Most businesses have to pay 19.8% of the average tax rate. Small businesses pay a 13.3% tax rate on average, and those with more than one owner pay 23.6%. This may not seem significant, but it is a lot for small business owners who are always trying to find strategies to cut down their costs and expenses.
Businesses have to pay taxes to the government as the government needs funds and resources to increase economic growth. The five types of business taxes are gross receipts, corporate franchise, employment withholding, excise, and value-added taxes (VAT). Businesses pay income tax, property tax, and sales tax, but these aren’t explicitly considered business taxes.
A simple way to calculate business tax is by dividing the income tax expenses by the earnings (before taxes. Each year, the IRS releases new rules and laws regarding taxes which can be very difficult for small business owners to handle and plan.
Many small business owners work hard to achieve positive revenue, only to give a large portion of it in taxes. To save or use more of your income for yourself, your business should find strategies to decrease your taxable income and keep more revenue. Here are five strategies to save you on taxes for your business.
Change the structure of your business
Owning and operating a small business, you can indicate yourself as the employer and the employee in the business and show that you pay yourself a salary in the business books. This way of structuring the business will eliminate the employer half of taxes owed as you now have an employer. This bookkeeping is an intelligent way to reduce taxes and tax responsibilities.
Start creating a retirement plan for yourself
Find retirement plans which offer financial security to save yourself from stress. Even if your business is running successfully, it is essential to find efficient retirement plans. It is better that you consult a financial professional to draw out the best suiting plan for you. The most popular plan is the 401(k) plan. With the one participant 401(k) plan, the IRS allows you to put away up to $57,000 in total contributions for retirement.
Use your home office deductions
Claiming home office deductions is an efficient way of saving money on your taxes, which many small business owners forget to use. The IRS allows both homeowners and renters to claim a home office deduction, which many people are confused about as they think leased places can’t be utilized for tax reductions.
Your home office should be regular and in an “all-time” used to claim these reductions. The home office should also be your primary place for running the business. This is useful for service businesses or online businesses.
Hire a family member in your business
This is the best way to save your funds as it is also allowed by the IRS, and you are allowed to hire your children in your business. By hiring family members, you can eliminate the tax on the income paid to your children. The IRS also allows small business owners the benefit of reducing their taxes by hiring a spouse, and that can be deferred to your 401(k) plan.
Conclusion
For small business owners, it is hard to cut down expenses, especially those involved in legalities. Other expenses such as credit card dues or unimportant advertisements can be cut off relatively easily but saving money over taxes can be challenging.
Expenses like taxes are in massive amounts, so small businesses have to find strategies to reduce these expenses. Some other practical ways are planning your incomes and expenses before the end of the business years to plan the taxes correctly. You can also take the help of a tax professional to figure out the best suitable way for your business to reduce taxable income.
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