Tax-Saving Boot Camp for Small Business Owners
Taxes can be stressful. But there are ways to prepare yourself so you don’t get overwhelmed and blindsided by small business taxes. As a business owner, your goal should be to keep more of your hard-earned profits in your wallet and build the business rather than being financially burdened by unnecessary taxes. To get started, first, let’s dive into the various types of taxes all business owners will face: Here’s a rundown:
Income taxes: There are federal and, in most cases, state income taxes to contend with, whether the business pays the tax (as in the case of a business organized as a C corporation) or the owner pays the tax on their share of business income and expenses (as in the case of a business organized as a sole proprietorship, partnership, limited liability company, or S corporation).
Employment taxes: There are federal and state taxes related to employee’s taxable compensation. They include income tax withholding based on information provided by employees on Form W-4. This tax is paid exclusively by employees.
FICA is comprised of Social Security and Medicare taxes and is paid equally by employers and employees. FUTA, which is federal unemployment tax paid exclusively by employers. State unemployment tax is paid by employers. Sales taxes are paid if you sell goods and services and you are based in a state with a sales tax, you may be required to collect sales taxes on your transactions. While the customers pay the sales taxes, you can be subject to penalties for failing to collect the taxes and pay them to the state.
Before you go to file your taxes, you should have a general understanding of which business expenses are deductible and which are not.
Your small business can deduct all expenses necessary for doing business. This includes wages, vehicle expenses, supplies, interest on loans, rent or mortgage payments, and employee benefits you offer. Be sure to keep receipts, invoices, deposit records, and contracts to support your expense claims in the event you get audited. Some common tax deductions your business can take advantage of include:
Wages and Payroll Taxes: Being an employee in your own business has a lot of benefits at tax time for your personal tax return. By paying yourself a wage or salary rather than distribution or dividend, you’ll avoid paying a self-employment tax on your personal return.
Taxes, Interest, Fees & Charitable Contributions: If your business pays tax to any state or local jurisdiction, you may be able to deduct those taxes as a business expense on your federal return. If you pay for business expenses with credit cards, you can deduct any interest and late fees you incur. You can also deduct banking fees such as card processing fees, fees when making payments, and any others you incur on your business banking accounts.
Retirement Plan Contributions: The tax benefits you’ll receive depend on the retirement plan you have – IRA, 401(k), or one of many others. Retirement plan contributions are an opportunity to receive tax benefits now and again in the future. Businesses can establish inexpensive 401(k) plans with higher contributions for owners. Contributing to a retirement plan will not only give you a deduction, but it’ll increase your retirement savings as well.
Home Office: If you run your business out of your home, there’s a long list of home-related expenses that you can consider deducting. Your home office should be a dedicated space for running your business and it needs to be your principal place of operation.
Health Insurance: Depending on the type of business entity you own, you may be eligible to take advantage of a self-employed health insurance deduction on your personal return. This is usually a pretty significant deduction as it includes the insurance you paid not just to your plan but to your entire family’s insurance costs as well.
Advertising and Promotions: Small businesses need to market their products or services. Luckily, marketing, advertising, and other promotional costs that bring in new customers and retain current ones are deductible expenses.
Tax credits serve you better than deductions. Whereas deductions reduce your taxable income, credits come directly off your tax bill. In other words, if a tax credit is $800, that means you will pay $800 less in taxes. Here’s a glance at some tax credits:
Earned Income Tax Credit (EITC) provides a tax break to people who are employed but still earn low to moderate-income.
Credit for Employer-Provided Childcare Facilities and Services If you are an employer and you provide childcare facilities for your employees either on-site or through a contract or referral program with an outside childcare facility, then you can qualify for this childcare tax credit.
Child and Dependent Care Credit- If you pay for childcare or dependent care (for a spouse or other dependent who can’t care for him/herself) while working or looking for work, then you qualify for this credit.
The Premium Tax Credit- You qualify for this credit if you purchased your own health insurance through the Health Insurance Marketplace.
Retirement Plan Startup Costs Tax Credit- If you are a small business owner starting a retirement plan for your employees, then the IRS will reimburse some of what they term “ordinary and necessary” costs of that startup.
You can depreciate any asset you purchase that is designed to last more than one year. You write off a portion of the asset’s value each year over the life of the asset. The IRS allows this because assets go down in value over time, and you can count that decline in value as an expense for your business. This can give you tax savings now, but you must be aware that you will not be able to write off the assets in future years if you fully depreciate them in the first year.
Payroll taxes are types of tax that are applied to earned income, meaning wages, salaries, bonuses, and income from a business you actively participate in. There are two components to the payroll tax in the United States — Social Security and Medicare.
You pay payroll taxes on your employees. You pay 6.2 percent of the first $106,800 of each employee’s wages in Social Security tax. In addition, you pay 1.45 percent of employee wages for Medicare taxes. You also pay .8 percent of the first $7,000 of each employee’s wages in Federal Unemployment Tax. These taxes apply to bonuses as well as salaries. If you want to keep your payroll taxes down, offer employees added benefits instead of bonuses. You do not pay taxes on benefits. In fact, you can write them off your taxes as expenses.
Taxes don’t have to be a last-minute scramble. With the right tax planning and enlisting the help of a small business accountant, CPA, and tax advisor, you can truly save yourself money every year in taxes. Before putting these strategies to use, consult with Jeanine Hemingway CPA.