how it compensates employees, and even its investment strategies all play a role in how much it owes at tax time. While some business owners assume taxes are just another unavoidable cost, smart decision-making can significantly reduce liability and keep more profits in the company’s bank account. From choosing the right business structure to understanding how employee stock plans impact taxes, here are some critical decisions that can either save—or cost—businesses a substantial amount in taxes.

Should You Structure Your Business as an S-Corp or an LLC?

One of the first decisions business owners make is choosing a legal structure, but many don’t realize how much that choice impacts their tax bill. The debate between S-Corp vs. LLC is more than just a paperwork issue—it determines how much tax a business owner pays on profits, distributions, and even payroll.

An LLC is known for its simplicity, but it comes with self-employment tax on all profits. That means business owners must pay Medicare and Social Security taxes on everything the company earns. On the other hand, an S-Corp allows owners to split income between salary and distributions, with only the salary portion being subject to payroll taxes. The result? Potential tax savings that can add up quickly, especially for businesses generating significant income.

While LLCs provide flexibility and fewer administrative requirements, S-Corps offer clear tax advantages in many situations. However, choosing an S-Corp also means adhering to IRS rules regarding salaries, ownership restrictions, and reporting requirements. B

How ESOPs Impact Taxation

Employee Stock Ownership Plans (ESOPs) offer a unique way for business owners to transition ownership while providing employees with financial incentives. But beyond their benefits for succession planning and employee retention, ESOPs come with significant tax advantages—if structured correctly. How is an ESOP taxed when distributed? Answering this question will help you maximize those benefits.

An ESOP allows employees to accumulate shares in the company over time, but the tax treatment of those shares depends on how they are distributed. Employees typically don’t owe taxes while shares are held in the ESOP, but once distributions begin, tax liability kicks in. Depending on how the plan is set up, distributions can be simply taxed as ordinary income or, in some cases, treated as capital gains. This distinction plays a huge role in determining how much employees—and the company—owe in taxes.

For business owners, ESOPs also offer corporate tax advantages. Contributions to the ESOP are tax-deductible, which means businesses can use them to reduce taxable income. In some cases, an ESOP-owned company can operate tax-free, making it one of the most tax-efficient ways to transfer ownership while keeping the company financially stable.

Deducting Business Expenses Reduces Tax Liability

Business owners know they can deduct expenses, but not all deductions are created equal. Many companies leave money on the table by failing to take advantage of fully deductible expenses or missing out on strategic tax planning opportunities.

The IRS allows businesses to deduct many different ordinary and necessary expenses related to operations, but some deductions provide greater tax benefits than others. For example, businesses that invest in employee training and development not only improve their workforce but also qualify for tax deductions on those expenses. Similarly, businesses that lease instead of buy equipment can often deduct more upfront, reducing taxable income in the short term.

Hiring Decisions can Affect Taxes

Expanding a team is a sign of business growth, but how a company hires employees can have long-term tax implications. Hiring full-time employees, independent contractors, or even utilizing tax credit programs can significantly impact tax liability.

Businesses that hire full-time employees must pay payroll taxes, including Social Security, Medicare, and unemployment insurance. However, hiring independent contractors eliminates those obligations since contractors handle their own tax payments. While this might seem like a clear financial advantage, misclassifying employees as contractors can result in hefty IRS penalties if not handled correctly.

On the flip side, businesses that take advantage of tax credits for hiring—such as the Work Opportunity Tax Credit (WOTC)—can offset payroll costs by reducing tax liability. These programs provide incentives for hiring veterans, individuals from disadvantaged backgrounds, and other qualifying workers.