Taxes can be stressful for a small business owner. You likely wear many hats and the last thing you want to do is pay more of your hard-earned business income to the government. Thankfully, there are many ways to reduce your taxable liability as a business owner and keep more of that revenue for yourself. If you need ways to reduce your tax burden this year, consider some of the following methods to do just that. Just keep in mind to speak with a tax professional before taking action on any of these suggestions.
Employ a Family Member
One of the best ways to reduce taxes for your small business is by hiring a family member. The Internal Revenue Service (IRS) allows for a variety of options, all with the potential benefit of sheltering income from taxes. You can even hire your children, at as young as seven years old. According to Scott Goble, certified public accountant (CPA) and founder of Sound Accounting, “Small business owners can reduce their taxes by hiring their children. With this strategy, business owners are able to pay a lower marginal rate, or eliminate the tax on the income paid to their children.” It is important to point out earnings need to come from justifiable business purposes. Assuming you’re able to hire your child, their salary can be put in a Roth IRA for future purposes allowing you the tax benefit plus a way to provide for their future needs. (For more, see: Starting a Small Business: Taxes.)
The benefit does not stop with hiring your child. The IRS also allows you to hire a spouse. Depending on the benefits they have through another job you may be able to put aside retirement savings for them, thus reducing your taxable liability.
Start a Retirement Plan
As a small business owner, you give up a 401(k) match. You may miss the free money available through the match though there are several retirement account options that maximize retirement savings and reap valuable tax benefits. For example, with the Individual 401(k), the IRS allows you to put away up to $53,000 for retirement. Some of those retirement planning vehicles are: (For more, see: SIMPLE IRA vs. SIMPLE 401(k) Plans.)
It is important to point out, in the case of Independent 401(k)s, you must open them by December 31st to qualify for the current tax year.
Save Money for Healthcare Needs
One of the best ways to reduce small business taxes is by putting aside money for healthcare needs. Medical costs continue to increase and while you may be healthy now, saving money for unexpected or future healthcare needs is essential. You can accomplish this through a Health Savings Account (HSA) if you have an eligible high-deductible health plan. (For more, see: IRS Sets 2016 HSA Deduction Limits.)
“I also encourage every business owner to explore utilizing an HSA. As medical costs rise, many businesses look to lower the costs of health insurance. By utilizing HSAs, the business and the employees can reduce taxes and potentially associated medical costs” says Sean Moore, CFP, ChFCof Smart College Funding. The savings Moore explains comes in three key ways, otherwise known as the triple tax advantage – your contributions are pre-tax, they grow tax-free and withdrawals for qualified medical expenses are tax-free.
Change Business Structure
As a small business owner, you don't have the benefit of an employer paying a portion of your taxes. You're on the hook for the entire amount of Social Security and Medicare taxes. Those amounts only increase an already high tax bill. If your business is taxed as a Limited Liability Company (LLC), you still have to pay those taxes. In certain circumstances, you can eliminate the employer half of those two tax responsibilities. There are many things to consider in this switch, such as paying yourself a reasonable salary and other associated risks, but it can be a good way to reduce your taxable responsibility. (For more, see: 10 Tax Benefits for the Self-Employed.)
Deduct Travel Expenses
If you travel a lot for both business and pleasure, you may be able to reduce your business taxes. Business travel is fully deductible, though personal travel does not enjoy the same benefit. There are several ways to manage travel to save on business taxes. You can combine personal travel with a justifiable business purpose. You can also use the frequent flier miles you earn for personal travel.
The Bottom Line
With wise planning, you can reduce your small business taxes and keep more of your money working for you. Just remember to consult a tax professional first to make sure you qualify for the potential savings discussed here. (For more, see: 5 Tax Breaks Overlooked By Small Business Owners.)