If you’re not a tax expert, it can be hard to make sense of business tax liability. The definition is simple enough: this is the amount that you owe the IRS, and it’s based on your income and tax rate. The hard part with tax liability is figuring out how to minimize it. This involves taking advantage of all available tax deductions and making your gross revenue work for you.
Want to get into the nitty-gritty of how to reduce your tax bill? Here are three time-proven tips that will help you leverage small business tax codes to your advantage.
- Hire a Family Member
The IRS offers a variety of tax benefits when you hire a family member. For instance, if you own a sole proprietorship, you can hire your spouse. As long as they’re a legitimate employee, their income will be subject to federal income tax and FICA taxes for Medicare and Social Security, but not to the federal unemployment tax (FUTA).
If you decide to hire your children, their age will determine how they’re taxed. Kids under 18 aren’t subject to FICA taxes, and those under 21 aren’t subject to FUTA taxes. Plus, if your child has earned income, they can start putting money into an IRA for their retirement.
- Save for Retirement
Speaking of saving money for retirement, did you know this can also help you pay less in taxes? If you’re self-employed, for instance, one way to do this is to establish a Solo 401(k). That way, you can save up to a full 100% of your income as an employee contribution. The annual limit for Solo 401(k) accounts is $66,000, plus an extra $7,500 if you’re 50 or older.
A SEP IRA can be another solid option for a retirement account. This allows you to save up to 25% of your income with similar contribution limits as a Solo 401(k). You can also contribute to Roth and traditional IRAs, potentially lowering your tax bill even further.
- Get the QBI Deduction
Do you report your business income on your tax return? If so, you may be able to claim the qualified business income (QBI) deduction. This allows eligible small business owners to deduct up to 20% of their income as long as their taxable income is under $182,100. If you earn more than that, you can still receive a prorated QBI deduction.
Keep in mind that the IRS defines QBI as the net amount of qualified gains, losses, and expenses incurred as part of doing business. This doesn’t include things like dividends, interest income, capital gains or losses, and certain guaranteed payments made to shareholders.