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Taxes can be one of the most stressful factors of running your own small business. If you are like most small business entrepreneurs, you probably wear a number of hats and the last thing that you will want to do is pay any more of your hard-earned cash to the government.
Thankfully, there are several perfectly legal tax-saving methods that you can use in your business to reduce your taxable liability. We’ve put together a list of some of the main things that you might consider doing to reduce your taxable income.
Employ Family Members
If you have a relative who’s looking for work, employing them to work for your business can be beneficial for both of you. In fact, hiring a family member is one of the best ways to reduce taxes for your small business.
The Internal Revenue Service (IRS) allows for several options that can shelter some of your income from taxes. You could hire siblings, parents, your spouse or even your kids to work for you.
By hiring family members, business owners are able to pay a lower marginal rate or even completely eliminate the tax on any income paid to their relatives. If you employ your spouse, you may also be able to double your deductible contribution amount using a pension plan.
Curious how much you can save in a defined benefit plan?
You can use Saber Pension’s handy cash balance plan calculator to figure out your deductible contribution and maximize your benefit plan. Check out this cash balance plan calculator here.
Contribute to a Retirement Plan
If your business is turning over a profit, you can shelter income by using a qualified retirement plan that provides you with tax deductions for your contributions or defer tax on earnings on contributions until you start taking money from the plan when you retire.
In addition, you can also save on taxes by providing any employees that you have with their own retirement plans through your company, along with gaining employee loyalty.
Structure Your Business Correctly
The business structure is the most commonly overlooked aspect of running a company when it comes to tax planning. Many businesses that start out small will fail to change the business structure when it is necessary.
For example, you may be set up as an LLC or an S corporation if you run a company in which the income passes through to you, even though you may be able to gain more tax advantages by changing the structure to a C corporation where the first $50,000 of any income you make is only taxed at 15% rather than 35%.
Defer Income
When the end of the year is coming around, there are a few steps that you can take in order to put off income into the next tax year which can increase your deductions in the current tax year.
For example, sending your bills out a few days later than usual during the last month of the tax year means that you will be paid in the next tax year and will be able to defer the income rather than having to declare it immediately. Similarly, you can also pay any bills due in January in December instead, allowing you to take those deductions during the current tax year.
Add to Employee Benefits
Compensating your employees for their efforts is important for fostering loyalty and dedication, but rather than offering raises, consider adding to employee benefits packages instead.
For example, increasing your employer contributions to health insurance costs rather than giving the employees the same amount in their wages means that you can avoid paying a number of taxes such as FICA tax, income tax, and Medicare tax.
Use an Accountable Plan
If your business reimburses employees for travel, tools, or other costs, consider doing this with a plan that meets IRS requirements, known as an accountable plan.
These plans allow the business to deduct the expenses without reporting the reimbursements as income to employees, which can potentially save the company money on employment taxes and lower the overall amount of taxable income.
In addition, providing an accountable plan to your employees will also help them save money on their own taxes since employees are no longer able to deduct unreimbursed employee expenses.
Hire a Professional
Finally, working with a good accountant will ensure that your business is making the best tax decisions. If you are not skilled in this aspect of the business, it is easy to overlook small yet very costly mistakes.
A good accountant will be able to provide you with tailored advice for reducing your business’s tax bill and taking the right strategies to keep tax costs low for both the company and your employees.
Don’t let taxes be the biggest source of your stress as a small business owner; keep these tips in mind and ensure that you are not paying more than you need to be.
