January Tax Tips: Setting Your Small Business Up for Success in 2025

This week’s insight rings in the new year with a glass full of tax talk. We’ll try not to party too hard.

Small business owners aren’t so much concerned about post-New Year’s hangovers as they are with the headaches that come with taxes in January. It seems like every year there is some new requirement that demands your time and energy. Fear not. Let’s outline how to avoid tax follies in 2025.

Long-term tax strategy is like a game of chess. You must make probability-based decisions and constantly adjust to changing conditions. At the same time, simply knowing the basics of the game helps you avoid common pitfalls. For small-business tax planning, it’s important to have a master tax plan, of course, but just doing the little things right goes a long way.

For instance, be sure to pay the IRS throughout the year. Underpayment penalties used to be puny (3%), but higher interest rates today make income-tax underpayments more costly (8% for most of 2024). You should forecast your company’s revenue, expenses, and net income to determine what you’ll owe. CPAs and Enrolled Agents (EAs) can help.

Another prevailing trap is thinking that your marginal tax rate equals your total average tax rate. For example, if your taxable income is $1 into the 32% bracket, only that single dollar is taxed at 32%. The rest of your taxable income is taxed first at 0%, then 10%, 12%, 22%, and so on up to 24%. So, don’t be alarmed to see a high marginal income tax rate – chances are your average tax rate is far lower. This is Tax 101 stuff.

Now is also an ideal time to map out retirement plan contributions. Do you have a SEP-IRA, SIMPLE IRA, Solo 401(k), or some other plan? Be sure to pay your future self by making tax-advantaged retirement contributions. Those in a high marginal tax bracket and who may owe state income taxes may benefit the most from pre-tax contributions. If you have a low-income year or could just benefit from “tax diversification,” then making Roth contributions might be the wise move.