If you’re a small business owner, you probably have a lot of questions about your taxes. Finding plausible deductions isn’t just for the ultra rich and successful. You might be able to reduce your business taxes as well.
Often, small business owners end up overpaying on their taxes. It’s hard to catch every deduction if you’re not an accountant. The U.S. tax code is notoriously hard to understand. However, armed with the right knowledge, you can put a serious dent in your tax bill.
Keep reading for strategies.
1. Change Your Structure
If your business is a sole proprietorship, you might be able to shave money off of your taxes by changing the structure. For example, you might set up as a limited liability company instead. At this point, you can reduce taxes with an s corp. An LLC can be taxed as an S corporation. Doing this can save you money because you won’t have to pay self-employment taxes at the end of the year. As a business owner, you’ll have to pay yourself a salary.
2. Deduct Your Health Insurance
If you own an S Corp, you can deduct your health insurance. Here’s how. Use your company to pay your insurance premiums, or reimburse yourself if you’re paying out of pocket. At the end of the year, you can add your premiums to your W-2 as income that’s exempt from social security taxes. You can also deduct your premiums from your self-employed insurance.
3. Work With Your Kids
If your business is a sole proprietorship, you don’t have to pay medicare or social security taxes on your child’s income until they turn 18. To keep everything simple, pay your child with a check. Keep track of everything in case you get audited. However, there is a limit to how much they can earn tax-free every year.
The child’s money can be used to pay for tuition, school books, summer camp fees, etc.
4. Employee Benefits
If your small business has employees, you can save taxes by offering tax-exempt benefits. These include health benefits, educational assistance, and transportation benefits. Of course, not hiring employees to begin with is even cheaper. However, it’s often unavoidable. Businesses need to grow and that usually involves hiring more people.
5. Medical Expense Reimbursement Plans
A Medical Expense Reimbursement Plan allows to you reimburse your employees, along with their spouses and dependents, for their out of pocket medical costs. If your small business hires your spouse, you can pay them in health benefits rather than typical wages. You won’t have to file a W-2.
Track all of the work your spouse does. In order to be legal, the work has to be deemed “reasonable” by another person.
6. Hire a Professional
Perhaps the easiest way to save money on your taxes is to hire an accountant. According to accounting.com: “If you haven’t had formal training in accounting or are more interested in other aspects of your business, keeping meticulous records of financial data can be a chore. Furthermore, understanding precisely what information you should be tracking can be overwhelming and confusing.”
The IRS is very demanding. It has strict requirements that must be met if you don’t want to get into trouble with the law. If you want to both lower your bill and comply with the law, it’ll will be simpler if you hire a professional.
The upfront cost is daunting for many small business owners.
When you make the leap to become a business owner, a million things are flying through your head. Your best tax strategy likely isn’t one of them. Taxes aren’t something most people think about until they have to. However, as your business grows, saving money on your taxes becomes more important. Large corporations like Amazon use such skilled accountants that effectively pay $0 in federal taxes. This saves millions of dollars every year.
You might not be saving millions, but smart planning might be able to save you tens of thousands. Part of being a business owner is being forced to wear many hats. Dealing with the books might not be your favorite part of the job but it’s absolutely necessary if you want to succeed.
The tricks that giant companies like Amazon use likely aren’t applicable to your situation. But the idea is the same. The U.S. tax code was written in a way that hardworking individuals and business owners can take advantage of certain loopholes.