How to Stay on the IRS’s Good Side: Tips for Small Businesses

For small business owners, taxes and regulations can feel like an endless maze. Between managing employees, tracking expenses, and trying to grow your company, it’s easy to let something slip through the cracks. But staying on top of small business compliance isn’t just about avoiding penalties. It’s about building a stable, sustainable business that can grow with confidence.

In this guide, we’ll break down practical, intuitive strategies to help your small business stay in good standing with the IRS. From managing documentation to understanding your obligations, these tips are designed to take the guesswork out of tax compliance.

1. Keep Thorough and Accurate Records

Good recordkeeping is the foundation of tax compliance. The IRS expects small businesses to maintain organized, accurate records of income, expenses, payroll, and deductions. These records should be updated regularly and not just at tax time.

Some of the key documents you need to keep organized are: 

• Receipts and invoices
• Bank and credit card statements
• Payroll reports
• Tax forms (W-2s, 1099s, etc.)
• Asset and depreciation records
• Mileage logs (if applicable)

Cloud-based accounting software can help you organize and automate recordkeeping. The goal is to be able to support every number you report on your tax return with clear documentation in case of an audit.  We suggest scanning all receipts and documents, as receipts fade over time.

2. Understand Your Tax Obligations

The IRS expects you to meet your federal tax obligations throughout the year and not just in April. As a small business owner, your tax responsibilities may include:

• Income tax: Paid on business profits. Depending on your structure (LLC, S-corp, sole proprietorship, etc.), income may pass through to your personal return.
• Self-employment tax: Covers Social Security and Medicare for business owners.
• Estimated quarterly taxes: Required if you expect to owe at least $1,000 in taxes for the year. These are due four times a year.
• Employment taxes: If you have employees, you’re responsible for withholding federal income tax, Social Security, and Medicare taxes—and for paying the employer portion of those taxes.
• Excise taxes: May apply if you sell certain products or services (e.g., fuel, tobacco, or heavy trucks).

Understanding your full tax picture helps avoid underpayment penalties and keeps your business on the IRS’s good side.

3. Classify Workers Correctly

Misclassifying employees as independent contractors is one of the most common (and costly) mistakes small businesses make. If the IRS determines that you should have treated a worker as an employee, you may be held liable for back taxes, interest, and penalties.

In general:

• Employees: Work under your direction, use your tools, and follow your set schedule. You must withhold and pay employment taxes.
• Independent contractors: Control their own work, may serve multiple clients, and file their own taxes.

Review each working relationship carefully and consult a tax advisor if you’re unsure.

4. Separate Business and Personal Finances

Mixing business and personal funds can create a host of problems—from missed deductions to increased audit risk. It will also “pierce the corporate veil,” meaning that the LLC protection may not protect you personally. To stay compliant:

• Open a separate business checking account
• Use a dedicated credit card for business purchases
• Pay yourself a salary or owner’s draw rather than dipping into business funds
• Avoid using business funds for personal expenses, even temporarily

Clear financial separation makes it easier to track expenses, file taxes, and demonstrate compliance during an audit.

5. Stay on Top of Payroll

Payroll is one of the most heavily regulated areas of small business compliance. If you have employees, you must withhold federal and state taxes, issue proper forms, and deposit taxes according to IRS deadlines.

Here are a few compliance tips where payroll is concerned.

• Use payroll software or a payroll service provider to manage calculations and deadlines
• Submit Forms 941 and 940 on time, along with state and local returns.
• File W-2s and 1099s accurately by January 31 each year
• Keep detailed records of hours, wages, and tax withholdings

Mistakes in payroll reporting can lead to steep penalties. Staying current ensures that both your business and your employees remain protected.

6. Monitor Deductions and Credits Carefully

Small businesses are entitled to a variety of tax deductions and credits—but they must be claimed correctly. Common deductions include:

• Office rent and utilities
• Business-related mileage
• Marketing and advertising costs
• Professional fees (e.g., legal or accounting)
• Equipment and software
• Home office expenses (if applicable)

Tax credits, such as those for hiring certain workers or providing healthcare, can also reduce your liability. However, misuse or overstatement of deductions and credits is a red flag for the IRS. Be honest, document every deduction, and work with a professional to avoid costly errors.

7. File and Pay Taxes on Time

It may sound simple, but meeting tax deadlines is one of the easiest ways to stay in the IRS’s good graces. Failing to file or pay on time triggers automatic penalties and interest, even if you eventually correct the issue.

Here are some key deadlines to keep in mind:

• January 31: W-2s and 1099s due to workers and the IRS
• April 15: Most annual tax returns and first quarterly estimate
• June 15, September 15, January 15 (following year): Remaining quarterly estimated payments
• Various: Payroll tax deposit deadlines (monthly or semi-weekly, depending on your size)

Set calendar reminders or work with a CPA to ensure you never miss an important date. It is also important to note that even if you have no activity in your business or you just started your business at the end of the year, you are still required to file. Don’t skip assuming no transactions means no filing. 

8. Respond Promptly to IRS Notices

If you receive a letter or notice from the IRS, don’t panic. But also, don’t ignore it. Many notices are routine and can be resolved easily if addressed promptly. Failing to respond can escalate the issue and result in additional penalties.

• Read the notice carefully and understand what it’s requesting
• Gather your records before replying
• Contact a tax advisor if you need help interpreting the notice or crafting a response
• Always respond by the stated deadline

Being proactive and cooperative goes a long way in maintaining a positive relationship with tax authorities.

Get Small Business Compliance Support with Katherine M. Johnson, CPA

Small business compliance may seem daunting, but with the right habits and a bit of planning, it becomes manageable and maybe even empowering. Staying organized, understanding your obligations, and seeking help when needed are the most reliable ways to keep your business in good standing with the IRS.

If you want professional guidance tailored to your unique situation, Katherine M. Johnson, CPA, offers experienced, compassionate support for small business owners navigating the complexities of tax compliance. Reach out today to schedule a consultation.