We can not avoid the reality that every business owner is mandated to pay their taxes. Avoiding tax responsibilities will put you behind bars, but there are ways to lessen your financial charges.
Taxation is needed to fund public infrastructure projects, public education, public transport, government officials’ salaries, and more. This is part of the largest business expenses and bills. An average small business pays a 19.8% tax income rate and the amount varies on the business structure and state. Here are ten ways to protect your income from taxes.
1. Hire a CPA or use Accounting Software
Hiring a Certified Public Accountant might be hard for some taxpayers to understand. Should I hire an Accountant? Will it be a wise financial decision? The ins and outs of a complex tax code can be overwhelming. But you don’t have to address this responsibility on your own.
What does an Accountant do?
Employing a qualified professional can help you with documentation, monetary settlements, accounting, and more. If you are still doubtful and wondering about the perks of having licensed people to handle your taxes, here’s a detailed explanation of how CPAs do their duties:
- Prepares and fills the tax documents and provides advice.
A tax preparation checklist can help you handle taxes by yourself, but a more serious tax picture needs a pro-worker. CPAs are experts on taxes. It’s best to meet a CPA first before starting your business. They can feed you with guidance on which business structure and accounting method will save you money.
- They will represent you before the IRS for auditing.
The Internal Revenue Service (IRS) has automated and manual human processes for auditing tax returns. CPAs are very knowledgeable of any red flags that may trigger an IRS audit. The services and services they offer are worthwhile.
- Informs you of tax liabilities and deductions
Any income source report and deductions will be delivered to you by your hired CPA. They will take care of your tax liability and alert the taxpayer to any possible allegations of misconduct.
- Analyzes retirement account options
It’s beneficial to have consultations regarding retirement savings. Consider a tax-smart investment to make sure you are growing your nest egg to its fullest.
Using a third-party service or Accounting Software is another option for tax preparation. It’s very convenient and affordable, but financial analysis, business modeling, and audit support can be limited.
2. Make Estimated Tax Payments
Estimated tax payments are taxes an institution must pay as it earns and receives income throughout the year. It varies on the composition of the business. Small firms are mandated to prepare estimated income tax payments. Sole proprietorship and partnership are required to both have income tax and self-employment tax. S corporations must pay the income tax in four quarterly installments.
An estimated tax payments quarterly installments are due based on the following schedules:
- Quarter 1: January 1 to March 31, payment due on April 15.
- Quarter 2: April 1 to May 3, payment due on June 15.
- Quarter 3: June 1 to August 31, payment due on September 15.
- Quarter 4: September 1 to December 31, payment due on January 15 of the following year.
Can I Hop Over My Estimated Taxes?
Constructing your estimated quarterly taxes will keep your finances organized. You as an owner can focus on the other aspects of your business like marketing, advertisement, and Corporate Social Responsibility. Skipping estimated tax payments is not recommended if you are not into penalties and consequences.
It can only be appropriate if you already have enough payment in your previous estimated tax remittances. However, always prioritize consulting with a professional on your every career transaction and decision.
3. Claim the 199A Qualified Business Income Deduction
Section 199A Qualified Business Income Deduction (QBID) of the Internal Revenue Code provides a 20% deduction from domestic businesses. This component depends on a taxpayer’s taxable income. Entities that are fit to claim a QBID include Sole proprietorship, Partnerships, S corporations, and Limited liability companies.
What are the QBID Exemptions?
The eligibility to claim this deduction has limitations based on income and type of business. In 2023, a total taxable income must be under $182,100 for single filers and $364,200 for joint filers. A certain IRS rule will determine if a business income will be qualified for a partial or full deduction once the limit was not met.
A specified service trade or business is not allowed for the QBID. These are some of the industries that are exempted:
- Performing arts
- Investing & investment management
- Actuarial science
- Brokerage Services
- Trade or business whose principal asset is the reputation or skill of one or more of its employees and owners
The Qualified Business Income is the business’s net profit of qualified items of income, deduction, gain, and loss. It excludes capital gains or losses, dividends, interest income, income earned outside the U.S, and certain wage and guaranteed payments made to partners and shareholders.
4. Include your Children on your Payroll
You reward your child with gifts or money during Christmas, birthdays, graduation, or whatever milestone it is. Instead of instant materials and cash, you can employ them with job assignments and include them on your payroll. Shifting your business income to your children because of their lower marginal tax rate will save your taxes.
