Are You Paying More in Taxes Than You Need To?
What every small business owner should know about a tax review, simple changes that lower your bill, and when it may be time to become an S Corp
You had a good year. Sales were up, customers were happy, and you worked harder than ever. Then your tax return came back, and the number at the bottom took your breath away. Maybe it was a big balance due to the IRS and the Wisconsin Department of Revenue. Maybe it was a penalty for underpaying estimates you didn't even know you owed. Either way, you are left wondering where all that money you earned actually went.
If that sounds familiar, you are not alone. We talk with small business owners every week who are paying more than they have to. Not because they did anything wrong, but because no one ever sat down with them and looked at the whole picture. The good news is that overpaying is usually fixable, and often the fix is simpler than you think.
You Actually Have Two Tax Bills
Most owners think of taxes as one big number. In reality, you are usually paying on two fronts, and overpaying can happen on either one.
Your business taxes. This includes the income your business earns, sales and use tax, payroll taxes if you have employees, and in some cases state franchise or entity-level taxes. Missed deductions, poor recordkeeping, and the wrong entity structure all show up here.
Your personal taxes. If you are a sole proprietor or single-member LLC, your business profit lands right on your personal return. You pay federal income tax, Wisconsin income tax, and self-employment tax of 15.3% on top of it. This is where many owners get hit the hardest without realizing it.
Because the two are so closely tied together, a decision on the business side can raise or lower your personal bill, and the other way around. That is why looking at only one of them rarely gives you the real answer.
Signs You May Be Overpaying
You owe a large balance every April, even though you made estimated payments.
Your business is profitable, but your personal tax bill seems out of proportion to what you take home.
You have been a sole proprietor or single-member LLC for years, and no one has ever talked to you about your entity type.
Your bookkeeping is behind, or you catch up on it all at once at tax time.
You are not putting anything toward retirement through your business.
You pay for things like your phone, vehicle, or home office personally and are not sure whether they are being deducted.
You have been using the same tax preparer for years, and the conversation never goes beyond filing the return.
What a Good Tax Review Looks At
A tax return tells you what happened last year. A tax review asks what should happen next. When we review a business owner's situation, these are the areas we focus on first:
Your entity structure. Whether you are set up as a sole proprietor, LLC, partnership, S Corp, or C Corp has a direct effect on how much tax you pay. The right structure at $40,000 in profit may be the wrong one at $120,000.
Your books. Deductions can only be taken if they are recorded. Clean, current bookkeeping is often the single fastest way to lower a tax bill, because it catches expenses that would otherwise be lost.
How you pay yourself. Draws, wages, and distributions are taxed differently. How money moves from your business to you matters.
Retirement contributions. Plans like a SEP IRA or Solo 401(k) let you put money away for your future while lowering your taxable income today.
Health insurance. Depending on your setup, premiums for you and your family may be deductible.
Vehicle, home office, and phone. These everyday costs are often under-claimed or claimed in a way that would not hold up if questioned.
Equipment and big purchases. When you buy equipment and how you depreciate it can shift thousands of dollars in deductions into the year you need them most.
Family on the payroll. Paying a spouse or children for real work they do can move income into lower tax brackets and, in some cases, reduce payroll taxes.
Estimated payments. Paying the right amount at the right time avoids underpayment penalties and the April surprise.
Prior returns. If something was missed, you can generally amend returns for up to three years back and recover money you already overpaid.
Small Changes, Big Difference
Owners often expect tax savings to require something complicated. More often, it comes down to a handful of practical adjustments made consistently.
Keep business and personal spending separate. One dedicated business account and card makes every deduction easier to find and easier to support.
Set up an accountable plan. If you own a corporation, this lets the business reimburse you tax-free for business use of your home, phone, and vehicle.
Track mileage as you go. A simple app beats reconstructing a year of driving from memory, and it often turns up far more miles than you would have guessed.
Plan purchases before year-end. If you need equipment anyway, the timing of that purchase can make a real difference in this year's bill.
Start a retirement plan. Even a modest contribution lowers your tax and builds something for you.
Review before December, not after. Once the year closes, most of your options close with it. The best planning happens while there is still time to act.
None of these require you to change how you run your business day to day. Together, they can easily add up to thousands of dollars.
The Big One: Is It Time to Become an S Corp?
For many profitable sole proprietors and single-member LLCs, the biggest opportunity is not a new deduction. It is a change in how the business is taxed.
