Setting up and running a small business has its upsides and downsides. One advantage is that you don’t have a supervisor looking over your shoulder. On the flip side, a relatively small loss can take a massive toll on your bottom line.
From a tax standpoint, smaller businesses suffer more from paying more taxes than they owe. Therefore, if you own a small business, you are expected to pay closer attention to the accuracy of your end-of-year taxes than your more established rivals. Here are four ways to save more on taxes with your small business:
1. Make use of tax filing software
Tax filing errors are among the most common causes of tax overpayment. Calculating taxes all by yourself can lead to errors. These inaccuracies can impact your business’s profitability and slow your progress.
With tax filing software, you can create a w2 form with the help of formpros.com and other tax documents without missing or adding unnecessary data. Online tax filing software is typically comprehensive and helps you fill out only what is required.
2. Hire an accountant
Having an in-house accountant saves you the hassle of tracking the flow of your business finances and frees you up for other managerial activities. Accountants can also be relied upon for financial advice, risk assessment, cash flow management, growth planning, and keeping your business books in order.
Additionally, an accountant can be helpful with the management of your personal needs. Often, the finances of small businesses, sole proprietorships, and startups are very closely related to those of their owners. The skill and expertise of a qualified accountant are needed to make informed decisions that benefit both parties. An accountant will help you create a strategy that reduces your tax burden and increases your net revenue.
3. Work from home
Operating a business from your home office has many advantages. Not only does it save you rent, transportation, insurance, repairs, and utility expenses, but it also lets you write off depreciation on your home as well as real estate taxes.
Home office tax deductions are calculated based on the percentage of the house used for business purposes. Note that the office must be used regularly and for nothing other than business operations for you to qualify. So, if you want to use part of your house as a home office, you have to be sure you won’t use the space for anything other than your business activities. Also, you cannot have a separate office elsewhere.
4. Increase your contribution to your employees’ health insurance
Increasing your contribution to your employees’ health insurance is a great way to raise their earnings without hurting your bottom line. For example, if you increase an employee’s salary by $200, the additional wages will be subject to income tax, FICA tax, and Medicare tax, all of which will be shared between you and the employee.
On the other hand, if you use the money to cover the employee’s medical insurance, you won’t be faced with any additional tax obligations. The employee will get an extra $200 regardless of the option you choose.
5. Hire family members
The tax law is a lot softer on sole proprietorships and businesses run by family members. For example, you will be under no obligation to withhold Social Security and income tax from their earnings if the employee in question is your spouse, child, or parent. You won’t be required to pay unemployment taxes either. As long as the family members serving as your employees have attained the legal age and are paid reasonable wages, your business will win big by minimizing the number of non-family employees.
6. Outsource services where possible
There are tax obligations that you face because you are legally considered an employer even though there are other ways to receive the services an employee provides. For example, a business can only pay a share of Medicare and Social Security taxes if they have employees on their payroll. If they obtained the same services from an independent contractor, they wouldn’t face this obligation.
Consider hiring an independent contractor for services you don’t need often. Just ensure the contractor doesn’t answer the IRS’s description of an employee. If this happens, you will likely pay a fine and be required to pay taxes for all the time the employee has worked for you classified as a contractor.
7. Ensure taxes are paid in a timely manner
Proper and timely preparation of tax returns helps reduce the chance of state tax agencies and the IRS assessing interest and penalties. A seasoned accountant will help you create a list of allowable deductions and ensure your business’s expenses are aligned with the product you sell or service you offer.
If for some reason, you are unable to file your tax returns with time to spare, you can request an extension and buy time to meet your obligation. It is always better to pay late than fail to file your tax return altogether.
8. Defer revenue
If you operate on a cash basis from the tax aspect and you project that your revenue will be higher this year than the average of the previous years, you have the option to defer end-of-year revenue to minimize your taxable income for the year. Where possible, push back the delivery of certain products and services until the start of the new year.
Another tactic that small business owners have been using for ages involves paying some of their costs a calendar year in advance. For example, if you are planning to participate in a trade show scheduled for February 2021, you can register in 2020 and avoid paying the registration fees in the new year. Alternatively, if the business is projected to make more profit in 2021 than in 2020, it would pay off to collect as much cash as possible before the end of the year and delay deductible expenses until January 1st at the earliest.
Follow these tips to reduce your small business tax obligation and increase your revenue. Use the advice of an expert to make necessary tax adjustments and align your tax strategy with your business’s growth.