Start by learning a new set of "3 Rs": record keeping, record keeping, and (you guessed it) record keeping. IRS studies show that poor records -- not dishonesty -- cause most small business owners to fail to comply with their tax reporting obligations and to lose at audits, with resulting fines and penalties.

Even if you hire someone to keep your records, you need to know how to supervise him or her -- because if your bookkeeper goofs up, you are responsible. Consider using a computer to keep your records if you aren't already in the electronic age.

Keep all receipts and canceled checks for business expenses, and keep them organized and in a safe place. Separate the documents by category, such as:

• auto expenses
• rent
• utilities
• advertising
• travel
• entertainment, and
• professional fees.

Put your documents into individual folders or envelopes. If you are ever audited (and small businesses are about three times more likely to be audited than individuals), the IRS is most likely to zero in on business deductions for car expenses and travel and entertainment expenses. Furthermore, the burden will be on you -- not the IRS -- to substantiate your deductions. If you're unsure how to get started or what documents you need to keep, consult a tax professional who is familiar with small business record keeping.

Does incorporating a small business start-up offer tax breaks?

Keep in mind that most corporate tax benefits flow to profitable, established corporations, not to start-ups in their first few years. For example, corporations can offer more tax-flexible pension plans than sole proprietors or partnerships, but few start-ups have the cash flow needed to take advantage of these tax breaks.

Similarly, the ability to split income between a corporation and its owners -- thereby keeping some income in lower corporate tax brackets -- is effective only if the business is solidly profitable.

In addition, incorporating adds state fees, as well as legal and accounting charges. So unless you are sure that substantial profits will begin to roll in immediately, you may want to hold off incorporating your business.

Is it safe and sensible for me to keep my own books and file my own tax returns?

To keep your own books, consider using a check-register type computer program such as Quicken Home & Business or Quickbooks (by Intuit) to track your expenses. If you are doing your own tax return, use the companion program, TurboTax.

To make sure you're on the right track, it's a good idea to run your bookkeeping system by a savvy, small business tax pro. With just a few hours of work, he or she should help you avoid most common mistakes and show you how to dovetail your bookkeeping system with tax filing requirements.

When your business is firmly in the black, consider hiring a bookkeeper to take care of your day-to-day payables and receivables, and an outside tax pro to handle your heavier-duty tax work. Not only are a tax pro's fees a tax-deductible business expense, but chances are your business will benefit if you put more of your time into running it and less into completing routine paperwork.

I am hiring people to help out with a big job coming up. Are they considered independent contractors or new employees?

If you will be telling your workers where, when, and how to do their jobs, you should treat them as employees, because that is how the IRS will classify them. Generally, you can treat workers as independent contractors only if they have their own businesses and offer their services to several clients -- for example, a specialty sign painter with his own shop or a freelancer who works for many clients. If in doubt, err on the side of treating workers as employees.

While classifying your workers as contractors can save you money in the short run (you don't have to pay the employer's share of payroll taxes or have an accountant keep records and file payroll tax forms), it may get you into big trouble if the IRS later audits you. The IRS may reclassify your "independent contractors" as employees and assess hefty back taxes, penalties, and interest against you.