Here is why. As a sole proprietor or single-member LLC, every dollar of profit is subject to self-employment tax. That is the 15.3% that covers both halves of Social Security and Medicare, and it comes on top of your regular income tax. When your business is profitable, that adds up fast.
When your business elects to be taxed as an S Corporation, things work differently. You become an employee of your own company and pay yourself a reasonable salary. That salary is subject to Social Security and Medicare taxes, just like any other paycheck. The remaining profit can then come to you as a distribution, which is not subject to those taxes. You still pay income tax on all of it, but the 15.3% applies only to your wages.
What That Looks Like in Real Dollars
Let's say your business earns $100,000 in net profit this year.
As a sole proprietor or single-member LLC: Self-employment tax is calculated on 92.35% of your profit, or $92,350. At 15.3%, that comes to about $14,130 in self-employment tax, before you pay a dollar of income tax.
As an S Corp: Suppose a reasonable salary for your role is $50,000. Social Security and Medicare on that salary total $7,650, split between the business and your paycheck. The other $50,000 comes to you as a distribution with no Social Security or Medicare tax on it.
The difference: Roughly $6,480 less in employment taxes for the year.
There are added costs to running an S Corp. You will need to run payroll, file quarterly payroll reports, and file a separate business tax return each year. For most small businesses those costs run somewhere in the range of a couple thousand dollars a year. Even after them, an owner in this example would still keep several thousand dollars more every year, and the gap grows as profit grows. Over five or ten years, that is real money.
Your actual numbers will depend on your industry, your total income, deductions, and how other parts of your return interact, such as the qualified business income deduction. That is exactly why this decision should be modeled on your own figures rather than a general rule of thumb.
The Reasonable Salary Rule
This is where some owners get into trouble. It can be tempting to pay yourself a tiny salary and take everything else as distributions. The IRS watches for this. Your salary needs to be reasonable for the work you actually do, based on what someone in a similar role would be paid. Set it too low and you risk back taxes, penalties, and interest.
It is also worth knowing that a lower salary means lower Social Security earnings on your record, which can affect your future benefits. A good plan balances today's savings with your long-term picture.
When an S Corp Makes Sense, and When It Doesn't
It is often worth a serious look when your business consistently earns around $50,000 to $60,000 or more in net profit, your income is steady from year to year, and you are ready to run payroll and keep clean books.
It may not be the right move when your profit is low or unpredictable, you are just getting started, or the added administrative costs would eat up most of the savings.
The good news if you already have an LLC: you usually do not need to form a new company. Your LLC can elect to be taxed as an S Corp by filing Form 2553 with the IRS. If you operate as a sole proprietor with no entity, you would typically form an LLC or corporation first.
Timing matters. For the election to apply to a full calendar year, it generally needs to be filed by March 15 of that year. If you are thinking about 2027, now is the time to run the numbers, so everything is in place before January.
What This Means for Your Business and Your Life
Lowering your tax bill is not just about a number on a return. It changes how running your business feels.
More cash stays in your business. That can mean a new hire, better equipment, or simply a cushion for slow months.
More money goes toward your future. Tax savings and retirement contributions work together, so you are building something for yourself instead of sending it away.
No more April dread. When you know what is coming and have planned for it, tax season stops being something you lose sleep over.
Better decisions all year long. When you understand how your choices affect your taxes, you can make purchases, set your pay, and plan growth with confidence.
What It Takes to Get Started
Getting started is simple. We begin with a conversation about your business and your goals. Then we look at your last two years of tax returns, your current profit and loss statement, and how you are paying yourself today. From there, we will show you where you may be overpaying, what changes make sense, and whether an S Corp election is worth it for you, with real numbers, in plain language.
You do not need to have everything organized before you call. Helping you get organized is part of what we do.
Who We Are
Business Advisory Services LLC has helped small business owners in Wisconsin and surrounding states for more than 20 years. From our offices in Middleton and Eau Claire, we provide tax planning, tax resolution, bookkeeping, payroll, and business advisory services. We work with owners who want more than a tax return filed. They want someone in their corner who knows their business and helps them keep more of what they earn.
Let's Take a Look Together
If you have a feeling you are paying too much, you are probably right, and it costs nothing to find out. Call us at 608-831-4900 ext. 801 to schedule a tax review. No pressure and no obligation, just a clear look at where you stand and what you can do about it.
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