Small business owners are busy people, and tax time creates even more stress. Although giving more of your hard-earned money to the government is the last thing you want to do, there are numerous ways to reduce your tax liability.
Though consulting a tax pro is usually the way to go, the following tips may help you minimize this year’s tax burden.
1- Hire a Relative
One of the most effective ways to reduce small business taxes is to hire family members. The IRS (Internal Revenue Service) allows various options, all of which may shelter some income. Small business owners can reduce their tax liability by hiring their children, but it’s important to note that earnings must come from a justifiable business purpose.
Consider putting their salary in a Roth IRA, which provides a tax benefit and helps with the child’s future needs. Consider working with a tax pro if you need tax preparation advice.
2- Create a Retirement Plan
Small business owners enjoy a range of advantages, but they give up certain things such as 401(k) matching. Though you may miss the money available through an employer’s matching program, there are several ways to maximize savings and reap the tax rewards.
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For instance, with an individual 401(k), the IRS allows up to $53,000 in retirement savings to remain tax-free. With an independent 401(k), it must be opened by December 31st to qualify for the tax year.
3- Put Aside Funds for Healthcare
Another easy way to reduce tax liability as a small business owner is to set aside healthcare funds. As medical costs increase, saving money for future and unexpected needs is crucial. Accomplish the goal with an HSA (health savings account) if your company has a high-deductible health insurance plan.
By using an HSA, your company and workers can cut taxes and associated medical expenses. Contributions are made before tax, they grow without tax, and withdrawals for eligible medical bills are not taxed.
4- Change the Corporate Structure
Small business owners don’t get the advantage of an employer paying a portion of their taxes. As such, they’re responsible for all their Medicare and Social Security taxes, which only add to an already significant tax bill. If the company is taxed as an LLC (limited liability corporation), you will still have to pay the tax.
In certain cases, though, it’s possible to eliminate the employer’s share of that tax liability. There are a few things to think of when changing the corporate structure, such as paying your own salary, but structural changes are effective ways to minimize tax responsibility.
5- Deducting Travel Expenses
If you’re traveling for pleasure and for business, it might be possible to reduce the company’s tax burden. Business trips are fully deductible, though personal travel isn’t. There are multiple travel management methods that minimize tax liability, and it is possible to mix business with pleasure as far as travel is concerned. Remember, you can also use accrued frequent flyer miles for personal trips.
Business owners wear many hats, but ‘tax preparer’ probably isn’t one of them. As a small business owner, you’re probably busy, and taxes are low on your list of priorities. With planning and the help of a tax preparation expert, it’s possible to minimize a company’s tax liability and keep those funds working in your favor.