Running a small business can be a demanding endeavor. The small business owner wears many hats and the last thing you want to do is to pay too much of your earnings in taxes to the IRS. As a small business owner there are many ways to reduce your taxable liability and keep more of your hard earned money in your pockets.
If you need ways to reduce your tax burden this year, consider some of the following methods to do just that. However, always consult a tax professional before taking action on any of these suggestions.
One way you can reduce taxes for your small business is by hiring a family member. There are a variety of options available to the small business owner in the regard. These options allow the small business owner to basically shelter some of his income from taxes and this is allowed by the Internal Revenue Service (IRS).
Hiring of your children – with this strategy small business owners are able to pay a lower marginal tax rate, or eliminate the tax on the income paid to their children. Their salary can be put in a Roth IRA for future purposes thus allowing you the tax benefit plus a way to provide for their future needs.
Hiring your spouse – taking into consideration the benefits they have through another job; you may be able to put aside an amount in retirement savings for them thus reducing your tax liability.
As a small business owner, you don’t have a 401(k) match from an employer but there are several retirement account options that can maximize your retirement savings and reap valuable tax benefits. For example, your traditional IRA contribution may be tax deductible.
A small business owner can reduce his tax liability by establishing a Health Savings Account (HSA). With the continued rise in health care cost this is a proven method to plan for the future while getting a tax benefit for doing so.
There is a triple tax advantage of establishing a HSA
1) You can claim a tax deduction for contributions you make to a HSA,
2) The interest or other earnings on the assets in the account are tax free,
3) Distributions are tax free when withdrawn for qualified medical expenses.
You don’t have the luxury of an employer paying a portion of your taxes as a small business owner. You’re on the hook for the entire amount of Social Security and Medicare taxes. Those amounts only increase an already high tax bill. If your business is set up as a Limited Liability Company (LLC), you still have to pay those taxes.
In certain circumstances, just by changing your business structure you can eliminate the employer half of those two tax responsibilities. There are many things to consider in this change, such as paying yourself a reasonable salary and other associated risks, but it can be a good way to reduce your taxable responsibility.
If you travel a lot for both business and pleasure, you may be able to reduce your business taxes. Business travel is fully deductible, though personal travel does not enjoy the same benefit. There are several ways to manage travel to save on business taxes. You can combine personal travel with a justifiable business purpose. You can also use the frequent flier miles you earn for personal travel.
The Bottom Line
With wise planning, you can reduce your small business taxes and keep more of your money working for you. Just remember to consult a tax professional first to make sure you qualify for the potential savings discussed here.
User | 7/02/2020