Although the new federal tax law in 2017 eliminated or reduced tax deductions for many individuals, small business owners still have a variety of benefits. If you're a small business owner, here are five easy ways to reduce your taxable income and keep more money in your pocket.
Important points
- Small business owners have access to a variety of tax breaks that are not available to individuals who do not own their own business.
- Employers can include family members on their payroll as long as they have legitimate work.
- If you are a small business, you may also be eligible for retirement benefits and medical expense deductions.
- The organizational structure of your small business (such as sole proprietorship or limited liability company) can have tax implications.
employ family members
One of the best ways to reduce your small business taxes is to employ family members. The Internal Revenue Service (IRS) offers a variety of options, all of which have the potential benefit of protecting your income from taxes. You can also employ your children.
For example, if your business is a sole proprietorship, you can hire your spouse to pay your income. That income is subject to federal income tax and the Federal Insurance Contributions to Social Security and Medicare Act (FICA), but is not subject to federal unemployment tax (FUTA) unless you are a legal employee and partner in the business. It won't happen.
How your child is taxed depends on their age. All children are subject to federal income tax on their wages. However, children under 18 are not subject to her FICA tax, and children under 21 are not subject to her FUTA tax. One benefit of employing children under 18 is that FICA taxes on an employee's wages are typically split 50-50 between the employer and the employee, with the employer paying half. Currently, each citizen pays 6.2% to Social Security and 1.45% to Medicare. In this case, you don't have to pay either.
Note that different rules apply if your business is set up as a legal entity.
Employing children means even more benefits for them. If they have income, they (or you on their behalf) can put their retirement funds into an IRA. And while their retirement may be decades away, by setting goals early, you can make a big jump to building a sizable fund for when that day finally comes. I can. In particular, you may want to consider a Roth IRA, which allows you to take your final withdrawal tax-free.
Note
Small business owners can also employ parents.
Fund retirement plans for yourself and others
Small business owners have several retirement plan options that are not available to people who work for other companies, and they can receive significant tax deductions. They include:
- A single-participant 401(k) plan. These plans allow you to defer up to $66,000 (2023) of income if you are under age 50. If you are over 50 years old, you will be eligible for an additional catch-up contribution (in 2023 he will be $7,500). Although called a “single participant” or “solo” plan, this type of 401(k) can cover both you and your spouse. If you have other employees, you can set up a traditional 401(k) plan for her instead.
- Simple Employees' Pension Plan (SEP). This is a type of IRA that is easy to set up and manage, making it suitable for busy small business owners. Also, unlike a 401(k) plan with only one participant, a SEP can also be used to provide retirement benefits to other employees (and in some cases, may be required to provide retirement benefits) . The contribution limit (2023) is the lower of 25% of your remuneration (or, if you are self-employed, your net income from self-employment). or $66,000. In addition to being able to take a deduction for contributing to their own accounts, employers can also take a deduction for contributions to their employees' accounts.
- Employee Savings Incentive Match Plan (SIMPLE) IRA Plan. Small businesses with 100 or fewer employees are eligible to set up this type of plan. Unlike her two plans above, the SIMPLE IRA can be funded by both employers and employees. Employers can match up to 3% of eligible employee contributions (over $15,500 in 2023, or $19,000 including catch-up contributions), regardless of whether the employee contributes. ) or 2% of compensation must be contributed to all eligible employee accounts. . In addition to contributing to the plan, employers can make their own contributions in the same way as eligible employee contributions.
important
Employers may be eligible for a tax credit of up to $5,000 for three years on the cost of starting a qualified plan, such as a SEP, SIMPLE IRA, or 401(k).
save on medical costs
Another good way to reduce small business taxes is to set aside funds for future medical needs. Medical costs continue to rise, and even though you may be healthy now, having some reserves for medical expenses could be a lifesaver. If you are enrolled in a qualified high-deductible health plan, you can do this through your Health Savings Account (HSA).
Additionally, if you're self-employed, you can often deduct health insurance premiums for yourself, your spouse if you have one, and your children up to age 27.
With an HSA, withdrawals are tax-free as long as you deposit pre-tax dollars into the account (which reduces your taxable income) and spend the money on what the IRS considers “qualified medical expenses.” Additionally, interest and other earnings in your account will grow tax-free during that time. The 2023 contribution limit is $3,850 for him if the high-deductible plan covers only himself and $7,750 for him if it covers you and your family.
As an added benefit, the funds in your HSA account roll over from year to year and never expire.
change business structure
Small business owners can choose to structure their business in a variety of ways, and changing that structure can potentially save them money on taxes. The main options include:
There may be tax advantages and disadvantages to each from both a federal and state perspective. Some businesses are taxed at the corporate level, while others pass their income on to their owners and are taxed as individuals. Pass-through entities typically include sole proprietorships, partnerships, LLCs, and his S corporations.
For example, Florida does not have a personal income tax, but it does impose a 5.5% corporate income tax on certain businesses. Ohio, on the other hand, taxes personal income but allows taxpayers to deduct up to $250,000 in business income from sole proprietorships and other pass-through entities. Texas does not tax personal or business income, but it does impose a franchise tax on corporations and LLCs.
Travel expense deduction
If you travel as part of business, you may be able to reduce your taxes. Business travel is fully deductible, but personal travel does not have the same benefit. However, to take full advantage of the business travel deduction, small business owners can combine personal travel with legitimate business purposes.
Frequent miles earned on your credit card for business travel can also be redeemed later for personal travel. Although business travel is not deductible, it is recommended that you also use it for personal travel.
What is the difference between a business tax credit and a business tax credit?
Deductions reduce the amount of income that is taxed, and tax credits reduce the amount of tax owed dollar for dollar.
What is employment tax?
If a small business has employees, employment taxes, which are often paid in full or in part, are in addition to Social Security and Medicare taxes (FICA) and federal unemployment taxes (FUTA). Consists of required withholding income tax. employee.
What is corporate consumption tax?
Consumption tax is a tax levied on companies that sell certain types of goods and services. The federal government and some states have sales taxes, which may vary by jurisdiction.
conclusion
By planning ahead, you can reduce your taxable income as a small business owner and have more money for yourself. In some cases, such as when deciding on a business structure, consulting with a tax professional familiar with small businesses may be well worth the cost.
