Tax is an unnecessary source of stress for small business owners. This is not surprising as many business owners have many things to worry about, and adding the complexity of preparing tax could make life unnecessarily difficult.
Besides, giving away your hard-earned money does not augur well for most people. However, the good news is that you can use various tax-saving strategies to bring down your tax liability. Here are tested ways to reduce your tax liability as a small business owner.
Employ a member of Your Family
Hiring a family member translates to significant tax savings for your small business. There are many options available from Uncle Sam, with which you can benefit from by reducing the income on your taxes. It is possible to hire your kids as well.
When you hire a family member, you get to pay a lower marginal rate, and for kids, you will not pay tax on their income.
A sole proprietor, for example, might not need to pay Medicare and Social security taxes on the wages of his kid. Also, there is no need for payment of the Federal Unemployment Tax (FUTA) Act. However, business earnings can only come from justifiable business purposes. Uncle Sam allows small businesses to bring down their taxes when they hire a spouse since there is no FUTA tax. There is also the tendency to have retirement savings set aside for them.
Consider a Retirement Plan
There are a series of retirement account options that allow you to get the full benefits of retirement savings alongside tax benefits. For instance, if you are participating in a 401(k) for a single participant, you can save as much as $57,000 in total contributions for retirement.
Sample retirement planning vehicles are:
Roth IRA or IRA
403(b) plans
Simplified Employee Pension Plan
Business owners can check the Uncle Sam website for various retirement plans alongside the tax savings strategy.
Save Money for HealthCare Needs
If you want to bring down the tax you pay for your small business, consider healthcare needs. The medical cost will keep rising, and even though you have no immediate health needs, it is essential to save money for future needs. This is possible by using a Health Savings Account (HSA) for people with a high deductible health plan.
As medical costs rise, business owners are better off using an HSA. With the increase in medical expenses, businesses will consider bringing down the cost of their health insurance. Using HSAs can bring down taxes and other associated costs for a small business.
Saving is possible in three ways which gives the triple tax advantage: what you contribute is taxed already, their growth is tax-free, and whatever you withdraw that qualifies for medical expenses are not taxed.
Adjust Your Business Structure
Since you are a small business owner, you have no employer paying your employer a share of your taxes. You are solely responsible for paying the Medicare taxes and Social Security taxes. For businesses classified and taxed as Limited Liability Company, paying tax is compulsory. However, there are cases that you might be able to get rid of the employer portion of these two obligations. Some small businesses can benefit from this transition.
There are, however, many things to consider when making this switch, like having a handsome wage alongside some risk. It, however, brings down your tax responsibility.
Deduct Travel Expenses
For people who travel a lot for business purposes, reducing business taxes is possible, as well. You can completely deduct business trips even though it does not apply to personal journeys.
One way to maximize business trips for small business owners is to merge personal travel with a business purpose that can be justified. Whatever frequent flier miles you earn from your business trip, can be redeemed later for personal travel.
Conclusion
With some intelligent moves and wise planning, you can bring down your taxable income as a small business owner. Working with a tax professional can help you qualify for many of the tax savings discussed here.
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