Business tax liability is complicated and we’d be willing to bet you’re not taking full advantage of the strategies designed to help you. Today we’re breaking down 10 ways you can minimize your tax liability, decrease your estimated quarterly taxes, and spend your business dollars smarter.
What is tax liability?
Your tax liability is the amount for which you’re responsible to the IRS. Tax liability is determined by your tax rate and your amount of income.
Reducing your tax liability means taking advantage of all of the deductions you can and minimizing the bottom-line total that’s used to calculate your tax bill. There are several strategies for using your gross revenue wisely so that less of it is eligible for taxes and so that your taxes are working harder for you.
Now let’s jump into the ways you can leverage small business tax codes to work to your advantage.
10 ways to minimize your small business tax liability
1. Employ family members
It’s not possible for every small business, but if you hire a family member you can skip some of the employer taxes you’d be paying for another employee. If you hire a spouse you are not required to pay unemployment (FUTA) taxes, and for children, you aren’t required to pay employment (FICA) taxes.
2. Build a retirement fund
Not only is it common sense to save for retirement—it can actually help you pay less in taxes. As a small business owner, you can save up to $57,000 per year in total retirement contributions. These contributions are totally tax free, and you have a few options for executing this strategy:
- SIMPLE IRA: Savings Incentive Match Plan/Individual Retirement Account. As an employer you can require a 2% contribution from employee paychecks to their retirement fund, or offer an employer match up to 3%. Employees can contribute $13,500 per year (and an additional $3,000 for employees over the age of 50).
- Roth IRA: Individual Retirement Account allowing for tax-free qualified withdrawals. These savings accounts are preferable for those making less than $140,000 annually and who think taxes will be higher for them in the future. The money is taxed when it goes into the account but can be withdrawn tax-free. However, the employer match is pre-tax money.
- 403(b): A retirement account for certain non-profit and public school employees. Like other retirement plans, employers can match employee contributions pre-taxes and can maximize benefits if employees stay for 15 years of employment.
- Simplified Employee Pension Plan (SEP): A retirement account with higher contribution limits available for self-employed individuals. A simplified retirement account that provides employers tax free contributions as well as a tax credit when initiating the plan.
3. Focus on healthcare
If you have a high deductible health care plan you may be eligible for health savings accounts (HSAs), which make it easy to save tax-free money to be used for health and wellness spending. Both contributions and withdrawals are tax-free, which makes this option particularly appealing. Raises might seem like an easy win, but you’d actually be better off contributing more to your employees’ healthcare. A raise is subject to employer taxes (with FICA & FUTA taxes being withheld like regular wages) and then taxed on the employee side as part of their income. Instead you can cover more of their health insurance costs without paying any taxes.
4. Get incorporated
If your business operates as a sole proprietorship or other business structure, it may be beneficial for your tax liability to make the switch to a Limited Liability Corporation or LLC. Many small business owners are able to omit the employer portion of their FICA taxes and decrease their tax liability. Further, you can have your first $50,000 taxed at a lower rate if you are structured as a C-corporation.
5. Maximize deductions
Work closely with a tax professional to understand exactly what you can deduct in your business expenses (hint: it’s a lot). From travel to office supplies to marketing, you can deduct “ordinary and necessary” expenses to reduce the amount taxed. The same can go for credits.
In order to deduct your expenses correctly and apply tax credits you’ll need meticulous records. Set up your books and expense management to categorize your tax deductible expenses and be sure to capture receipts for future access.
Do you need help managing your small business taxes? Check out our tax guide.
6. Contract employees
When you hire freelance employees or independent contractors, you are able to get quality work for a smaller portion of the taxes. You are not responsible for their employment taxes or healthcare costs, but can still get the same (if not better) results.
7. Charitable contributions
Making charitable contributions is a great way to pay it forward and to establish trust with your customer base. Choose meaningful and effective charities and then keep careful track of your donations. You are able to deduct up to 25% of your taxable income in charitable donations, so it’s always a great option for building a reputation and reducing your tax liability.
8. Optimize deductions
It’s critical that you deduct everything for which you are eligible to minimize your tax liability. But you shouldn’t stop there. For some business expenses you’re able to choose between two ways of deducting the expense.
For example, for cars and travel you can deduct the cost or use the IRS standard mileage rate for deduction. Another example is using large purchases as a whole-item deduction or deducting depreciation over time. Keeping meticulous records allows you to compare the advantages of each method and to choose the one that will provide the greatest return.
9. Stay current on tax law
Tax law is changing constantly, and the way you completed your taxes last year might not work this year. Stay up-to-date on the current tax regulations and deduction particulars so that you can take full advantage of the most recent changes. Contract with a tax professional if you don’t have your own accounting team.
10. Adopt accountable plans
If you need to reimburse your employees for mileage, travel, or other expenses, you can save money on taxes by adopting accountable plans. It means that the reimbursements are not counted as part of W-2 income and are exempt from FICA and FUTA taxes.
Put money back into your small business
It’s not too late to minimize your small business tax liability with some carefully placed purchases or donations, and managing the way you deduct expenses for your business. Talk with your trusted tax professional to determine the best course forward for your company.
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