Raleigh NC Financial Advisor: Business Owners & Taxable Income
Taxes pose a significant source of stress for small business owners, who often juggle multiple roles and are eager to safeguard their hard-earned income from excessive government deductions. Nevertheless, there is a silver lining as numerous tax-saving strategies exist to alleviate your taxable burden as a business owner. Here are some methods to explore if you are seeking effective ways to lower your taxable income this year.
Employ a Family Member
A highly effective means of reducing taxes for your small business involves the strategic hiring of family members. The IRS offers ways to protect income from taxes, like having your kids work.
Sole proprietorships can skip paying social security, Medicare, and FUTA taxes on their child's wages. However, it is crucial to ensure that earnings stem from legitimate business purposes. Small business owners can save on taxes by hiring their spouse, who would not have to pay the FUTA tax. Additionally, depending on their benefits from another job, there might be an opportunity to contribute to retirement savings on their behalf.
Start a Retirement Plan
Being a small business owner means forgoing the convenience of a 401(k) match from an employer. Nevertheless, there are various retirement account alternatives that not only maximize your savings for retirement but also offer valuable tax benefits. You can save up to $57,000 for your retirement with a one-participant 401(k) plan.
On the IRS website, small business owners can explore a range of retirement plan options aimed at tax savings strategies. These include:
Simplified Employee Pension Plan (SEP) IRA
Roth IRA
403(b) plans
There are various retirement plans available that offer different benefits and advantages. These plans are specifically designed for business owners who want to ensure their financial future and also save on taxes.
Save Money for Healthcare Needs
To effectively lower small business taxes, allocating funds for healthcare needs proves to be one of the most beneficial approaches. With medical costs increasing, it's wise to save money for unexpected or future healthcare needs, even if you're currently healthy. One way to reach this goal is by using a Health Savings Account (HSA) with a qualifying high-deductible health plan. Through an HSA, you can secure tax advantages while safeguarding your finances for medical expenses.
With the continuous escalation of medical expenses, numerous businesses seek ways to alleviate the burden of health insurance costs. By using Health Savings Accounts (HSAs), businesses and employees can save on taxes and possibly spend less on healthcare.
The savings from HSAs are derived from three significant avenues, known as the triple tax advantage. First, your contributions are made pre-tax, providing an immediate tax benefit. Secondly, the funds within the HSA grow tax-free, ensuring your savings can expand unhindered by taxation. Lastly, taking money out for medical expenses is tax-free, which makes using an HSA for healthcare even more financially beneficial.
Change Business Structure
As a small business owner, you are responsible for paying Social Security and Medicare taxes on your own. You do not receive any assistance from an employer. Even if your business is taxed as a limited liability company (LLC), you are still obligated to fulfill these tax obligations.
However, under certain circumstances, there is a possibility of eliminating the employer-half of these tax responsibilities, which may present a wise choice for some small businesses.
When changing to this setup, think about important things like paying yourself a fair wage and understanding the risks involved. Nonetheless, opting for this approach can prove advantageous in reducing your overall taxable responsibility, making it a viable option to explore.
Deduct Travel Expenses
For frequent travelers, there exists a potential opportunity to lessen their business taxes. Business-related travel expenses are fully deductible, while personal travel does not share the same tax benefit.
Nevertheless, small business owners can optimize their business travel deductions by incorporating a justifiable business purpose into combined personal trips. You can use frequent flier miles earned on business trips for personal travel later. This gives an extra benefit to work-related journeys.
Don't Confuse Cashflow with Taxable Income
Many business owners mistakenly believe that all money coming in is taxable and all money going out is deductible. However, whether a cash inflow or outflow is subject to taxation or eligible for deduction depends on its nature.
For instance, revenue generated from selling a business's goods or services is indeed taxable income. However, there are certain cash inflows that are not taxable to the company, such as bank loans, lines of credit, and loans from the owner to the business.
Small business owners or their bookkeepers often make a common error. They treat all deposits as income. This includes refunds or transfers between accounts.
To avoid errors, thoroughly review bank deposits. Ensure that deposits and transfers that are not subject to taxation are not counted as income. Being attentive to the specific nature of each cash inflow and outflow is vital in accurately determining taxable income and eligible deductions for a business.
Bottom Line
Small business owners can reduce their taxable income and keep more of their earnings for growth by planning carefully. This can help them maximize their profits and invest in their business's expansion.
By strategically managing their finances, small business owners can minimize their tax liabilities and retain a larger portion of their earnings. This extra capital can then be reinvested into the business, allowing for further growth and success.
Careful planning and financial management are essential for small business owners to optimize their taxable income and ensure long-term prosperity. However, it is crucial to bear in mind that consulting a tax professional is essential to ensure that you meet the requirements for the potential savings outlined in this discussion. Their knowledge will assist you in understanding tax rules and maximizing tax benefits to improve your tax situation.
Sources:
https://www.businessnewsdaily.com/767-small-business-tax-tips.html
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This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.
These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.
Advisory Services Network, LLC does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation.