Tax Considerations When Growing Your Business

As your business scales, its tax responsibilities can become increasingly complex. From hiring employees to expanding into new markets, growth often brings both opportunities and obligations. If you're not planning ahead, tax liabilities can cut into your profits—or worse, trigger costly penalties. Here are the key tax considerations to keep in mind when growing your business.

1. Choosing the Right Business Structure

When you're just starting out, a sole proprietorship or partnership may be the best option. However, as you grow, you may want to consider forming an LLC, S corporation, or C corporation. Each structure has different tax implications:

• LLCs offer pass-through taxation and flexibility, but may be subject to self-employment tax.

• S Corporations can reduce self-employment tax liability, but come with stricter ownership rules.

• C Corporations are taxed separately from owners, but may allow for better fringe benefits and reinvestment opportunities.

Changing your entity type can optimize your tax situation, but it should be done with the guidance of a tax professional.

2. Expanding Across State Lines: Nexus and Multistate Tax Issues

Growth often involves entering new markets—physically or virtually. However, crossing state lines can create a “nexus,” or a tax connection, that may subject your business to income, sales, and use taxes in multiple states.

Ask yourself:

• Are you hiring remote workers in another state?

• Do you have a warehouse or office outside your home state?

• Are you selling goods online to customers nationwide?

If so, you may be required to register and file taxes in each of those states. Multistate compliance is complex and often overlooked by growing businesses.

3. Employee vs. Independent Contractor Classification

Hiring help is a milestone, but classifying workers incorrectly can lead to audits and penalties. The IRS scrutinizes the difference between employees and independent contractors.

Key questions to consider:

• Do you control how and when the worker does the job?

• Are they utilizing your tools and adhering to your processes?

• Are they economically dependent on your business?

If so, they may be employees, and you’ll need to withhold and pay employment taxes (Social Security, Medicare, FUTA, etc.).

4. Quarterly Estimated Tax Payments

As income increases, so does the need to make quarterly estimated tax payments. Business owners who don’t have taxes withheld from paychecks must pay estimated taxes to the IRS—and often to their state as well. Failing to pay enough throughout the year can result in underpayment penalties, even if you pay in full by year-end.

5. Capital Expenditures and Depreciation

As your business invests in new equipment, property, or software, tax deductions like bonus depreciation or Section 179 expensing become essential tools. These allow you to deduct the cost of certain assets immediately, reducing your tax bill in the year of purchase. However, each option has its limits, rules, and long-term implications. Strategic planning is essential to maximize benefits without hurting future tax years.

6. Research & Development (R&D) Tax Credits

If your business is innovating—developing new products, software, or processes—you may qualify for the R&D tax credit. This federal incentive can offset income tax or even payroll tax liabilities for qualified small businesses. Documenting expenses properly is key, as the IRS may require evidence of experimentation and development.

7. Keeping Clean Books and Records

As your revenue grows, so does the need for accurate accounting systems. Good records are the foundation of tax compliance—and are essential for:

• Maximizing deductions

• Preparing financial statements

• Defending against IRS audits

Consider upgrading from spreadsheets to accounting software like QuickBooks or Xero. You may also need to hire a bookkeeper or fractional CFO.

8. Working with a Tax Professional

Growth brings complexity. Working with a qualified CPA or Enrolled Agent (EA) who understands your business can save you money and headaches. They can:

• Help you plan for tax season year-round

• Advise on tax-efficient growth strategies

• Ensure compliance across jurisdictions

  
  

As your business expands, taxes shouldn’t be an afterthought. Proactive tax planning not only minimizes liability but also sets the foundation for sustainable success. Whether you're adding employees, opening new locations, or investing in growth, make sure your tax strategy grows with your business. Need help navigating these tax considerations? Contact Andy Schliesman Tax & Accounting LLC to schedule a consultation and ensure your growth journey is financially sound and tax-efficient.