8 Tax Savings Hacks Small Business Owners Often Miss
Small businesses often run on tight margins, and you’ll need to pay self-employment, federal and state taxes on any profit you make. If you own a limited liability company (LLC), there are several excellent ways that you can reduce your taxes. Of course, managing your expenses will help you keep costs down, and combining good financial management with these tax reductions means you can keep more of the money you earn.
1. Take Advantage of All Your Tax-Deductible Expenses
If you spend money to operate your business, it’s likely you can claim the money you spend as a deduction, which will reduce the taxes you pay. We’ve got a guide to the types of business expenses you can deduct, here are some of the main ones:
- Home office expense: If you work from home, you can deduct a portion of your household expenses according to the amount of space you use to run your business. For example, if you use 15 percent of your home exclusively for business work, you can deduct 15 percent of what you spend on electricity, gas and other utility bills.
- Repairs and maintenance: If you need to make repairs to your home, it is sometimes possible to expense the same percentage as what you use for your business office.
- Vehicle mileage: If you drive for work, you can deduct some expenses for your vehicle. These do vary, and you can find more details on vehicle expenses here.
You will need to meet certain criteria to expense certain areas, so check with your accountant on what’s deductible.
2. Get the Right Accounting Software in Place
Accounting software will make a huge difference to how you manage your money. It won’t just save you time, it will help you run your business more effectively and plan for the taxes that will be due. There are plenty of good accounting solutions out there including FreshBooks, QuickBooks, Wave, Xero and more. Be sure to get accounting software as you start your business.
3. Keep on Top of Your Bank Accounts and Bookkeeping
Good accounting isn’t just important for tax season. Proper bookkeeping and reconciling your bank transactions means you’ll have a much clearer idea of what’s coming into and going out of your business. Setting aside time a couple of times a month to make sure your accounting software and transactions match up will save you a lot of stress come tax time.
You just need to download your business bank transactions, load them into your accounting software and make sure everything matches up. If you just drop a bunch of receipts on your accountant’s desk, they will charge you for understanding and organizing them, and you may miss important deductions.
4. File a Form 2553 to Pay Lower Taxes as an S Corporation
Under certain circumstances, you can file Form 2553 with the IRS and be treated as an S Corporation for tax purposes. That’s a bit of a mouthful, but what it really means is that you can choose to pay yourself a “reasonable salary” that you’ll pay standard taxes on (payroll, federal and state) but you can also take “distributions” out, which you won’t pay self-employment or payroll tax on.
There are some restrictions here, especially around what’s considered a “reasonable salary.” You’ll also need to set up proper payroll and file some forms with your state department of revenue and the IRS, but you could save thousands in tax each year. Speak to your accountant to find out more.
5. Work with Contractors and Freelancers
The workforce is evolving every year to become more inclusive of independent contractors and freelancers. Your business can benefit from working with these individuals too, since you are able to cut expenses both throughout the year and at tax time.
Regular employees cost a company like yours far more than just their salaries. You will need to provide overtime pay and health insurance and incur expenses related to payroll taxes, Social Security and worker’s compensation. By only bringing on full-time employees when you absolutely must, you can keep your business expenses and taxes to a minimum.
6. Put Money into a Retirement Account
If you put money into certain types of retirement accounts like an IRA or traditional 401(k), then those contributions are tax-deductible, although you’ll pay tax when you withdraw the money in retirement. Depending on the type of retirement account you have, the contribution limits can be quite generous. If you don’t need the extra money now, deferring the tax by contributing it to your retirement savings can be a great option.
If you put money into a Roth account, be aware that the contributions are taxable now, but will be tax-free when you take them out at retirement.
7. File and Pay Your Taxes on Time
Depending on the tax forms you need to file, you must meet deadlines set by the IRS and your state department of revenue. For example, if you’re filing an S Corporation or a partnership return, you need to have those to the IRS by the middle of March.
Personal tax returns are typically due by the middle of April. However, due to recent events with the coronavirus/COVID-19 pandemic, the IRS extended the due date until July 15, 2020.
With an extra three months to file your personal return, you should have plenty of time to get your tax filings in order. However, if you don’t file and pay taxes on time, it’s likely you will need to pay penalties and interest, so staying organized will save you from those fees.
8. Pay Estimated Taxes Throughout the Year
You can’t wait until Tax Day to pay all your taxes for the year. Instead, you’ll need to work out how much you owe in self-employment, federal and state taxes four times a year and pay that as estimated tax. This will help you stay on top of your cash flow and means you’ll be prepared come Tax Day. It will also reduce your likelihood of underpaying and being subject to penalties.