As a business owner, it is your duty and responsibility to pay your business taxes on time. If you fail to make a tax payment, then you will face hefty penalties! With business growth, your tax liabilities are likely to increase every year. Tax bills will range from self-employment taxes to federal and state income taxes. Hence, to ensure a successful business, you need to plan your taxes properly. Larger business income will require proactive tax planning.
Tax Planning strategies to save money
1. Employee fringe benefit plans:
Employee wages have increased in recent times, thus leading to increased employment tax expenditure. It is likely to affect your business’s budget. However, using employee fringe benefits can help reduce this strain. This includes group life insurance, medical insurance, transportation reimbursement, assistance with childcare, tuition reimbursement, and employee meals. It can help improve financial performance and reduce business taxes.
2. Minimize AGI (adjusted gross income):
Many high-income business owners are found to not take any tax deductions against their income. Maintaining a lower AGI will ensure your income is kept within lower tax brackets. You can avoid additional taxes, such as Medicare surtax, or enjoy tax credits. AGI reductions can fall upon personal tax returns. This includes itemized deductions like charitable donations, property taxes, and mortgage deductions. Also considered are contributions made to HSAs and retirement accounts.
3. Cash Balance Plan:
Business owners find a 401(k) plan to be a wonderful retirement planning tool. High-income entrepreneurs can find a cash balance plan that makes sense. Those earning $500,000+ and of 50+ age should consult with their CPA and tax planner concerning establishing a ‘Cash Balance Pension’ plan. Setting up and operating a pension plan is not easy.
4. Optimize your retirement plan:
You can make large pre-tax contributions by choosing an appropriate retirement plan. Large contributions will mean higher tax deductions, thereby reducing the overall tax bill. A previously established plan might not be optimized to boost your business’s current standing. Establishing a cash balance plan and a 401(k) plan can help limit your business tax contributions considerably. Amending an existing 401(k) plan can optimize annual contributions.
5. Accountable plans:
Employee reimbursement is common to meet business expenses. This includes travel, entertainment, etc. An accountable plan can help reimburse employees for expenses incurred by the business. It does not need to be reported as employee income. More of the latter will result in more payroll taxes to pay.
6. Avoid ignoring carryover deductions:
You may not be in a position to use certain credits or tax deductions in a particular year. Certain tax deductions, if not used, can be carried forward to be used in the future. Examples include net operating losses, home office deductions, capital losses, and business credits.
7. Optimize auto tax deductions:
Owning expensive luxury automobiles allows business owners and clients to derive the advantage of deducting actual auto expenses. The IRS mileage allowance offered in 2022 per mile is 62.5 cents, which you can benefit from.
8. Engage family in business:
Involving eligible family members in your business will help enhance its success. You can take their help and place them on payroll, thus saving on taxes. Adhering to IRS-set income tax thresholds will allow children to work tax-free! To derive additional credit, you can open a Roth IRA for your children with their income. A spouse can be added to the payroll, thereby doubling retirement plan contributions. They will also enjoy enhanced Social Security benefits in the future. However, you will have to pay payroll taxes that their income will attract. Otherwise, form a limited liability company!
Remember, proper tax planning is sure to help you save a good amount of money. But making mistakes will mean having to pay penalties and extra taxes.
