Women-owned businesses play a vital role in the U.S. economy, contributing nearly 40% of all businesses and generating approximately $2.7 trillion in annual revenue while employing close to 12.2 million people. Despite this significant impact, many women entrepreneurs face challenges in accessing the full range of tax incentives available to small businesses. These challenges often stem from gaps in the tax code that unintentionally exclude them. To thrive, women entrepreneurs must prioritize understanding and implementing effective tax strategies while advocating for reforms that support their growth.

The Tax Landscape for Women-Owned Businesses

What is Tax Compliance?

Tax compliance goes beyond a legal obligation—it’s a strategic tool that can lead to financial empowerment and business success. Adhering to tax laws not only enhances a business’s credibility but also improves its ability to secure loans and investments. Lenders and investors often view tax-compliant businesses as lower risk, whereas non-compliance can result in penalties, interest charges, and financial strain. By embracing tax compliance, women entrepreneurs can gain control and confidence in their financial journey.

Common Taxes to Consider

• Income Tax: Levied on net profits, all businesses must file an annual income tax return.
• Estimated Tax: Businesses expecting to owe $1,000 or more in income tax must make quarterly estimated payments.
• Employment Taxes: Businesses with employees need to withhold federal income, Social Security, and Medicare taxes from paychecks and pay their share of these taxes.
• Self-Employment Tax: This applies to individuals working for themselves, covering Social Security and Medicare contributions.
• Sales Tax: Certain businesses must collect and remit sales tax to the relevant state(s).

Business Structure Matters

Choosing the right business structure is crucial as it impacts tax liabilities:

• Sole Proprietorship: Income is subject to self-employment tax and reported on personal tax returns.
• Partnership: Each partner reports their share of income or loss on personal tax returns, subject to self-employment tax.
• Corporation: Business income is taxed separately from personal income, often resulting in double taxation.
• LLC: Can be taxed as a sole proprietorship, S-Corporation, or C-Corporation, depending on the election.

Challenges Faced by Women-Owned Businesses

Lack of Access to Capital

Women entrepreneurs often face systemic barriers to accessing capital, which is crucial for starting and growing a business. Despite the increasing number of women-owned businesses, they generally secure less or no funding. In 2022, 25 percent of women had their loan applications denied versus 19 percent of males. 

This disparity is partly due to biases in lending practices and a lack of representation in decision-making roles within financial institutions. Additionally, women are more likely to rely on personal savings rather than external financing, which can limit their ability to scale their businesses.

Poor Cash Flow Management

Cash flow management is a critical aspect of business operations, and many women-owned businesses struggle to maintain a healthy cash flow. This challenge is exacerbated by limited access to capital, leading to difficulties in managing day-to-day expenses and investing in growth opportunities. 

Poor cash flow management can result in an inability to pay suppliers on time, meet payroll obligations, or reinvest in the business. This issue is compounded by a need for more financial literacy and resources to implement effective cash flow strategies.

Lack of Funding Readiness 

Women often face unique challenges when applying for funding, which can significantly impact their ability to grow and sustain their businesses. Studies have shown that women are less likely than men to pursue funding opportunities, primarily due to feelings of unpreparedness. 

This often stems from concerns about having a solid business plan, accurate and sufficient financial records, and a thorough understanding of the funding process. As a result, women-owned businesses may miss out on crucial opportunities to access the capital needed for growth, innovation, and staying competitive in the market.

At FMS Advisory, we provide personalized financial support and resources that empower more women entrepreneurs to pursue the funding they need to scale their businesses.

Strategies for Effective Tax Compliance

1. Build a Robust Record-Keeping System

An effective record-keeping system is vital for tax compliance and overall financial health. Here are the best practices to establish a robust system:

• Choose the Right Tools
  • Selecting the right tools is the foundational step in building an efficient record-keeping system. Accounting software like QuickBooks Online (QBO) is highly recommended for small businesses due to its seamless integration with bank accounts, credit cards, and other financial platforms. This software facilitates real-time tracking of income, expenses, and invoices, thereby minimizing the risk of errors and overlooked transactions. For female founders, choosing the right tools can instill a sense of preparedness and confidence in managing financial responsibilities.
  • Tip: Opt for software with cloud storage capabilities to ensure your records are secure and accessible from anywhere, at any time.
    
• Establish Categories
  • Create clear and consistent categories that reflect the various aspects of your business, such as office supplies, marketing expenses, travel, and payroll. This categorization streamlines day-to-day management and simplifies the process of identifying and claiming deductions during tax season.
  • Tip: Set up these categories in your accounting software and apply them consistently across all transactions to maintain uniformity.
    
• Automate, Automate, Automate 
  • Automation can significantly ease the record-keeping process. Configure automated bank feeds to import transactions directly into your accounting software. Additionally, automate the categorization of recurring transactions like monthly subscriptions or utility bills. This approach enhances efficiency and reduces the manual workload for female founders, allowing more focus on other critical business aspects.
  • Tip: Regularly review automated entries to verify their accuracy and proper categorization.
    
• Maintain a Routine for Manual Entries
  • Despite automation, some transactions require manual entry, such as cash transactions or specific project details. Establish a routine—whether daily, weekly, or monthly—for these manual entries to ensure nothing is overlooked.
  • Tip: Set aside a specific time each week to review and update your records. Consistency helps prevent backlogs and maintains accurate records.
    
