Are You Overpaying Your Taxes?
There’s one really big secret to not overpaying on your business taxes — and it’s easy to do. Get professional help. Seriously, that’s it.
On the flip side, be cautious of the “tips and tricks” you see online from people who may not be tax experts. If it sounds too good to be true on social media, it probably is, according to certified public accountant Alex Oware.
“Many ideas on YouTube, Twitter and TikTok sound great, lovely and sexy, but business owners should think about the ability to defend such expenses if the IRS asks for substantiation and about the business purpose of the expense you took,” Oware told Business.org.
To make sure your business expenses are legitimate deductions and you’re not overpaying taxes, you should always seek the help of a competent tax professional, Oware says.
Below, we’ll cover five tax-saving strategies recommended by experts.
1. Get tax assistance
If you don’t consider yourself to be a tax expert, that’s OK. Most people aren’t. There are lots of ways out there to get tax assistance but getting pro help starts with having a system in place to track your expenses. You can’t take a deduction if you don’t have complete and accurate records.
“Small business owners can lower their tax bills considerably by first keeping a proper record of their transactions as they occur. Without (a) proper record, you may forget expenses when you prepare your tax return,” says Oware who works with JustAnswer, a company that offers 24/7 access to a range of experts.
One great solution for record keeping is accounting software, which saves time and ensures accuracy by automating important bookkeeping tasks.
Once you have an accurate record of all your expenses, then you can look at getting tax assistance when filing your taxes. Using guided tax software, like TurboTax, or hiring a CPA are two ways to help ensure you are getting every possible deduction and credit.
More advanced tax software plans sometimes offer audit assessments and guidance for small business owners, but it’s hard to beat the personalized counsel you’ll get from hiring a CPA.
If you’re worried about the cost, seeing a CPA may not cost nearly as much as you think. You can actually deduct tax preparation fees — at least until tax year 2025. Just make sure you fall under the qualifying criteria.
2. Change your business structure: LLC to S corporation
Switching your business entity from an LLC to an S corporation has a few great tax advantages. Let’s look at the difference between the two business entities.
- LLC: If your business is organized as an LLC, you must pay self-employment tax on the full amount of net income (income after deductible expenses) of your business.
- S Corp: With an S corp, not all earnings may be subject to self-employment taxes.
So an S corp offers the potential to see significant savings on self-employment taxes, which will greatly reduce your tax liability. These are not just one-time savings too, they are available as long as the S corporation is in business.
An important thing to note about S corps, however, is that you are required to pay yourself what the IRS deems to be a “reasonable salary” from the business. This means that you will have to look at your responsibilities and the general market salary for that position to set a number.
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3. Deduct your home office expenses
The home office deduction is both the most abused and overlooked deduction for small business owners, according to Oware. When it’s utilized properly — as in, the space in your home is used both “exclusively” and regularly” — the benefits can be extensive.
But before we get into these benefits, it’s important to understand what those words really mean from a tax standpoint. "Exclusive" means the area can be used only for your business. "Regularly” means more than occasional or incidental use.
Once you’ve confirmed that your home office qualifies, you can take advantage of all the possible deductible expenses, which include:
- mortgage interest
- real estate taxes
- insurance losses
- maintenance and repair
That’s a great deal of potential savings. Just be sure that you deduct the percentage of the square footage of your office space divided by the total square footage of your house.
4. Deduct your health insurance
There’s a variety of health insurance based deductions, credits and plans that can help you save on taxes. These are the ones that Oware recommends for people who are self-employed and small business owners.
Self-Employed Health Insurance Deduction
If you’re self-employed, you can deduct 100% of the health insurance premiums that you pay. That’s an incredible savings opportunity. And this includes premiums for both you and your family — your spouse and dependents under age 27. Just one of these situations has to apply:
- You’re self-employed and had a net profit for the year (this includes income from a partnership).
- You were a partner in a small business with net earnings.
- You received income from an S corporation where you are a 2% or greater shareholder.
There’s an added benefit if your business is an S corp.
“S corp owners and partnerships are permitted, to the extent of their earned income from their trade or business, to claim it as a separate deduction — as an above-the-line adjustment to income, as opposed to an itemized deduction,” Oware says.
Above-the-line deductions are subtracted before your adjusted gross income, while itemized deductions are subtracted after. Either way, they’re both helping you reduce your taxable income.
HSAs and High Deductible Health Plans
People who are self-employed and small business owners alike can qualify for a health savings account (HSA) if they are enrolled in a high deductible health care plan. An HSA allows you to set aside pre-tax dollars for medical expenses, like counseling or drug store purchases.
The plus side is that not only are the contributions tax-free and tax-deductible, withdrawals for out-of-pocket medical expenses are tax-free as well. The downsides are that your deductible, obviously, will be higher than other plans and there are annual contribution limits.
For 2023, the HSA contribution limits are:
- $3,850 for self-only coverage.
- $7,750 for family coverage.
- If you’re 55 or older, you can contribute an additional $1,000.
Be sure to weigh both of the benefits and disadvantages when deciding to go for an HSA or a flexible savings account, which is similar.
Small Business Health Care Tax Credit
This tax credit is only eligible for small businesses with less than 25 employees, but it can put some serious money in your pocket. It may be worth up to 50% of your health care premium costs, Oware says. But there are a few more requirements you have to follow to ensure you get this credit.
- The insurance must be purchased by business owners through SHOP (Small Business Health Insurance Option Program) marketplace and form 8941 must be filed.
- You have to pay at least 50% coverage for full time employees and your average employee salary must be less than $61,400 (for 2023).
- The credit can only be claimed for two consecutive years.
The Small Business Health Care Tax Credit is definitely something to consider taking advantage of if you’re eligible.
5. Defer your taxes
If you’re looking to save money now and pay taxes later, you can defer your taxes by putting income into retirement savings accounts. There are several retirement accounts available for both the self-employed and small business owners.
“Many of the same options to save for retirement on a tax-deferred basis as employees participating in company plans apply to self-employed persons and owners of other small businesses,” Oware says.
You contribute pre-tax dollars to these accounts, then pay the taxes in retirement. (The reverse is true for a Roth IRA where you contribute post-tax dollars and withdraw the money tax-free in retirement.)
Here are the tax-advantaged accounts Oware recommends.
- Solo 401(k): If you’re either self-employed or a small business owner without employees, you may opt for a solo 401(k). You can contribute 25% of your net earnings from self employment — up to $66,000 for 2023.
- SEP IRA: The SEP IRA, or simplified employee pension, allows for the same contribution amount as the solo 401(k) for 2023.
- Simple IRA: The simple IRA, which stands for Savings Incentive Match Plan for Employees, allows you to contribute up to $15,500 in 2023. If you’re 50 or older, you can contribute an additional $3,500. You can also make either a 2% fixed contribution or a 3% matching contribution.
You don’t have to choose just one account either. You can open as many retirement accounts as you want, so long as you don’t go over the contribution limits.
Just be sure this tactic applies well to your future situation. If you’re an entrepreneur with plans to retire on a higher income than your current tax bracket, this may not be a great strategy for you — as you’ll just get taxed more when you withdraw the money.
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There are lots of tax-saving strategies out there, but the one with the biggest impact? Hiring a pro! Tax stuff is complicated and the implications could be far reaching if you get something wrong.
If you’re worried about the cost of hiring a pro, get a quote and then compare the price to online tax software — an often cheaper alternative. Just be sure to keep your eyes open for plans that offer 1:1 guidance.
Above all, you should get some form of professional tax assistance. Getting input from an expert can help you not overpay on taxes and that expert’s help can be vital as tax laws change, your business structure evolves and your income increases.