Not only is running a small business hard work, it also comes with a lot of obligations that simply are not fun to deal with, or even think about. But as the owner of your own business, many of these processes are entirely unavoidable. Doing taxes is one of them.
The entire process of filing taxes can be incredibly stressful and time-consuming, yes, but it’s also of incredible importance. The difference between doing it the right and wrong way can decide whether your small business is going to be profitable or not.
Small businesses need to save on their taxes as much as possible in order to remain profitable, especially in their formative years. Missing big opportunities to save on taxes could literally sink your business if you are just starting out and teetering on the edge of profitability.
If this description fits you and your small business, here are some opportunities to save money on your taxes that you must take advantage of if you are serious about putting your business in the best possible position to turn profits on an annual basis.
Reimbursing your employees for expenses they incur that are business related is absolutely the right thing to do, there’s no question. But there are also ways to do it that will help you save when it comes to filing taxes.
You need to be using accountable plans. These are plans that meet all IRS requirements and allows you to deduct these reimbursements as business expenses instead of income paid to your employees.
What this essentially means is that if you are paying back your employees the money these spent to take business trips, purchase software, or any other type of work-related expenditure, you are chalking it up as a business expense that you can deduct when doing your taxes instead of listing it as an employee income payment.
Saving on payroll taxes is a smart thing to do whenever possible. Head over to this page of the IRS website to learn more about accountable plans.
Deduct What You Can
Taking advantage of every possible tax deduction is an integral part of the process of trying to save every single penny you can when running a small business. It’s also a process that is important enough to deserve the attention of a tax professional.
Even if money is tight, hiring a tax expert in order to make sure that you are getting the most out of your tax deduction opportunities is a worthy investment that will pay off for you when all is said and done.
One thing that your tax man or woman can’t help you with, however, is keeping good records. That’s all up to you. Make sure that you are documenting all of your expenses and making sure that you are keeping all of your receipts in order.
The list of expenses you can deduct is truly enormous, so you are going to need to do some research in order to identify every possible opportunity. You can deduct travel, education and insurances expenses, as well as office costs such as equipment and furniture, for example. Even if you are operating a business from your home, there are still things you can write off. Do the legwork and find out what those things are so that you aren’t leaving any money on the table.
Offer Benefits Instead of Raises
As mentioned when discussing accountable plans, finding a way to decrease the amount you are paying in income taxes is always a good idea. With that in mind, offering employees increased benefits instead of pay raises in order to keep them motivated and loyal could be a great idea to implement if your employees are willing to take that type of compensation.
For example, you can see if your employees are open to getting more contributions towards health insurance instead of getting a raise. If you agree to give them $300 a month worth of health insurance contributions instead a $300 a month increase in salary, you can save yourself and them a lot of money potentially.
If they opt for the raise instead, they would have to pay more income tax, a FICA (Federal Insurance Contributions Act) tax and Medicare tax on their wage. If they take the increased healthcare benefits, they avoid paying those added taxes and you avoid an increase in the income taxes that you pay. Everyone should be happy with a deal like that.
Start a Retirement Plan
If you already have a profitable business and are looking for new ways to save money on taxes, qualified retirement plans are the way to go. There are plenty of options when it comes to choosing the perfect retirement plan as a small business owner, which means that you’re going to have to do your fair share of research in this case as well.
Generally when it comes to retirement plans, you don’t start paying taxes on them until you start making money from them, which usually doesn’t happen until you’ve decided to retire.
If you are making money regularly already and your business has a proven track record of being profitable, you can consider offering retirement plans for your employees as well. There are a variety of retirement plans that are tailored to small business owners that allow you to reap substantial tax benefits. It’s definitely something worth looking into, but only if you’ve reached that point as a small business owner where you’ve turned the corner and are now focused on growing instead of simply surviving.
Hire Family Members
Running a family business is not always the easiest thing to do, but employee a family member is certainly one of the best ways to save on taxes. The IRS offers a variety of options that can save you a lot of money. Hiring your children or even your spouse is a fantastic option.
If you choose to hire your children, you can eliminate the income tax you would have to pay on their salary. However, you can’t just hire them to do nothing. There need to be some sort of “justifiable business purposes” involved.
One option when going this route is to put the income you are paying your child into a Roth IRA (which is one of the recommended retirement options for small businesses). With that option, you are getting both tax benefits and you’re saving money for your children. It’s a great option when it comes to finding a way to both reduce your taxes and put money towards their college education, for example.
It may be a daunting and often unpleasant task, but doing your taxes right is crucial if you want to succeed as a small business. Even in your first years of owning and operating your own business, the savings can be significant and even imperative.
Minimizing the amount of taxes you are paying on a yearly basis not only helps you earn more, it could also be the difference between success and failure.
One of the most important things to keep in mind is that you should be learning from the process every year. Take time to review your taxes at the beginning of each fiscal year and never stop looking for additional ways to create savings for yourself.