You Pay Tax on Profits, Not Revenue

Business owners have one of the greatest abilities among all U.S. taxpayers to minimize their taxes—because you’re taxed on profits, not total income. If your business earns $1 million in revenue but has $800,000 in expenses, you pay income tax only on the $200,000 in profit. A solid system for tracking every legitimate expense is the foundation of tax savings.

Timing matters too. Around November each year, consider whether prepaying certain expenses—like an extra month of rent—can shift deductions into the current tax year.

Hire a CPA, Not Just Tax Software

A good CPA does more than file returns. They identify deductions and credits that software and budget accountants miss. The cost of a CPA is frequently offset by the tax savings they find. If you don’t have a CPA you trust, ask other business owners for referrals and interview several before choosing one.

Sales Tax and Use Tax

Sales tax applies to certain products and services, and each state sets its own rules. If you sell across state lines, you may owe sales tax in multiple states. Use tax is the lesser-known cousin: if you buy taxable goods from out-of-state vendors who didn’t collect sales tax, your state likely requires you to pay use tax. States are increasingly aggressive about auditing businesses for unpaid use tax.

The S Corporation Payroll Tax Strategy

Payroll tax—shared between employer and employee—totals roughly 15%. An LLC or corporation that elects S corp status can split income between a reasonable salary (subject to payroll tax) and owner distributions (which are not). As a rule of thumb, this strategy starts making sense once your business clears about $50,000 in annual profit after expenses. An LLC can elect S corp taxation without changing its legal structure—just file the form by March 15 of the tax year.

Video Transcript

Introduction

When business owners hear that we are going to talk about taxes, their first response is often, ” This is such a boring topic.” But today we are not going to go into theory or philosophy or anything to deal with the tax code. We are just going to talk about one thing. What do you need to know to save money on your taxes? What are the essential pieces you need? And that is it. You will find we are going to fly through this.

Understanding Income Taxes

Income taxes. This is just government’s way to tax you and generate revenue for the government when you have income. This is when you talk about income. It is wealth from whatever source derived. With income tax, you, as a business owner, have one of the greatest abilities to minimize your taxes among all US taxpayers.

How Business Owners Control Tax Liability

Business owners can control how much they pay in taxes because you pay tax on the profits, not the total income. So let me explain. Let’s say you have one million dollars in revenue, so total income, but you have eight hundred thousand in expense. You only pay income tax on the $200,000 in profit. So what this means is by having a solid system of tracking expenses, that is one way you can make sure you are maximizing your expenses and thus minimizing your profit in order to minimize how much you have to pay in tax every year.

Tracking and Timing Expenses

So there are a couple tips here. First, make sure you have a good system to track all your expenses. Second, consider at the end of the year, somewhere around November, whether there are other expenses you want to add that will reduce your tax burden that year. I will give you a typical example. Sometimes, a business will pay the lease for their office space one month in advance because, as long as the business is a cash-basis taxpayer, which most small businesses are, the business will be able to deduct in that present year when the payment is made. the amount paid for rent the next year.

So, for example, let’s say in November, a business pays rent for December, January, and February. All of that will be deducted in the year when the payment was made, not when the the payment was due. So that is a great way at the end of the year to reduce what you pay in taxes that year. Now, sure, in effect, you are bumping that forward until next year, so you may still have to pay that next year. But that is where having a good tax CPA can be helpful for you. So you look at your financial status and make some decisions at the end of the calendar year before the next year comes so that you can make some adjustments in your tax bill.

The Value of Working With a CPA

You might say, “I am not sure if it is worth using a CPA.” Especially small businesses sometimes try to do this on their own or they will use an enrolled agent or H&R Block or something like that. I have found, and my clients have told me they have found, that it is always worth paying a little extra money for a CPA because of all the tax breaks and benefits a CPA finds.

So, in my experience, I have found that the CPA saves me more in taxes than the CPA costs to prepare the tax return every year and give a little tax advice throughout the year. So I recommend using a CPA, not another accountant who doesn’t have the CPA credentials. Anybody can call themselves an accountant or a bookkeeper in most states. Anybody can register with the IRS to become an enrolled agent. But to become a CPA, you have to demonstrate a fairly high level of proficiency with tax laws and accounting in order to get that certification. And in my experience, that is money well paid.

Sales and Use Tax

Let’s talk about sales and use tax. We all know about sales tax because when we go to check out at a restaurant or some other convenience store, we see the sales tax being charged. But what is use tax? Most business owners don’t even know what use tax is unless they are required to collect it.

