Average Small Business Spends Up To 255 Hours and $2.3 Million on Tax Compliance

Complying with the federal tax system involves substantial costs for small businesses, both in hours and money spent, according to a new survey.

The researchers, from IBM Global Business Services, IRS NHQ Office Research and Quantria Strategies, surveyed more than 7,000 businesses that meet the IRS' definition of a small business -- one that's organized as a C corporation, S corporation or Partnership with assets of no more than $10 million. They estimated that small businesses spend a total of 1.7 billion to 1.8 billion hours to comply with the U.S. Federal Tax System, in addition to $15 billion to $16 billion in out-of-pocket costs above the actual taxes paid to the federal government. On average, small-business owners spend 236 to 255 hours and $2.1 million to $2.3 million to comply with taxes.

As expected, an overwhelming majority of this time was spent on record-keeping, while most of the money was spent on help from tax professionals. In addition, the survey found that transaction-oriented retail businesses report the biggest time burden, while equipment heavy manufacturing businesses carry the biggest money burden.

On average, the money burden to comply with taxes was calculated at $349 to $383 per employee, while the time burden -- monetized at $45.40 an hour per employee -- proved even more costly, at $2,159 to $2,336 for each worker. The smallest businesses were the hardest hit, with those employing one to five workers bearing a money burden of $1,101 to $1,221 per employee and a time burden equal to $6,926 to $7,622 per employee.

The idea that they're shouldering a heavy tax burden shouldn't come as a surprise to any small business, particularly at the end of this tax season. As we previously reported, National Small Business Association members claimed the complexity of the tax code imposes an increasing burden on their businesses.