Tax Saving Tips for Small Business Owners
Though tax time might be a stressful time of year, how to save money on taxes might be an interesting topic for you.
There are many tax deductions introduced by the IRS for business owners. Not only do many deductions lower your taxable income, but they also minimize your income belonging to self-employment tax. Therefore, make sure to claim all of these tax deductions available to your small business to save on your business tax.
And here we have rounded up some of these tax deductions
Hire a Family Member:
One of the tricks to minimize taxes for your small business is by employing a family member. The IRS or Internal Revenue Service provides a variety of options, all with the prospective advantage of protecting income from taxes. You can even employ your children.
By employing family members, small business owners are not required to pay taxes on income paid to their children or pay a lower marginal rate.
For instance, sole proprietorships are not required to pay social security and Medicare taxes on the wages paid to the child, nor the FUTA or Federal Unemployment Tax Act.
Even your spouse would not a subject to the FUTA tax. Depending on the advantages they might have through another job, you can also put aside savings for their retirement.
Create a Retirement Plan:
A 401 (k) plan won’t be of your use as soon as you become a business owner. Luckily, several retirement options increase retirement savings and let you reap tax advantages. For instance, the one-participant 401 (k) plan enables you to put aside $57,000 in total retirement contribution. You can refer to the IRS website to find out other retirement plan options to save on taxes.
Start Saving for Healthcare Needs:
One of the useful ways to minimize small business taxes is by saving money for healthcare needs.
Medical costs are on the rise. Although you might be healthy now, saving money for an emergency or future healthcare needs is important. Opt for a Health Savings Account if you have an eligible high-deductible health plan.
By using this, you can save on taxes and potential medical costs. After all, the money that comes and goes out of your HSA account is tax-free. In fact, earning from interest and investments in HSA is also tax-free.
Change Your Business Structure:
When you become your own boss, you lose the advantage of having your portion of taxes paid by your employer. You are liable for the Social Security amount and Medicare taxes.
If your business structure is LLC or Limited Liability Company, you are mandated to pay those taxes, though certain scenarios let you eliminated the employer-half of those two tax requirements.
This might be a good decision for small businesses. While there are many things to ponder over while switching to an LLC business structure, it can be a great way to minimize your tax responsibilities.
Claim Deduction on Vehicle Expenses:
If you own a business vehicle, you may be able to reduce your business taxes. Every time you drive to buy office supplies, business purposes, or meet your client, make sure to track your business miles so you can get the tax deductions.
There is generally a couple of ways to calculate your vehicle expenses. You can note the standard mileage rate, or you can deduct your actual expenses for driving your business vehicle.
To opt for business vehicle deduction, you are required by the IRS to track your commuting, personal miles, and the business purpose of your miles, irrespective of which method you use. If you want to claim an actual deduction, you have to track gas, oil, service, vehicle loan interest, insurance, depreciation, and lease payments too.
However, the commuting expenses of driving from home to the store are not deductible.
Run a Home Office (In case you are a freelancer):
You may also be able to take a deduction if you use a space in your home for the office. However, it requires you to meet certain guidelines. First of all, the space being used for a home office should be used for business and nothing else.
You can claim the expenses based on the square footage being used exclusively for your business.
If your business is eligible to the IRS guidelines, there are two scenarios in which you might need to follow the exclusive use rule: If you use your home to store product samples or inventory, or if you operate a daycare facility.
Expenses such as painting and repairing your office are also deductible. Apart from that, you can claim a tax deduction for rent and electricity bills.
Use a Separate Phone for Business:
If you use separate phones for business and personal use, no matter if they are cell phones or landlines, you generally can take full deductions for the lines being used for your business.
If you only use a single landline phone for both business and personal use, you are not allowed to deduct its cost. Using a separate line or a cell phone for your business and personal use lets you deduct a percentage of the cost of your phone service.
For instance, if you use a cell phone 60 percent for business and 40 percent for personal use, you can be able to deduct 60 percent of your phone bills.
So these are some tips to save on your business tax. However, make sure to choose the relevant tax deduction for your business.