Collecting and Remitting Sales Tax

When a person buys something that is subject to sales tax in Minnesota, the company must collect that sales tax and then turn it over to the government. And that is the state tax collection agency. We don’t have a US sales tax. We don’t have a federal sales tax, in other words. It is only state by state. Some states rely more on sales tax. Some states rely more on income tax or property tax.

Out-of-State Sales Tax Obligations

But here is the key to know. First, are you required to collect sales tax? That is step one. Step two is, are you required to collect sales tax for people who are buying from other states? This is a very challenging area because a lot of ecommerce companies who are selling to other states have found out the hard way that they may be required to collect sales tax for states they are not located in.

Without getting too deep into this, the short answer is, it is risky not to collect sales tax, and if you are regularly selling to other states, the best practice is to use some sort of nationwide software that can figure out, “How much are you supposed to collect in every state, county, and city?”

It has gotten really confusing because if somebody buys from a little city in a little county in some state. How are you supposed to know, as the seller, how much tax to collect and then turn into the government? It is very difficult to track because every city and county in most states can have their own little taxes on this stuff.

The Role of Use Tax in Audits

This was a big deal when Amazon was selling to people in all 50 states and wasn’t collecting sales tax. The state government started going after businesses saying, “Hey, you have been buying from Amazon. You didn’t pay sales tax on those purchases, but you are using the products here in Minnesota, so you have to turn over a use tax.” Basically, states realized, “We can make a lot of money. It costs us less to hire some tax agents to go after these businesses because we will get so much more money from the businesses that pay these tax bills.” So you don’t even want to deal with these audits. At the end of the year, typically, you need to pay a use tax. That is if your state has that. You can work with your CPA on this, but generally speaking, it is just the sales tax amount for any products that would be subject to sales tax, but you didn’t pay sales tax because you bought them from out of state. Now, if you don’t buy stuff from out of state, you typically don’t have to deal with this.

There are a ton of exceptions. There are many different rules related to this, but that is where a good CPA can help you figure out what do you need to do to make sure you avoid violating the law in your state and running into an audit.

Payroll Tax

Payroll tax. Many of you know what payroll tax is, but just so we are all on the same page, I will give a brief explanation. Remember when you had your first job and you were expecting a certain paycheck, and then you saw all these withholdings, you know, that goes out to the government for this and for that and for that, and all of a sudden your paycheck was a lot less? That is essentially the payroll tax. Half the payroll tax is paid by the employee, and roughly half the payroll tax is paid by the employer. Generally, it is about 15 percent total, so about 7.5 percent for the employee, 7.5 percent for the employer.

Handling Payroll Tax Obligations

So as an employer, you obviously are having to collect all of this because if you are taking it from the employee’s paychecks and withholding it, now you are holding onto that money, and you need to turn that in on a regular basis to the government. You also have to turn in your portion on a regular basis to the government.

Usually a CPA will help you with that or a payroll service like paychecks or ADP. Generally speaking, a CPA costs about the same as paychecks or ADP. And some companies prefer one approach over the other. I use a CPA for everything just so everything is in one place. But some places find that it is just simpler for their system to have the software provided by like ADP or paychecks.

Saving Money Through S Corporation Election

So why are we talking about this? How can you possibly save money on this? The big opportunity is if you are not an S Corp, you might be able to save some money on going to be an S Corp. To do that, you typically just file a form with the IRS by March 15th of the calendar year in which you want it to apply. So, if you want to benefit from being taxed as an S Corp in 2025, you have until March 15th of 2025 to file that form.

You can do that if you are an LLC. You can also do that if you are a corporation. Now there is some rules around this, and it is best to work with a CPA on doing that. A CPA can also help you figure out, “How much money might you save being an S corp?” As a rule of thumb, business owners have often found that after they pay all of their expenses and they have about $50,000 left at the end of the year in profit, if they have more than $50,000, an S corp makes sense. If they have less than $50,000, an S corp may not make sense. And it is just simpler to be an LLC under the default rules, not under an S-selection.

LLCs Taxed as S Corporations

So, if you are an LLC, you might be wondering, “Do I have to actually change to become a corporation in order to get taxed as an S corporation?” No, you don’t. An LLC can simply file a form to be taxed as an S corporation, but the LLC remains an LLC. Now, you can’t have the benefits of an LLC and the benefits of an S corporation. So, as an LLC, you essentially need to follow the same rules that an S corporation would follow. One of the big rules there is that you can’t have multiple classes of stock. You can’t have like an A stock and a B stock, but for most small businesses, that is not an issue.

Closing Remarks

I am Aaron Hall, an attorney for business owners and entrepreneurial companies. It As I always say, before you rely on any of this, consult with an attorney. It is my hope that you use these questions to identify topics and questions to bring up with your attorney. I hope you are doing well. Take care.