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This will depend on what type of business structure you current have. My recommendation below is catered to sole proprietors.
1. Employ a family member: An excellent way to reduce business income taxes. Small Business owners can pay a lower marginal rate or eliminate tax paid on income to their children.
2. Start a retirement plan: Small business owner can maximize retirement savings to gain tax benefits.
3. Save for Future Healthcare Needs utilizing a Health Savings Account which supplement to lower the cost of health insurance plans.
4. Change business structure. This requires consideration where as the business owner you can pay yourself a reasonable salary and reduce your taxable responsibility like a Limited Liability Company (LLC)
A small business owner can reduce their taxable income and reduce their tax burden in a variety of ways. One way would be making an S-Corp election for income tax purposes for their small business.
Most small business owners start off by choosing a Limited Liability Corporation (LLC) as their business entity structure which, by default, is taxed as a sole proprietorship for single member LLCs and as a partnership for multi-member LLCs. In addition to business income taxes, members in an LLC must pay self-employment taxes on all company profits. Self-employment taxes cover Medicare and Social Security taxes for business owners and the self-employment tax rate is 15.3%. The LLC has the option of electing S-Corporation (S-Corp) status and being treated as an S-Corp. In doing so, a business owner can save money on self-employment taxes. With an LLC, each member is considered a business owner who has to pay self-employment taxes. With an S-Corp, a shareholder who actively works for the company is considered an employee and only their salary as an employee is subject to self-employment. Distributions of business profit outside of paid salary are not subject to self-employment taxes.
Keep in mind, business owners cannot purposely evade self-employment taxes by paying themselves only through distributions, and the IRS requires the owners of a business electing S-Corp status to pay themselves a “reasonable salary” given their job duties and experience.
In essence, by electing S-Corp status, a business owner would be saving 15.3% on any of the remaining distributions after paying themselves a reasonable salary.
There are other ways to reduce a business owner’s taxable income and reduce their tax burden: tracking business meals, work-related travel expenses, work-related automobile use, business insurance, home office expenses, office supplies, phone and internet expenses, depreciation, and many others; however, above we have addressed one of the best ways to reduce a business owner’s tax burden.
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