We are starting down the third year of the Tax Cuts and Jobs Act and tax savings are all around us. Every year the standard tax brackets increase with inflation. Here’s a breakdown of the 2020 tax brackets.
No matter which bracket you fall in, there are multiple ways to cut down your tax bill and take advantage of savings. Here are 5 tax saving strategies for small businesses. Let’s start planning.
If you are one of the unlucky few contractors receiving 1099s, you will end up paying an enormous 15.3% self employment tax on the entire amount of every 1099. Let’s say you made $10,000 on a 1099. You would end up paying $1,530 in taxes. Example: Alley is a digital marketing contractor. She receives $100,000 per year in 1099s. Her tax bill would be ($100,000 * 15.3%) = $15,000. This is in addition to income tax. Luckily for Alley, there’s an easy way to reduce or eliminate this tax. Read #5 to find out how.
Carrying health insurance is still mandatory under the Affordable Care Act and most small business owners can deduct health insurance related expenses for themselves and their employees on their business tax return. The deduction doesn’t stop with insurance premiums. There are other healthcare related expenses you can deduct such as HSA (Health Savings Accounts). Let’s dive more into this. HSAs are contributions you and your employees make to an account. The monies must be used to pay health related expenses. In addition to paying for medical and dental expenses, some other exciting things you can use this account for include massages and yoga classes (with a doctor’s note), doctor ordered over the counter medicines , eyeglasses, teeth cleanings, health related home improvements, fertility treatment, and your kids’ health expenses even if they are not on your plan. Sounds like a win win to us.
Here’s a list of HSA qualified medical expenses published by Optum Bank https://www.optum.com/content/dam/optum/consumer-activation/A13534/42994-hsa-qualified-expenses.pdf.pdf
Setting up a qualified IRA account is not only reduces your taxable income (and thus your tax bill) and allows you to keep that money in your pocket for retirement. Example: Alley, a small business owner, contributes $15,000 per year to her SEP IRA retirement account. On her business tax return, she can deduct the entire $15,000. Since she is in the 24% tax bracket, Alley saves $3,600 in income taxes and she also gets to keep that money for retirement; her $15,000 saved just became $18,600 saved! Alley’s smart and will be thankful for the extra retirement money when she’s drinking margaritas in Mexico. Cheers to that!
Speaking of Mexico, have you ever wondered if you can write off that trip south of the border? While tempting, it’s important that you follow the rules on this deduction. The trip has to be an actual business trip the majority of the time but that doesn’t mean you can’t add in a few extra days at the beginning or end for extra traveling. The rules are different on domestic and international travel. For domestic travel, you must spend over 50% of the time on business and you are able to write off 50%. Any less than 50%, and you can’t write off zip. For international travel, the write off amount depends on how much time you spend doing business. For example, Alley is a social media manager. She has multiple clients she posts content for. She spends 40% of her time taking photos and videos for her clients. Alley can write off 40% of her travels. Keep in mind that you can only deduct your portion of expenses if you bring the family along. If you can follow the rules and record keeping requirements, you’ll get two thumbs up from the IRS.
Form an S-Corporation
The money your clients pay you is subject to 15.3% self employment tax if it’s reported on a 1099. If your clients pay your s-corp instead, some of that money is required to be paid to you by your s-corp as an Employee and reported on a W-2. Your payroll is another deductible expense which lowers your net taxable income. That remaining net income is not subject to any self-employment tax …meaning you skip the 15.3% tax! The salary portion you paid yourself is of course subject to self-income tax, but not the remaining net income. Example: Alley pays herself a $60,000 salary and still has an additional $40,000 in net income. By switching to an s-corp, Alley saved 15.3% x $40,000…that is $6,120! Money in her pocket that she can spend on other things such as marketing, IRA contributions, or a Mexico vacation – all achieved merely by changing the way her income is reported. If her income had been reported on a 1099, she would be facing a self employment tax bill of $6,120 on April 15. While an s-corp seems like a no brainer, the formation can be tricky. Make sure you have a professional accountant set it up correctly.
These tips are all great ways to reduce your tax bill. Every business and individual’s taxes are very different and the best advice we can give you is to seek professional help about your individual situation. Singletrack Accounting saved customers over $100,000 in taxes in 2019 and we can absolutely have you be a part of that statistic. Reach out to our team of professionals.