The parents of sole proprietorship and partnership owners who pay wages to their child under 18 years old are subject to these potential tax savings:
a. Income tax
Hiring a grandchild or child will make you pay NO federal income taxes and a low state tax. Take into consideration the practical tax savings from a 37% federal tax rate and a 7% state tax rate.
b. Social security and other tax
A minor kid is not required to pay Social Security, Medicare, or Federal Unemployment Tax Act (FUTA) taxes on their wages.
c. Worker’s compensation
Your child will not sue you for any unexpected work accidents. The government and insurance companies do not generally enforce workers’ compensation. Be sure to pay your child a reasonable payment and ensure their qualifications for the position. The IRS can disallow the wages if the auditing does not pass the possibilities.
5. Invest in a Real Estate Property
Diversify your investments. Real estate properties are a valuable constant cash flow and an efficient tax shield. Strategize your rental possessions to take advantage of its tax benefits. Deduct the property taxes, insurance, management fees, maintenance fees, mortgage interests, advertisements, office space, legal fees, accounting fees, travel, and business equipment on your taxable income.
The “wear and tear” depreciation cost can also be lessened as an expense to lower your tax liabilities. Follow the regulations to pass through the 20% QBI on your taxes by the real estate tax law.
6. Contribute to your Retirement Account
Your financial future is in your hands and so are your legal tax breaks. Setting aside funds for your and your employee’s retirement is tax deductible. The Retirement Savings Contributions Credit can reduce the tax bill based on income and filing status.
What’s the best timing to Withdraw for Lesser Taxes?
Individual retirement accounts do not allow any tax on the interest or gains the account receives until its withdrawal. Tax payments are bestowed once the earnings and contributions are extracted but in a lower tax bracket compared to your charges as an employee.
The IRS permits a withdrawal without a penalty at age 59 1⁄2. You are expected to withdraw your retirement by April 1 the year after you turn 72 or after age 70 ½. Build an after-tax annuity for additional retirement savings without contribution limits and income rules unlike the 401(k), 403(b), or IRA.
7. Claim Home Office Expenses
Certain expenses can be taken off from the home office deductions. Many employees and businesses transitioned to remote jobs during the pandemic. Working from home may permit you to avail yourself of home office tax implications. Mortgage interest, maintenance, insurance, utilities, and taxes can be deducted for a home office.
How to qualify for a home office tax deduction?
If you think your set-up fits this deductible and you’re afraid to trigger any auditing, check these qualifications and limitations to yield any tax breaks.
- A portion of your house was used for running your business on an exclusive and regular basis. It can be a fixed meeting place or the business location itself.
- A home can be a house, mobile home, boat, apartment, or condominium. Attached property structures like garage, greenhouse, studio, and barn are included too.
- Real estate properties that can not be considered are motels, inns, hotels and the
- The calculation for the tax year 2022 is $5 per square foot. Simplified square footage has a maximum of 300 square feet.
- Home office deductions are not for employees on remote work.
- Using a home office for managing rental properties can only qualify the taxpayer for the tax status of property managers and not as investors.
8. Deduct Your Mileage Expenses
The standard mileage rate in 2022 is $0.58 per mile if you are self-employed. Driving your vehicle for business endeavors and reasons will cost you a lot of tax deductions. Availability of mileage is just half of the car-related tax benefits. Your actual car expenditures can claim a decrease for car insurance and repairs.
Who may Declare Mileage on Taxes?
The number of tax deductions per mile is dependent on your situation. Medical and charitable expenses are different from business expenses.
- Self-employed taxpayers and Small business owners filing for Schedule C or Schedule F.
- Independent contractors, drivers for rideshare services, and other self-employed business owners.
- Qualified performing artists, armed forces reservists, fee-based government officials, and other certain types of employees.
- Individuals traveling for medical engagements and volunteer work.
9. Make Charitable Donations
Itemize your deductions on charitable contributions to legit organizations. The donations must be in the form of cash or property made before closing the tax year to be deductible.
This is a list of qualified organizations you can donate to and have lesser tax liability:
- Religious organization
- The non-profit volunteer fire company
- Civil defense organizations under federal, state, or local law
- Domestic fraternal society
- Nonprofit cemetery company
- War veterans’ organization
- A state or United States possession made for public purposes
An individual can grant and donate up to 100% taxable income. Corporations were just limited to 25% of their taxable income.
10. Set Aside Cash for Payroll Taxes
The business owner must report, withhold and pay their employment taxes. This method will provide a more feasible accrual basis than paying them two or three months later. During periods, liabilities involved in payroll solutions will not be missed out.
What are the Types of Taxes per Employee?
Consider these tax guides and calculations per employee to accurately report the wages you paid them.
- Social security tax: employers pay half of the employee earnings (6.2%).
- Medicare tax: employers pay half of the employee’s earnings (1.49%).
- Federal income tax: rates vary depending on salary and personal expenses.
Paying your taxes and aiming for a deductible can be complicated and easy based on the strategy and approach you will come up with. Regardless of the ways, you should never forget your financial jargon and obligations. Taxes can be reduced to the most possible and legal rate.