It’s hard enough to run a business these days, but having to file taxes each year makes it even harder. There are, however, things that you can do to make the process easier for you and your business. Here are five tax tips for small business owners to ensure that your business doesn’t always take a big hit.
This may be surprising, but one of the best ways to reduce your company’s taxes is to hire a family member. The Internal Revenue Service (IRS) provides a wide range of options that can help to shelter your income from taxes. According to experts, by hiring their children, small business owners will be able to pay a lower rate or eliminate taxes paid to children.
For instance, sole proprietor companies don’t need to pay Medicare, social security, and Federal Unemployment Tax Act (FUTA) taxes for their child’s wages. The IRS also allows entrepreneurs to reduce their taxes by hiring their spouses, who won’t be charged with the FUTA tax.
A great accountant will do more than just your taxes and financial statements. If this is all they can offer you, then they aren’t a good fit for small businesses. They should be able to work with you throughout the year to:
- Ensure that you don’t have a cash flow problem
- Monitor your net and gross profits
- Track your income and spending
Furthermore, the right accountant will give you advice on how you can grow your business. Be sure to ask for their advice to see how much you can contribute to your retirement fund. Your accountant will also be able to give you advice regarding renting or buying a small space for your business.
Because you’re an entrepreneur, you won’t have access to a 401(k) match matched by an employer. You do, however, have many retirement options to choose from that can maximize your retirement savings. You’ll be able to reap great tax benefits such as the one-participant 401(k) plan, where you can save as much as $57,000 in total contributions.
Other retirement plans you can look into include:
- 403(b) plans
- IRA or a Roth IRA
- Simplified Employee Pension Plan (SEP)
As the owner of a small business, you don’t have the benefit of having an employer cover some of your taxes. As such, you’re responsible for paying for the whole amount of Medicare and Social Security taxes. If your business is taxed as an LLC, you will still have to pay both taxes. However, if you meet certain conditions, you may be able to eliminate the employer half of these tax responsibilities.
If you fail to correctly classify your company as one of the following…
- S Corporation
- C Corporation
- Limited Liability Company
- Limited Liability Partnership
- Sole Proprietor
- Single Member LLC
… You may suffer from overpaying your taxes. Each of these categories will have a different effect on your taxes. If you’re unsure of how to classify your business, it’s important to consult with an accountant and an attorney to determine where your business falls.
Keeping accurate and thorough records of your business transactions all year will provide you with a correct tax return. If you fail to keep an accurate record, you risk leaving deductions on the table, or you could even put yourself up for an audit. To keep your business protected and organized, be sure to invest in accounting software.
Even the basic ones will do, since they’re user-friendly, inexpensive, and track all of your money’s coming and going.
Taxes can be stressful for an entrepreneur, and the last thing you want to do is to hand over your hard-earned income to the government. Luckily, you can reduce your losses by planning and strategizing to have your money work for you. Visit Wealtheo+ to learn more and ensure that you can make the most of your savings.