Taxes are a significant burden for a small business owner. This can be tough since owners are not employed by other people and are fully responsible for their taxes and social security. Keeping accounting straight while innovating, marketing, dealing with employees, and running a business can be a challenge. According to the National Small Business Association, two-thirds of businesses reported spending two full weeks or 80 hours on federal taxes. Any methods to reduce or simplify taxes are welcome for most business owners. Fortunately, there are several ways to reduce the tax burden.
Hire a Family Member
Some may call it a traditional Mom and Pop operations, others may consider it nepotism, but any business owner who has a qualified son or daughter who is willing to work for the company should consider hiring them. Not only does it give a child a solid start in life, but hiring children can save a significant amount on taxes if you run a small business. Also, it may be a great solution if your child has graduated and can’t find a job.
In some cases, hiring a family member means a lower marginal rate and possibly an elimination of taxes paid on children. If the business is a sole proprietorship, you may not have to pay any Social Security or Medicare on the pay given to a child of the owner. Make sure, however, that your child is doing work for the company and can prove it in case the tax authorities investigate whether he or she is legitimately hired.
Begin a Retirement Plan
Many retirement plans represent significant tax savings. Since a small business owner is not an employee, they can’t take advantage of the 401(k) match program in which the employer matches the contribution made by employees. However, business owners have access to their own 401(k) plans, some of which allow putting away up to $57,000 for retirement. Other plans for small business owners include:
- Simplified Employee Pension Plan (SEP)
- IRA or Roth IRA
- 403(b) plans
Save for Healthcare
Healthcare is a primary concern and is also a great way to reduce taxes. One way to do this is through a Health Savings Account or HSA along with a high-deductible health plan. These plans do the double duty of providing coverage for small business owners while shielding them from large tax burdens. The contributions have many tax advantages–they are given before taxes, their growth is not taxes and provided withdrawals are used for medical care, they are also tax-exempt.
Business Restructuring
Sometimes the structure of your business can make the difference between having to pay a lot of taxes or a small amount. If your business is a Limited Liability Company, your business will still have to pay taxes, but it will be exempt from the employer’s side of the taxes. Changing your business to the LLC structure can provide significant tax savings.
Keep Track of Expenses
Consult with an accountant for clarity on what is and what isn’t tax-deductible. If you travel often for business, you may be able to write off plane tickets and hotels from your taxes. Be careful not to try to claim too many exemptions, since this could be a red flag to tax authorities. However, if you can justify every exemption in writing, it is a good idea to take advantage of tax relief.
Reducing the Burden
One of the most formidable aspects of running a small business is the issue of taxation. An employee has the luxury of having taxes handled by an employer, but business owners are on their own. However, there are many things business owners can do to reduce taxes. Employing relatives, putting money into healthcare and retirement, and restructuring the business can be ways to pay less to the government and to use more to develop the business.
