How Can a Business Owner Lower Their Taxes?
Tips For How a Business Owner Can Lower Their Taxes
Small business owners often stress over their taxes. They started their venture to serve as their own boss and make enough money to live comfortably. No person wants to pay more than their fair share of to the government when they can avoid it. Tax savings strategies benefit many individuals by reducing their taxable liability. What are some strategies an owner might wish to use to achieve this goal?
Bring a Family Member on Board
To lower taxes, hire one or more family members. Many individuals actually start a business with the goal being to pass it down to future generations. They don’t take into account the fact that employing family members can help shelter income from taxes. The business doesn’t have to pay tax on any income paid to their kids working in the business, and the kids generally have a significantly lower marginal tax rate.
For instance, a person operating a sole proprietorship will not pay Medicare and Social Security on any wages they pay to their child, and they are exempt from the Federal Unemployment Tax Act (FUTA) fee when it comes to their children working for the business. The only catch is the child must be engaged in activities that benefit the business to earn the wage and remain exempt from the taxes.
Owners of small businesses may also hire their spouses to work for the business and avoid the FUTA tax when doing so. The sole proprietor might also find they can put aside retirement savings for the spouse, although this depends in part on whether the spouse has benefits through another job they also work.
Save for the Future
Owners of small businesses cannot take advantage of the 401(k) match they would receive from an employer in a more traditional work paradigm. This doesn’t mean the individual cannot save for retirement. They need to learn about the different account options available to them as the proprietor of a small business. With one of these plans, the owner can maximize their savings and get tax benefits at the same time. A single participant 401(k) plan, for instance, allows the owner to put away up to $57,000 for their senior years, and this is only one option an owner should consider. Other options include a simplified employee pension plan (SEP), a 403(b) plan, an IRA, or a Roth IRA.
Healthcare Savings Account (HSA)
Business owners receive the option of setting aside funds for their healthcare needs. Individuals continue to see healthcare costs climb and want to prepare for the future, as they cannot know what their healthcare needs will be as they age or how much they will cost. A Health Savings Account (HSA) used in conjunction with a high-deductible health plan may be the ideal solution for their needs. With the help of the HSA, they may be able to lower the cost of health insurance as well as their small business taxes. Contributions to the HSA are pre-tax, and any money put into the account grows tax-free. If the individual withdraws the funds for qualified medical expenses, they won’t pay taxes on the money.
The Business Structure
Entrepreneurs don’t have the benefit of a major corporation footing the bill for a portion of their taxes. They must pay the entire amount for Medicare and Social Security obligations. When the business operates as a Limited Liability Company or LLC, the taxes must be paid, although the employer-half may be eliminated in certain cases on specific types of distributions. However, the business owner must meet certain requirements to qualify as an LLC, and they need to discuss the options with their financial advisor to determine the best business structure to reduce their tax responsibility.
Disclaimer: This material is for information purposes only and is not intended as tax, investment, or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation as these matters can be quite complex.