Taxes can be a source of anxiety for a small business owner. You most likely wear many hats, and the last thing you want to do is give the government more of your hard-earned business income. Fortunately, numerous tax-saving strategies are available to help you reduce your taxable liability as a business owner. Consider the below methods if you need to reduce your taxable income this year.
Hire a Family Member
Hiring a specific family member is one of the best ways to reduce taxes for your small business. The Internal Revenue Service (IRS) provides several options, all of which have the potential benefit of shielding income from taxes. You could even hire your children.
According to Scott Goble, CPA, and founder of Sound Accounting, hiring family members allows "small business owners to pay a lower marginal rate, or eliminate the tax on income paid to their children."
For instance, the Federal Unemployment Tax Act does not apply to sole proprietorships, so such businesses do not have to pay social security or Medicare taxes on a child's wages (FUTA). It cannot be overstated how important it is for profits to come from honest enterprises. Small business owners can save on the Federal Unemployment Tax Act (FUTA) by giving employment to a family member who is exempt from it. You may be able to contribute to their retirement in addition to any benefits they receive from their other job.
Create a Retirement Plan
As a small business owner, you forego a 401(k) match provided by your employer. However, several retirement account options can help you maximize your retirement savings while reaping valuable tax benefits. For example, the IRS allows you to save up to $57,000 in total contributions for retirement with the one-participant 401(k) plan. Among these retirement planning vehicles are:
• Simplified Employee Pension Plan (SEP)
• Individual Retirement Account (IRA) or Roth IRA
• 401(k) plans
As a tax-saving strategy, the IRS website offers several different retirement plan options for business owners.
Save money for medical expenses.
Investing in healthcare is one of the best ways for small businesses to reduce their tax burden. Even if you are currently in good health, you must save money for unforeseen or future healthcare expenses as medical costs continue to rise.
Alter the Organizational Structure of Your Business
As a small business owner, you do not have the benefit of an employer paying a portion of your taxes. You must pay the full amount of Social Security and Medicare taxes. You must still pay those taxes if your company is taxed as a limited liability company (LLC). In some specific cases, you may be able to eliminate the employer-half of those two tax responsibilities. This could be a wise decision for some small businesses. While there are many factors to consider when making this switch, such as paying yourself a reasonable salary and other risks, it can be a good way to reduce your taxable liability.
Travel Expenses Can Be Deducted
If you travel for business deals, you may be able to reduce your business taxes. While business travel is fully deductible, personal travel does not receive the same benefit. On the other hand, small business owners can combine personal travel with a justifiable business purpose to maximize their business travel. Any flier miles earned during business travel can be redeemed later for personal travel.
As an owner, you can reduce your taxable income and keep more of your money working for you with careful planning. Just check with a tax professional to see if you qualify for the potential savings discussed here.