When it comes to taxes, last-minute used to be my strategy.
I hated it—the paperwork, sorting through receipts, and tracking expenses. So, I put off tax planning until the last minute. After all, who enjoys paying Uncle Sam a big, fat check? Not me.
But my lack-of-planning planning didn’t work. In fact, it made the whole experience more stressful and expensive. I was unorganized, scrambling for documentation, and ultimately, paying more than I should. Fortunately, since then, I’ve taken the time to talk to a good accountant. Now I know how to conquer my small business taxes before they get the best of me—and save money along the way.
Here are a few tax planning strategies I’ve found to work.
6 Surprisingly Easy Small Business Tax Planning Tips for 2020
Start saving for retirement.
Most small business owners and entrepreneurs I know are so focused on the day-to-day grind that they forget to save long-term. But opening a small business retirement account can actually help you reduce your taxable income and save money during tax season.
There are a few options to choose one. Talk to an accountant about which retirement plan is best for your small business. It really depends on the size of your business and your financial goals.
- SEP IRA—Make tax-free contributions to an individual retirement account for each of your employees.
- Self-Employed 401(k)—This plan is designed for business owners with no employees, with the exception of a spouse.
- Simple IRA—This stands for Savings Incentive Match Plan for Employees and lets employers and their employees both contribute to traditional IRAs.
When in doubt, call your local CPA for advice. I’m going to open a SEP IRA this year (I can’t wait), but what’s best for my situation might be different for yours.
Hire your spouse or another family member.
Can you handle working with your spouse or child? Then go for it. There are a lot of tax benefits to getting a family member involved in your small business. Spouses can help reduce your workload and children can learn the family trade. Plus, working helps teach teens and young adults lifelong lessons about managing money.
Employing a family member also gives you these tax benefits:
Tax breaks on FICA and FUTA
Normally small business owners have to pay Federal Income Contributions Act (FICA) taxes and Federal Unemployment Tax Act (FUTA) taxes on wages paid to their employees. But, children under age 18 who are employed by a parent who is a sole proprietor or a business that is unincorporated aren’t subject to FICA taxes. And, you don’t have to pay FUTA taxes for services done by a child who is under age 21.
Reduced taxable income
If you’re paying a family member wages, whether it’s a spouse or child, you’re also reducing your taxable income. This means you’ll pay less in self-employment taxes.
A lower tax bracket
Any income you pay to a child is taxed in a lower tax bracket than your income. This also helps reduce your taxes.
Consider moving to an S Corporation or C Corporation.
What’s your business set up now? If you’re a sole proprietor, in a partnership, or own an LLC, you may want to research the benefits of moving into an S Corporation or C Corporation. A corporation means you’ll have less personal liability and you’ll get better tax benefits too.
- S Corporation—The IRS considers an S Corporation a “pass-through” entity, meaning you report the business’s profits and losses on your income as the business owner.
- C Corporation—This structure allows you to apply tax-free employee benefits that aren’t offered to S Corporations, like meal expenses, and medical, disability, and other insurance benefits.
The bottom line: Talk to an account about this one. Both options offer tax benefits, and you’ll want an expert to review your situation before giving you a recommendation.
Make the most of credits and maximize deductions.
Sure, you’re tracking expenses and doing your best to maximize deductions. But have you heard of these lesser-known tax credits? If not, ask an accountant if you can apply them in 2020.
Energy efficiency credits
From energy-efficient windows to solar panels, if your office tried to “go green,” you may qualify for a tax credit.
Health care credit
Depending on the number of employees you have and their average salaries, you could save money with the health care credit.
Work opportunity credit
You could get a tax credit if you’ve hired any veterans, people with disabilities, or other qualifying groups.
You’ll also want to maximize your deductions. This means organizing expenses throughout the year and strategically making purchases. A lot of small business owners will deduct their:
- Home workspace
- Car expenses, including gas and mileage
- Parking costs
- Public transportation costs
- Business trip costs, including airfare and lodging
- Phone bills and other utilities
Did you know you can also deduct business insurance? If you don’t have a plan now, it’s a good idea to think about getting one. Business insurance will protect you, your employees, and your business’s assets in the event of an accident, injury, loss, or legal issue. Here are a few plan types to investigate:
General liability insurance—This type of insurance covers the costs associated with third-party accidents, property damage, and bodily injury.
Workers compensation insurance—If one of your employees gets sick or injured while working for you, workers compensation covers lost wages, medical bills, rehabilitation expenses, and even death benefits.
Self-employed business insurance—If you work for yourself, you may want professional liability insurance to cover legal fees, and claims involving libel or slander, copyright infringement, and more.
Just like with everything else, ask your trusted CPA about deductions and credits first. A professional can tell you which deductions are best to take - and whether your qualify for certain tax credits.
Create a system and stick with it.
Just like my New Year’s Resolutions, my intentions to stay organized begin feigning by March. It’s not enough to get organized at the start of the year. I have to stay organized all year long.
Easier said than done.
That’s why I set up a system to help me keep up with tax paperwork throughout the year, not just in January. Here are a few tips I’ve found to work.
Keep up with a calendar.
Create monthly (or quarterly) check-in appointments at the beginning of the year. Put them in the calendar. I use this time to review my expenses, get organized, and check in on my taxable income. I also reach out to my CPA to ask any questions, including ways I can reduce my taxable income going forward.
Work on your phone.
There are a lot of great apps that can help you track expenses, including mileage while you’re on the go. Expensify and Freshbooks have apps to track expenses, and MileIQ and TripLog can track your mileage.
The IRS offers a calendar of important deadlines for small business owners. Even though I put the dates in my calendar, I use the option to have reminders sent to my email, too.
Another way to keep track of your expenses is by getting a business-only debit or credit card. This helps me quite a bit. All I have to do is review my spending record, and it’s all in there—in one account.
Pay attention to 2019 taxes.
Reviewing what happened last year is key. It helps me make a plan for 2020. I ask myself (and my accountant) important questions, like where can I save money next year? How can I maximize deductions and credits? Then we make a game plan together.
It’s a process, but each year it seems to be getting better and better. I’m more organized, efficient, and less stressed about tax season. Plus, I’m getting bigger savings by paying attention and planning ahead.
I hope you can say the same soon as well!
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