In many cases, small business owners do not know that there are a few deductions they are eligible for, and they miss out on tax-efficient ways of retirement savings and business management. Although the amount of tax that a small business has to pay depends on the ownership and type of business, it is possible to reduce the amount of small business taxes. Here are a few ways for small businesses to pay less tax.
- Give tax-free fringe benefits to employees: If an employer pays more wages to employees, the employment tax expenditure paid by the business will also increase. By paying for fringe benefits for employees, a business can save on this expenditure. Many fringe benefits can exempt a small business from paying additional taxes. These benefits help to save on the taxable income of employees. The following are included in tax-exempt benefits: long-term care insurance, health benefits, disability insurance, group term life insurance, educational assistance, transportation benefits, dependent care assistance, and meals provided to employees.
- Restructure business to an LLC: Most small businesses are initially set up based on a partnership or sole proprietorship. Such businesses taxes are also applicable and have to be paid as a part of the small business tax. This is because Federal Insurance Contribution Act tax applies to any salary earned by an employee (in a small business based on sole proprietorship, the owner is treated as an employee as well). Restructuring a business to an LLC (Limited Liability Company) helps to divert a major part of the business income to distribution channels. FICA taxes are not applicable to this part of the business income, and the business can save a lot on taxes.
- Channel profits towards retirement plans: If a small business has limited number of employees, establishing retirement plans for employees can be beneficial for an employer. A small business can qualify for tax credits by setting up employee retirement funds. The profits of the business can be channeled to the employer’s contribution towards these retirement plans. The contribution made by an employer towards employee retirement plan is tax deductible. With a retirement plan such 401(k) or any simple tax-deferred retirement plan, employees can use the flexibility and option to save for retirement and employers can save on overall small business taxes.
These are just a few ways to save on small business taxes. By taking advantages of opportunities and tax breaks, small businesses can easily lower their overall taxes.