5 Must Read Tips to Reduce Your Small Business Tax Bill

16 Feb, 2017 / Comments: Comments Off on 5 Must Read Tips to Reduce Your Small Business Tax Bill / By

Tax time is here again. If you are a small business owner, you know that running your business and paying your taxes are inseparable. While it may not be your favorite time of year, tax time is unavoidable. Making one small misstep can result in an astronomical tax bill, which could potentially sink your small business. On the other hand, taking the proper steps and planning can help you to reduce your small business tax bill and keep more of the money you have worked so hard to earn.


1.  Types of Business Taxes

It is important to know that taxes aren’t a single entity. There are actually several different types of taxes that you need to be aware of, including income taxes, employment taxes, sales taxes and excise taxes. Income taxes are the most well-known. If you have employees, you are responsible withholding income and FICA taxes, as well as pay your share of FICA and unemployment tax. Selling goods requires you to collect sales tax, and failing to do so, or submit them to the state, can result in penalties. Finally, excise taxes are paid only by certain businesses for fuel or highway miles accumulated by trucks.


2.  Structure Your Business the Right Way

The way your business is structured is often one of the most overlooked aspects of your tax bill. Small businesses are usually set up as a sole-proprietorship or an LLC (limited liability company). While these structures are fine, you may gain an advantage by making a change. For instance, as the owner of an LLC, you would normally be subject to self-employment tax on all of your company’s earnings. However, if you elect to be taxed as an S corporation, only your salary is subject to FICA taxes. You may be able to gain from structuring yourself as a C corporation, which means that your first $50,000 is taxed at 15%, rather than the 35% you would be taxed at if you are in the highest bracket.


3.  Defer Income

One way to reduce your small business tax bill is to send out your bills just a few days later during the last month of the year. This way, you receive your payments in the beginning of the year, meaning that you won’t have to claim that income right away. In conjunction with this strategy, you can pay bills that you have due at the beginning of the year in December. By doing so, you can take advantage of the deductions during the current tax year.


4.  Offer Benefits Rather than Pay Increases

Your employees’ salaries are subject to certain taxes, including income, FICA and Medicare taxes. Any wage increases you pay your employees are subject to those same taxes. What this means for you is that you have to pay federal and state unemployment taxes as well as your share of FICA and Medicare taxes. Rather than offering a pay increase, consider offering fringe benefits instead. These benefits are not subject to these taxes. For example, you could pay more for employees  medical insurance. Other fringe benefits you may want to think about include meals, transportation benefits or assistance for education.


5.  Set Up a Retirement Plan

If you are sitting in a good place financially, set up a retirement plan, not just for you, but for your employees as well. A qualified retirement plan will give you deductions on contributions. As an added bonus, employee retirement plans are a great incentive for employees to stay. There are several types of retirement plans available, so you will need to do some research and find the one that best suits your specific needs.


With the right steps, you can significantly reduce your small business tax bill and keep more of the money you have earned throughout the year. Consult your tax specialist to find out more.

William Mahnic
William Mahnic is a Finance Professor at Case Western University and has spent more than 20 years in the finance industry before becoming a professor. Mahnic has appeared as a commentator on both TV and radio talk shows including NPR, Crain's Cleveland Business, WKYC 3 and The Washington Post. He has been interviewed in BusinessWeek, Wall Street Journal and The Los Angeles Times.

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