Taxes can add extra stress to the life of a small business owner. The small business owner already contributes so much to the business. Taxes are usually the last item on the priority list. However, there are several ways a small business can learn how to save on taxes.
How Can Small Businesses Save on Taxes?
Below are seven methods on how to save on taxes in 2022.
Bring a Family Member Aboard
Employing a family member is one way to decrease your small business taxes this year. The Internal Revenue Service (IRS) enables a small business to shelter its income from taxes by hiring family members, including children and grandchildren.
When a small business owner hires family members, they will either pay a lower rate or eliminate taxes paid to their children. A sole proprietor would not need to pay Medicare or social security taxes on a child’s wages, based on the Federal Unemployment Tax Act (FUTA) tax. A spouse hired into the business would also secure these benefits from the FUTA tax.
Begin a Retirement Plan
Small business owners forgo the 401(k) match from an employer. However, a small business owner can maximize other retirement account strategies to realize substantial tax benefits. A one-participant 401(k) plan will enable an individual to set aside $57,000 in total annual contributions. A few retirement planning options include:
- 403(b) plans
- Roth IRA
- Simplified Employee Pension Plan (SEP)
Even though it might be a sacrifice to give up an employer-matched 401(k) plan, the IRS provides many different tax-saving vehicles.
Adjust the Structure of Your Business
A small business owner does not have the luxury of an employer paying a part of their taxes. By going out on your own, you must pay the entire portion of Social Security and Medicare taxes.
If your business is an LLC (limited liability company), you will still have to pay Social Security and Medicare for both yourself and the employer (your business). However, you could cancel the employer’s half in certain circumstances. This decision could save money for certain types of small businesses.
Deduct Travel Expenses
If you travel frequently for your business, you could find out how to save on business taxes for the year. You will be able to deduct business travel for taxes, but personal travel will not fall under this umbrella. Many small business owners will mix personal travel with business travel if they maximize their time for business activities. Frequent flier miles from business travel can also apply to personal travel.
Budget Money for Healthcare Things
One of the most effective ways for small businesses to save money on taxes is through saving for medical needs. Healthcare costs continue to rise, which is why saving money for healthcare demands is necessary. A health savings account (HSA) will help you save money if you have a high-deductible health plan. An HSA will not only help you save money on taxes, but it will help you mitigate rising medical costs.
Deduct Assets Provided to Charities
One reliable tax reduction strategy is to donate to your favorite local charity and deduct your assets. Not only do your funds help the charity, but it also showcases your business’ commitment to other local businesses. Find a charity that aligns with your brand, and then maximize this tax-saving strategy.
Outsource and Hire a Reliable CPA
If you have the budget for it, hiring a trustworthy CPA will help you navigate the challenging tax world. A CPA can examine the ins and outs of your business, and then identify tax-saving strategies for you. A CPA will give personalized attention to your business and its tax-saving strategies. The CPA will notice things that you may not, which could help you save money in the long run.
Simple Tax Tips for Small Business
Taxes can be complex. If you are a small business owner filing your taxes, there are several tax tips and best practices to follow. Below are some tax tips for small businesses and other ways to save on business taxes, properly prepare for tax season and conduct accurate accounting.
- Claim all income reported to the IRS – double-check that your reported income matches the amount on the 1099s you receive.
- Keep your business expenses and personal expenses separate – if the IRS audits your business and finds that you mix personal expenses with operations, they might audit your accounts as well.
- Keep reliable, accurate records – keeping your receipts and business record organized throughout the year is critical. If you do not track all your expenses, you could be leaving tax-saving opportunities behind.
- Classify your business correctly – if you inaccurately classify your business, you might overpay in taxes. Make sure you understand the difference between an S Corporation, C Corporation. Limited Liability Company, Limited Liability Partnership, Sole Proprietorship, and Single Member LLC.
- Seek advice from an accountant – a reliable accountant will provide tips and strategies for growing the business. Ask them good questions about your business plan, retirement contributions, and payroll.
- Outsource payroll administration – if you have the flexibility in your budget, it would be best to hire an external company to manage the payroll. The IRS checks closely to see if your business pays payroll taxes every quarter.
Small Business Tax Strategies to Consider
Saving money on taxes takes a detail-oriented, analytical perspective. We described many of the small business tax strategies above, but here are some other small business tax tips 2022.
- Track and record business losses – you can deduct these losses from your income, which could decrease your overall tax bill.
- Verify all expenses, including utilities and rent – these figures might be small in the grand scheme of things, but you should include all of your expenses to reduce as much as you can from the tax total.
- Organize receipts – whether it is through software or an organized filing system, you should have a detailed record of all your receipts.
- Turn to startup deductions – you are allowed to deduct no more than $5,000 in startup costs and $5,000 in organization costs if your total startup costs were below $50,000.
An Outsourced CEO and expert witness, Jim Thomas is the founder and president of Fitness Management USA Inc., a management consulting, turnaround and brokerage firm specializing in the gym and sports industry. With more than 25 years of experience owning, operating and managing clubs of all sizes, Thomas lectures and delivers seminars, webinars and workshops across the globe on the practical skills required to successfully overcome obscurity, improve sales, build teamwork and market fitness programs and products. Visit his Web site at: www.fmconsulting.net or www.youtube.com/gymconsultant.