By James Chittenden
Business success is fun, but business taxes are not. They are an unavoidable part of making money, but there are ways to save money on business taxes. Use these strategies to improve the lives of yourself and employees, save some money on your business taxes, and increase your take-home profits.
Tony Morales is a CPA at Miami area-based FinTax . In over a decade of small business accounting, Morales has found a few trends of what business owners do correctly as well as common mistakes. He shares a few insights to help you save money on business taxes.
Get a proper accounting system.
TM: “You wouldn’t believe how disorganized people are with their finances. Not properly tracking your business financial activity often leads to missing out on precious tax deductions come tax time.”
Recommendation: Financial organizing software such as Quickbooks is a good start. Hire whatever personnel necessary such as a bookkeeper, accountant or CPA to handle these duties.
Manage self-employment taxes
TM: “S-Corps are best known for their tax advantage of circumventing the self-employment tax. This doesn’t mean you get away from paying for this completely however. It means that you get to determine how much of your pay is subject to Social Security / Medicare tax (discretionary instead of compulsory). However, it’s always best to consult a tax professional when dealing with this provision as the tax code, as the IRS requires S-Corps to pay their shareholder-officers a ‘reasonable salary’, which is as vague as it sounds.”
It is distributions, not revenue that drives this valuation of “reasonable salary”. Take a reasonable salary based on how much a company is generating. The metric is…how much would it take to replace you? If it is a startup where you are doing everything, it gets precarious. Keep documentation to justify this figure.
Retirement planning provides retirement income AND tax breaks
TM: “Proper management of S-Corps opens the door to great retirement planning opportunities that offer a wide range of tax saving options.”
Do you have an IRA or 401k? Contributions depend on your individual tax return situation. Your company is a vehicle that augments your tax situation. You can max out contributions for pension plans, IRAs, 401k .at age 55 or older. If you are younger than that, the size of your contributions depend on your cash flow and tax and financial situation.
TM: “Leverage your accounting system to work for you by forecasting your financial activity to get a glimpse of the potential future. By performing tax projections, you can budget and plan for tax saving events, like big purchases and their tax impact.”
Morales recommends estimating, or projecting, your taxes midway through the year. His clients usually do this around July; others do it throughout the year. Others don’t do it at all. You can send quarterly payments or withhold enough to send them while depositing that money into an interest-bearing account.
TM: “S-Corps host a wide range of options for taxable-advantaged benefits they can offer to employees (including owners). Dependent Care Benefits, HSA contributions, the list goes on.”
In other words, your business can provide benefits such as health insurance for employees even if you are the only employee. This includes far more than most people realize. This also includes reimbursement of investments or loans to the business. You can reimburse yourself for these expenses and deduct them. The deduction for startup capital is $5000 over the first year.
S-corporations, C-corporations and LLCs offer different advantages and disadvantages. This video explains the differences.
The state where your business is registered as a corporation or LLC makes a difference as well. Some states have a minimum LLC tax that must be paid each year. CA has an $800 minimum tax that must be paid each year. This is part of the registration fee.
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