7 Tax Tips to Leverage for Your Small Business

By Gaurav Sharma

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Small business owners have so many responsibilities. From sourcing business supplies to managing customer relationships, there’s a lot they need to do to keep their enterprises running. 

Amidst all the responsibilities, tax obligations often get pushed to the back burner as entrepreneurs deal with more ‘serious’ issues. 

This often leads to missed opportunities to reduce the tax burden and could also mean facing costly fines when you don’t adhere to the set tax regulations. 

By taking charge of your tax planning, you can reduce your tax bill, save more money, and guarantee the long-term financial health of your business. Below, we share the top tax tips every small business owner should know to make tax season less stressful. 

1. Effective Bookkeeping

Year-round, effective recording keeping is mandatory if you want to have an easy time during tax season. It will also help you maximize your deductions since you’ll have clear records of the expenses you can deduct when calculating your tax bill. 

That's why it's important to install a robust bookkeeping system that sorts and organizes all your tax information. With the many recording-keeping software available to you, you no longer have to rely on manual systems of bookkeeping that are error-prone. 

When choosing a keeping system, pick an all-in-one solution that automates crucial bookkeeping functions such as:

  • Tracking business expenses
  • Tracking business income and sales
  • Managing inventory
  • Creating invoices

Such a system will ensure all your tax information is up-to-date for easy filing and maximization of deductions. It will also help you avoid the huge penalties that come with incomplete or incorrect tax returns. 

2. Separate Your Business and Personal Affairs

From the day you launch your business, make an effort to keep your business and personal affairs separate. Separating these two aspects of your life makes it easier to claim deductions when filing taxes and supporting your claims during an audit. 

Some of the measures you can take to keep your business and personal affairs separate include:

  • Opening a separate bank account for the business. Don’t use the same bank account for your business and personal affairs as this makes it difficult to track business expenses and income for taxation purposes. 
  • Don't combine personal and business expenses as this could bring confusion when determining business expenses for a given period. For example, when running a bakery get separate receipts for your home and business supplies. 
  • Pay yourself a fixed salary from your business account. This makes it easy to calculate how your personal and business income will be taxed. 

3. Incorporate Your Business

If your business is registered as a sole proprietorship, then you should consider incorporating it to reduce your tax liability. 

Business owners who work with a small business formulation agency such as Inc Authority to register their entities either as an LLC or Corporation can remove the employer option in their FICA taxes to decrease their tax liability. You can review this agency's services in detail in this comprehensive GovDocFiling's Inc Authority review post.

Additionally, businesses registered as C Corps can have their first $50,000 taxed at a lower rate, further lowering their tax burden. 

4. Employ Your Kids

If your children are of age, then you can employ them in the business to reduce your tax bill. 

Children have a lower tax rate and employing them will help you save on taxes. Find suitable roles the children can perform in the business and pay them a reasonable wage. 

The wages paid to children are taxed at a lower rate (often zero), thereby reducing your tax liability. This strategy also applies to other low-tax rate individuals under your care such as retired parents. 

Rather than gifting them money, employ them in the business and add them to your payroll. 

5. Make Contributions to a Retirement Plan

Saving for retirement is one of the wisest things you can do as a small business owner. Not only will the funds ensure you have something to sustain yourself during old age, but it can also help you pay less taxes. 

Small business owners can contribute up to $57,000 per year to a retirement plan and these contributions are tax-free. 

6. Hire a CPA 

Most small business owners are not convinced that hiring a professional to handle their tax reporting is the right thing to do. They believe that they can do the taxes themselves and save on the professional fees. 

What most don't realize is that tax professionals know how to help you maximize your tax benefits. These professionals know the tax deductions you're entitled to and will guide you to claim them effectively. 

They also help you make the right long-term plans to ensure your business stays tax-compliant while reducing your tax bill. 

For someone busy with other business commitments, allowing a CPA to handle your taxes is a wise move that will unlock many benefits for your business. 

7. Contract Employees

Lastly, consider working with independent contractors rather than hiring employees on a permanent basis. With this strategy, you’re assured of quality work without the burden of additional taxes. 

This is because you’re not required to pay employee taxes for independent contractors, thereby reducing your tax bill. 

Conclusion

Small businesses have many tax obligations and it’s only with proper planning that you will meet these obligations and improve your financial position. 

The tax tips we have shared in this article are meant to be your roadmap to success. Implementing them will help you minimize your tax liabilities and improve your financial standing in the long run. 

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