• Keep Physical Records Organized
  • Although digital records are prevalent, physical documents like signed contracts, receipts, and tax forms still play a crucial role. Organize these documents in labeled folders and store them securely. Additionally, create a structured folder system for digital records on your computer or in the cloud, using clear and descriptive filenames to facilitate easy access.
  • Tip: Scan and digitize important physical documents to have a backup in case the originals are lost or damaged.
    
• Track All Financial Transactions
  • Every financial transaction, no matter how small, should be recorded. This includes income from sales, loans, investments, and expenses such as supplies, payroll, and rent. A complete and accurate record of all transactions is essential for preparing financial statements and tax returns.
  • Tip: Reconcile your accounts regularly—monthly or quarterly—to ensure your records align with your bank and credit card statements.

2. Separate Business vs Personal

Separating business and personal finances is crucial but can be challenging. Follow these steps to ensure effective separation:

• Establish Separate Financial Accounts
  • Open a dedicated business checking account for all business-related transactions. This separation simplifies bookkeeping and avoids mixing personal and business expenses, making financial tracking and tax preparation more straightforward. Additionally, consider using a business credit card to build a separate credit history for your business.
  • Tip: Some lenders consider only the funds in a business account when evaluating applications for funding.
    
• Formalize Your Business Structure
  • Register your business as a separate legal entity, such as an LLC or corporation. This structure provides legal protection for your personal assets and reinforces the separation between personal and business finances.
  • Tip: LLCs and Corporations can choose different tax statuses later, depending on your business needs.
    
• Implement Clear Financial Practices 
  • If personal items are used for business purposes (e.g., a car or phone), maintain detailed records of their business use. This documentation is crucial for tax deductions and maintaining financial clarity.
    
• Consider Paying Yourself a Salary
  • Determine a consistent salary from your business profits and transfer it to your personal account. This practice helps clearly demarcate business earnings from personal income.
    

Intentionally Plan for Taxes

• Stay Informed About Tax Law Changes
  • Tax laws and regulations can change frequently, affecting deductions, credits, and overall tax strategy. Stay updated with IRS changes and consult with tax professionals to adjust your tax planning strategies as needed.
    
• Plan for Estimated Taxes
  • Many businesses are required to make quarterly estimated tax payments. Planning for these payments helps avoid penalties and interest charges. Calculate estimated taxes based on projected income and expenses, and set aside funds regularly to meet these obligations.
    
• Consult with a Tax Professional
  • Engaging with a tax professional, such as a CPA or EA, provides valuable insights into tax planning and compliance. They can help identify tax-saving opportunities, ensure adherence to tax laws, and assist in preparing and filing tax returns.
    

Tax Benefits for Women-Owned Businesses

Tax Deductions

Business deductions encompass a broad range of expenses necessary for running a business, including advertising, office supplies, travel, and employee wages. Additionally, businesses can deduct expenses related to the cost of goods sold (COGS) and depreciate certain types of equipment.

To properly claim tax deductions, businesses must follow specific IRS requirements and guidelines:

1. Ordinary and Necessary Expenses
   • Ordinary Expenses: These are common and accepted costs in your trade or business. For example, office supplies for a corporate office or tools for a construction company qualify as ordinary expenses.
   • Necessary Expenses: These are expenses that facilitate your business operations. While an expense does not need to be indispensable, it should support the business’s functioning.
2. Substantiation of Expenses
   • Proof of Payment: To claim a deduction, you must have proof of payment. Acceptable forms include canceled checks, bank statements showing the transaction, credit card statements, or invoices marked as paid.
   • Documentation: Maintain records that substantiate the nature and purpose of the expense. This includes receipts, invoices, and other documentation proving the expense was business-related. For some expenses, such as travel and meals, the IRS requires more detailed documentation, including the business purpose and context.

Tax Credits

Business tax credits are incentives the government provides to encourage businesses to engage in certain activities or behaviors deemed beneficial to the economy or society. Unlike tax deductions, which reduce taxable income, tax credits provide a dollar-for-dollar reduction in taxes owed, making them more valuable.

Here are some common types of tax credits available to these businesses:

Conclusion

Tax compliance is crucial for the growth and sustainability of women-owned businesses. Adhering to tax regulations and managing tax obligations effectively allows women entrepreneurs to avoid legal issues, optimize financial health, and leverage available tax incentives. Proper tax compliance ensures businesses remain in good standing with tax authorities and enhances their credibility with investors, partners, and customers. This foundation is essential for unlocking opportunities for expansion and achieving long-term success.

Women entrepreneurs are encouraged to proactively seek resources and support to navigate the complexities of tax compliance. Utilizing professional tax advice, leveraging accounting software, and staying informed about tax law changes are critical steps. Engaging with networks and organizations that support women in business can also offer valuable insights and assistance in overcoming tax-related challenges. By doing so, women-owned businesses can better position themselves to capitalize on tax benefits, improve cash flow management, and ultimately drive growth.

Resources for Women-Owned Businesses

1. The Small Business Administration (SBA)
   • The SBA offers numerous resources and programs specifically designed for women entrepreneurs, including guides on tax compliance.
2. IRS.gov
   • The IRS website is a valuable resource for forms, publications, and advice on small business taxes.
3. Women’s Business Centers (WBCs)
   • WBCs provide training and counseling on various aspects of running a business, including financial management and tax strategies.
4. National Association of Women Business Owners (NAWBO)
   • NAWBO offers resources, networking opportunities, and educational programs to support women business owners.
5. FMS Advisory
   • Provides personalized financial support and resources for women entrepreneurs. For further support and resources, download our free guide here.

By embracing these strategies and leveraging available resources, women-owned businesses can navigate the complexities of tax compliance and position themselves for sustainable growth and success.