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Being a small business owner is no easy task. Add taxes into the mix, and running an enterprise becomes all the more stressful. Alongside managing multiple responsibilities and trying to meet targets for your business, calculating your taxes and saving on them is just as important. With the self-employment tax rate pegged at 15.3%, you’re also required to pay an income tax that can be as high as 37%. This gives small business owners much reason to look for legitimate and legally viable methods to save up on tax. Apart from tracking everything associated with your business, several methods can help you save taxes and channel more of those resources toward your business. While some practices need to be put in place before the end of the tax year, several others can be made a part of your business at any time. Read on as we discuss essential tax-saving strategies for your business.
6 Intuitive Business Tax Saving Strategies
1. Stay Organized & Maintain Records
Irrespective of the best and worst states for business tax and their associated norms, being organized helps you save taxes irrespective of location. With a detailed and granular expense report, you can understand where your money goes and also minimize business taxes. Track every receipt and file them in the relevant records. If you have paper receipts for certain expenses, try to get them digitized to ensure you have a traceable record. It’s also essential to maintain a separate bank account for your business so you can track every transaction. Bookkeeping software is also integral to maintaining records and organizing them under the apt areas of your small business. You can generate returns based on detailed statements from your bookkeeping software.
2. Switch up Your Business Structure
Small business owners often have to pay the total of all medicare and social security taxes. In case you’re a sole proprietor in your firm, converting your business to a limited liability company (LLC) will help you eliminate the employer’s share of both medicare and social security taxes in certain situations. In case your company employs a small number of people, you can also consider making your company an S-Corp. S-Corp owners are only liable to pay payroll taxes on the salary paid to themselves and the amount disclosed on the W-2 form. The remaining business income apart from the owner’s salary is only taxable under the income tax bracket, not the payroll tax statutes. This makes switching your business structure one of the most ingenious business tax-saving strategies.
3. Recruit Family
You can recruit family members to your business and avail of several tax benefits. Hiring family members, including your children, allows you to pay a lower marginal tax rate, and also offers you the possibility to completely avoid paying taxes on the income paid to your children. If you’re running your business as a sole proprietorship, your child’s wages are also exempt from medicare and social security taxes. The wages, however, must be justified with quantifiable work for the company. So be sure to assign commensurate chores and tasks to your children. Spouses too can be employed at your firm in case you’re looking to avoid the federal unemployment tax.
4. Don’t Forget Your Travel Expenses
In case you travel a lot for business, an essential part of your tax-saving strategy is to deduct your mileage costs. All forms of business travel are deductible, and this is a rule that applies to all regions, regardless of the best and worst states for business tax. Though personal travel is not included in this, small business operators can add personal travel in case there’s a documented and justifiable business purpose in the trip, helping you increase mileage and the deductible amount. Business owners can use a variety of mileage-tracking applications to keep track of their travels so they don’t miss out on a single penny spent on traveling for work. These applications also allow for simple segregation of personal and business travel, ensuring you have a clear distinction between both.
5. Establish a Retirement Plan
Setting up a retirement account allows you to save on taxes and put away valuable savings. With the single-participant 401(k) plan, you can set aside up to $61,000 as a total retirement contribution for the year. You can also open an individual retirement account (IRA) and show your deposits towards retirement to avail of tax benefits. In case you have a small number of employees, a simplified employee pension plan also helps you get much-needed tax relief while helping you make straightforward retirement contributions to employee accounts.
6. Don’t Forget Rent & Utilities
All business costs, including your office’s rent and utilities, can reduce your taxes. Since rent for commercial spaces is steep, deducting it can help you save quite a bit on tax. Offices also require electricity and high-speed internet, these too are deductible. If you also operate out of a home office in addition to your official establishment, some of the costs incurred in running and maintaining your home office are deductible. However, it’s important to make sure the room is used only for business purposes. This includes using the office to do a substantial amount of office administration, managing inventory, and meeting with potential customers.
Finding workarounds to taxes can be a complex task considering the already stressful role of being a small business owner. Hiring a CPA can help you manage your taxes better, and also help you find better ways to increase your tax deductions. Understanding whether your current locale is suitable for your business is also integral. Educate yourself on the best and worst states for business tax so you know the advantages and disadvantages of your current state’s tax laws and their impact on your business.