Minimizing Taxes as a Small Business Owner

When your small company is just you and your spouse, you don't have to worry about the squabbles that may arise between coworkers. As a small company, you're less likely to be familiar with tax deductions, so you wind up paying more in taxes than you need to because of it. Every dollar matters in the early days of operating your own company since profit margins are so slim.

You may begin reducing your taxes right now by obtaining the advice of a financial adviser or an accountant with tax planning expertise. Finding the most effective means of reducing taxes on your own may lead to those services being cheaper, even if you don't have the starting capital.

To help you get started, here's a quick guide to tax planning for small company owners.

Keep it in the Family

Hiring family members is a well-known method of reducing your small business's tax burden since the Internal Revenue Service allows several methods to shield revenue from federal and state taxes.

For Spouses

Employing your spouse has several advantages, including the fact that it has no effect on your Solo 401k benefits and that they are only subject to a limited number of taxes. However, the Federal Unemployment Tax Act does not apply to the earnings of a spouse who works for your company (FUTA).

FUTA taxes will be 6% of each employee's first $7,000 in wages beginning in 2021.

With regards to Young People

Even though it may be difficult to persuade them, children of company owners are exempt from the FUTA, Social Security, and Medicare taxes.

By 2021, the Social Security and Medicare taxes will be 6.2 percent and 1.45 percent, respectively, of all wages.

Planned Retirement

An employer-sponsored retirement plan not only helps you plan for your golden years but also comes with tax advantages. The Solo 401k, SEP IRA, and Simple IRA are all retirement plans important to small companies.

401(k) for one person alone

The advantages of a Solo 401k center on the company being managed by a single individual and this individual's spouse may be included as well. As a result, it's an excellent option for tiny companies that have no intention of growing. However, one of the advantages of using a Solo 401k is that it may be converted to a regular 401k account if you need to hire additional workers.

Traditional Solo 401k and Roth Solo 401k are the two types of Solo 401k that provide distinct tax advantages. Due to the tax benefits of a conventional Solo 401(k), income is reduced in the year of contribution while retirement withdrawals are taxed at regular rates. A Roth 401k, on the other hand, does not provide an initial tax benefit but enables tax-free withdrawals after retirement. You and your small company may choose one of these options over the other.

Simple IRAs and SEP IRAs are both types of IRAs.

While the Solo 401k offers comparable tax benefits, these plans tend to be more user-friendly in terms of setup and management. To top it all off, these retirement plans support a larger workforce, making them a better place to start if you want to hire people other than your spouse. Learn about the distinctions between a Solo 401k and an IRA benefit plan by reading this article.

A tax benefit is a reduction in taxable income.

When individuals think of how to minimize their taxable income, these are the words that spring to mind. For the most part, tax benefits are linked to your employer-sponsored retirement plan, but they may also include education savings accounts, medical savings accounts, and government bonds as examples of other types of accounts. Looking at which employer retirement plan is most advantageous to yourself may be started by working with your accountant.

Financial incentives in the form of tax credits

Government incentives like this help company and people make better decisions that benefit society as a whole. The reduced environmental effect, recruiting staff, accessibility for handicapped workers and the general public, and health care for employees are all ways to get tax credits.

Deductions for Federal Income Taxes

Purchases of products or services that are either advantageous to or required for the operation of your business reduce your taxable income and that of your company. Business insurance, business travel, business equipment, and office rent are just a few examples.

Consult with an accountant to see whether your company qualifies for any tax benefits, credits, or deductions.