UNLOCKING SMALL BUSINESS SUCCESS: SUPERCHARGING GROWTH WITH WAGE DEDUCTIONS
If you have a small business, every dollar counts.? Which means you have to take advantage of strategic tax planning. In this article, we will talk about how to make the most of your wage deductions to help your business grow.? Wage deductions can be a powerful tool that can both reduce your tax liability and align with ethical business practices. If you want to see the first part of this article check out my last article on what counts as deductible wages for businesses.
Reasonable Compensation:
Crafting wages that mirror industry norms isn't just a good practice, it can also be a smart tax strategy. Depending on what kind of business entity you own, you have to give yourself reasonable compensation for the work you perform for your business.? The good thing is, the wage you pay yourself may be income to you, but it is tax deductible for your business.?
Try to find a reasonable balance that follows industry norms, but also provides you with the best tax outcome possible.? This can get a little complex so make sure you talk to a tax professional to help you with this.? As long as you report this income to the IRS and it doesn’t look unreasonable for your industry, the IRS won’t question it.
Employee Benefits:
Benefits are more than just perks; they can be potent tax allies. Not only are employee benefits good for your employees, but they are also good for you as well. Most employee benefits such as retirement, health insurance, or health savings account contributions are not taxable to your employees. But you, as the employer, can still deduct the amounts you pay into your employees’ benefits.? Just beware, there are some limits to contributions so make sure you talk to a tax professional before you start paying too much in employee benefits.
Retirement Plan Contributions:
We’ve already talked a little about retirement, but employee retirement plans really are a win-win for both you and your employees.? Depending on what kind of retirement plan and how you contribute to it, there are a lot of different ways you can reduce your small business taxes.?
You can deduct contributions and matches made to employees’ retirement plans.? You can reduce payroll taxes such as Social Security and Medicare taxes.? You can even get tax credits for offering retirement plans to your employees. This can all get pretty complicated so make sure you talk to a tax professional before you decide how to offer retirement to your employees.
Bonuses and Incentives:
This is where motivation meets tax planning. Performance-based payments like bonuses or commissions made to your employees are deductible. You might need to talk to a tax professional about how to make sure you are in reporting compliance, but if you are in an industry that can really leverage bonuses or commissions, you definitely need to make sure you deduct them as wages on your business tax return.
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Payroll Tax Planning:
Payroll taxes can be pretty expensive so it’s always good when you can catch a break. For those of you who don’t know what a payroll tax is, it’s essentially the employer’s portion of taxes taken on your employee’s wages.? These are things like Social Security tax, Medicare tax, Withholdings, and Unemployment taxes.
We’ve talked about some ways to reduce this already such as retirement plans or Health Savings Accounts (HSA).? But there are also other ways to reduce your payroll tax like using a section 125 cafeteria plan or using payroll tax deferrals.? You can also apply for a FICA tip credit, Work Opportunity Tax Credit (WOTC), Research and Development (R&D) Credit, or a Hiring Tax Credit.?
Evaluate Business Structure:
Different businesses are taxed differently, and one type of business might be better for you than another. If you are a small business, should you file as a C corporation, an S corporation, or a partnership?? Should you make your business an LLC and what does that even mean? Maybe your business is better off as a sole proprietorship. If you are doing business as the wrong business entity, you could be losing a lot of money in taxes every year.
This one can get pretty complicated, and I think I will do a full article on this in the future but for now, I’ll just say this. For wages, different business entities have different rules on employee compensation. Unless you want to dedicate a lot of time on this one, I would say just talk to a tax professional and they will help you make the best decision for your situation.??
Monitor Legislative Changes:
Tax laws are always changing. There are reasons for this which I won’t get into now, but just know that the tax code is always “evolving”. By staying up to date on recent changes, you can protect yourself from making mistakes or getting audited by the IRS. Remember, it’s your job, not the IRS’s, to make sure you are compliant with the tax code.?
And to be honest, it is easier now to be informed than it ever has been before. There are many tax professionals out there who release free podcasts, newsletters, or blog posts to help you keep up to date. You can also simply talk to a tax professional, and they will help you in your specific situation.? If you would like to schedule a consultation with one of our tax professionals, please feel free to follow the link below.