January 19th, 2021 | Updated on June 28th, 2022
If you’re running a small business, the issue of taxes can be confusing and even overwhelming. Most business owners are often asking specific questions: How much should I pay? Why do I have to pay this much? How can I reduce the amount I pay?
It’s essential to understand how you can reduce the tax burden on your business legitimately because it can have great returns.
Unfortunately, many people running small businesses overpay their taxes simply because they miss out on certain deductions, or manage their businesses and retirement packages inefficiently for tax purposes.
Given the complexities surrounding the tax code, it’s perfectly understandable why many business owners experience problems when it comes to navigating taxes.
However, with the right strategies, you can reduce the tax burden on your business and make your life less stressful when the tax season comes around. Here are some tips to help you get started.
Start A Retirement Plan
Small business owners don’t have the benefit of a 401K plan that’s offered by employers. Nonetheless, many retirement plan options can maximize your retirement savings and offer valuable tax benefits.
For instance, the IRS allows you to put away up to $57,000 in contributions toward retirement with the one-participant 401K plan.
The primary retirement planning vehicles you could consider as a small business owner include the IRA or Roth IRA, 403b plans, and the Simplified Employee Pension Plan (SEP).
There are other retirement plan options for small business owners that could serve as a tax-saving strategy.
Take Advantage Of Tax Credits
Tax credits serve as the government’s way of encouraging individuals and businesses to do things that positively impact society and the environment.
For instance, you can take tax credits for going green, investing in your employees, providing access to the public and the disabled, and providing healthcare insurance for employees.
These fall under the General Business Credit, which is pretty extensive, so there’s a possibility that you qualify under specific terms.
Some of the credits are available only if you belong to a certain tax bracket. You should check with your accountant or use a tax bracket calculator like https://taxfyle.com/tax-bracket-calculator to see the ones you qualify for under your tax bracket.
Consider A Different Business Structure
Small business owners don’t have the benefit of the employer paying part of their taxes. That means you’re in for the whole amount of Medicare and social security taxes.
If your business is a limited liability company, you still have to pay those taxes, although, in some instances, you can eliminate the employer-half of the two tax responsibilities.
As a small business owner, this can be a wise decision. While you have to consider many factors in such a decision, like paying yourself a reasonable salary along with other associated risks, it could be an excellent strategy to reduce your tax burden.
In short, you can reduce the tax burden on your business with wise planning and the right strategy, given the size of your business and your needs. Just remember to hire a tax professional to ensure you genuinely qualify for the savings listed here.