27 Mar Lesser-Known Tax-Saving Strategies for Small Business Owners
Being an entrepreneur is a lot of work, and for many business owners paying attention to tax strategy is lower on their priority list… until April 15. But not creating a tax strategy is allowing your hard-earned dollars to go out the door. From employing a family member to maximizing your home office deduction, we’ve got lesser-known tips to help you spend smarter and save more money. Read on to learn ways to reduce your small business tax liability.
Hire Family Helpers
Want to put your kids on the fast track to retirement? Want to also reduce your business tax liability? Hiring your child can be a win-win for you both. Not surprisingly, there are a handful of rules you need to follow in order to take advantage of this strategy.
You must follow the labor laws in your state around what type of work can be performed and at what age. The work your child does must be considered “ordinary and necessary” for your business and they must be paid accordingly based on what you would pay anyone else who filled the position. They need to officially be on your payroll as an employee and issued a W-2 during tax season. Children under the age of 18 who work for a business that is solely owned by their parents do not need to pay FICA or FUTA tax on their income so long as the business is not registered as an S Corp or C Corp.
Once your child has earned income, they can open and contribute to a custodial Roth IRA (individual retirement account). If one of your goals is to build generational wealth, a Roth IRA is an ideal vehicle to allow your child to save now, while their tax rate is lower, so that they are set up for success over the long term, when tax rates for them will almost certainly be higher. And because funds in a Roth IRA can be withdrawn at any time without a tax penalty, this is a fantastic option to allow your child to use the funds for their higher education or hold until retirement… at which point they should have a healthy-looking balance waiting for them.
Maximize Your Home Office Deduction
Whether you are a homeowner or renter, if you work from home and use a space exclusively and regularly to conduct work, it can be a deductible expense. Start by calculating the square footage of your workspace. Next, divide it by the total square footage of your home or apartment to determine what percentage of your home is office space. This percentage can then be applied against nearly all normal household expenses to determine how much of the expense you can allocate to your business. These expenses not only include your rent or mortgage but also your utilities, HOA fees, mortgage interest, insurance, wifi costs, etc. We’ll call these “indirect expenses” that affect your home office.
Where some business owners miss out, though, is that they apply that percentage to all indirect expenses, but also to what we’ll call “direct expenses” in your home office. For example, if you need to repaint the office, put down new flooring, purchase or replace light fixtures, etc. 100% of these expenses could be deducted as part of your home office expense because they are specifically related to your home office space (and only that space).
There are many small things that business owners may forget to track in their home office expense calculations. At Prestige Business Enterprises, we provide our clients with a spreadsheet to help organize their home office expenses during the year. You may also be able to find general templates online so that you have a complete file of every cost that goes into your home office expense deduction to provide to your CPA at the start of tax season.
The Right Way to Retire
If you’re a new small business owner, putting money aside for retirement may not even be on your radar given the significant financial investment that usually comes with starting most businesses. But saving for retirement should start as soon as possible. Not only will the deduction reduce your total taxable income in the present, but it will also help you build security for the future.
First, you need to start with a “tax-qualified” retirement plan that complies with IRS requirements. These may include Traditional Individual Retirement Accounts (IRAs) or SEP-IRAs, which you set up as an individual and not through your business. There are also SIMPLE IRAs and Keogh plans that can be set up by an employer. They are ideal for partnerships and LLCs but also work for sole proprietors. Solo 401(k)s are also an option for any business owner who has no employees. If you have a Roth IRA, it is not tax-deductible, but you will pay no tax when you withdraw funds.
Each type of retirement plan has different contribution limits based on your age or net profits. And sometimes, the best retirement plans mean having more than one type. Be aware that IRS rules are very specific about which types of retirement accounts you can hold. For example, if your business has a SIMPLE IRA, it cannot have other types of retirement plans, though you may still have an individual IRA. It’s always prudent to discuss your strategy with a CPA before establishing and contributing to any type of account.
Prestige Is Here to Help
If these tax tips have piqued your interest in more ways to save, set up a consultation with our professional tax team. We have decades of experience in helping small business owners like you develop an effective tax strategy to help minimize their tax liability each quarter and at year-end. Call Prestige Business Enterprises at 813-774-5866 or email us at firstname.lastname@example.org to begin.