As a business owner, you work hard day and night to grow your business. And the last thing you want is to give more of your business income to the government. Although it’s your responsibility to pay tax for the continued operation of your business, you probably want to reduce it as much as possible.
Fortunately, there are numerous tax-saving strategies you can try to use to help reduce your tax liability as a business owner. Enumerated below are some effective tax reduction methods:
Fortunately, there are numerous tax-saving strategies you can try to use to help reduce your tax liability as a business owner. Enumerated below are some effective tax reduction methods:
- Partner With A Tax Service Firm
You probably have some background in managing taxes, but not as comprehensive as that of the experts. Hiring companies like Sharp LLC, a reliable firm providing tax services Philadelphia has to offer, can help you in all things taxes.
In particular, hiring an expert can provide you with insights on where you can save more on taxes and help you maximize potential deductions on tax liabilities. With these certified experts, business owners also don’t have to worry much about tax-related activities such as planning, audits, as well as having costly mistakes and corrections.
- Hire A Family Member
One of the most effective ways to reduce your small business tax obligation is to employ a family member. In general, the Internal Revenue Service (IRS) allows for different family members, even your children, to work for you, with the potential benefit of reducing your tax liability.
By hiring family members, small businesses can pay a lower marginal rate. If business owners employ their children, it also eliminates the tax on the income paid to them. For instance, sole proprietorship businesses don’t have to pay Medicare and social security taxes on the wages of a child, as well as the tax from the Federal Unemployment Tax Act (FUTA).
Take note, however, that the earnings should come from business-related purposes. Furthermore, a business owner can also hire a spouse who wouldn’t then be subjected to the FUTA tax.
- Track Allowable Deductions
Allowable deductions are any necessary expense that a business needs to make to create an income. You can claim these deductions to legally reduce your tax. And that means you’ve got a lot of potential deductibles.
From office space rentals to office supplies and business software to travel expenses to professional services, you can deduct ordinary and necessary expenses to reduce the amount taxed on your business.
Of course, the allowable deduction should meet specific criteria. In general, it should relate to your business. It should be of a reasonable amount and is complying with the tax requirements. Also, these deductibles should be supported by documents. So, as mentioned before, a tax professional can help you determine potential tax deductions for your business.
- Switch To LLC
If your business currently operates as a sole proprietorship or other structure, switching to a limited liability corporation (LLC) can help reduce your tax liability.
In general, small business owners don’t have the benefit of an employer paying for a part of their taxes. This means you need to pay for the entire amount of your Medicare and social security taxes. By incorporating your business, you will still pay for those taxes, however, it should eliminate the employer’s portion of these tax liabilities. This means you only need to pay half of the amount of these tax responsibilities.
- Prioritize Healthcare
Most businesses think that salary increases are an easy win. However. It’s best to contribute more to your employees’ healthcare. Increasing your employees’ salary means higher employer taxes, as part of employee income. However, by covering more of their healthcare insurance costs, you don’t have to worry about paying any taxes. This is because the government considers the amount deposited into healthcare insurance as a type of business expense, allowing you to save more on your taxes.
Having a high deductible healthcare insurance plan makes your business eligible for health savings accounts (HSAs). Furthermore, both withdrawals and contributions are tax-free, making it particularly appealing for both businesses and employees.
- Offer Retirement Plan
Another way to reduce tax responsibilities is to have a retirement plan. Whether it’s for yourself or your employees, setting up and funding a retirement plan can help save money on taxes. Just make sure that it’s a qualified retirement plan to ensure tax reduction benefits.
In general, the plan you choose should be recognized by the IRS to allow tax savings on earnings until withdrawn. These plans include IRAs and contributions plans like 401(k). Consider your business, goals, and needs when choosing the right retirement plan to offer.
Takeaway
Managing tax is one of the most stressful processes for small business owners. However, with wise planning, you can reduce your tax and keep more of the money you work so hard for. If you need ways to save some money on your tax liability this year, try some of the methods mentioned above. Just remember to consult a tax expert first to ensure that you qualify for the potential tax savings mentioned here.
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