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CHART OF THE WEEK: The Cost of Small Business Tax Compliance

Today is tax day in the United States. And in honor of that auspicious event, this week’s chart looks at the cost of small business tax compliance.

Although it probably won’t surprise most of you to learn, it costs much more on a per employee basis for smaller businesses to adhere to federal tax regulations. The figure below shows the results of a study of the cost of complying with U.S. income tax [1] conducted on more than 7,000 companies that met the IRS definition of a small business – a C corporation, S Corporation, or partnership with up to $10 million in assets.

Costs of small business tax compliance [2]CLICK for Larger Chart [2]

The study’s authors combined the cost of both money and time spent on adhering to tax rules, estimating the cost of time at $45.50 per hour.  When they combined the time and money spent on adhering to the tax rules, they found steep economies of scale in tax compliance.  As the figure shows, businesses with one to five employees averaged $7,274 per employee to adhere to federal tax regulations, while businesses with more than 50 employees averaged only $296.50 per worker.

For those keeping score, the study found the largest cash cost of tax compliance was for tax preparer time, while the largest time burden was for keeping records.