Always worried about the tax debt? Well, they can certainly be a real pain, especially for small business owners, with most of their hard-earned profits invested there.
No wonder why many entrepreneurs have a hard time growing their businesses. However, what if we say there are some powerful tactics following which you can effectively prevent a tax debt in the very first place? Sounds like a dream, right?
Well, not anymore. Here is a list of the top six ways to keep more of your money while bidding farewell to the tax worries.
1. Hiring Family Members
Family members?
It may seem like a not-so-good plan. But, in reality, they can play a huge role in preventing the tax debt. For example, if you hire your spouse or children, you will not have to worry about paying the unemployment taxes. This, in return, can greatly reduce your annual tax bill, along with preventing you from falling into the tax debt pitfalls.
And, in case of any emergency where you cannot pay in full, make sure to check in with the IRS Fresh Start Program. This initiative is one of the biggest weapons for entrepreneurs looking to remove their tax burdens.
Besides, hiring family members is not just a savvy business move. Instead, it is more like a tax-saving strategy that brings a team of your best kin. Moreover, you can be a witness to watching your loved ones contribute and growing themselves as a successful individual.
2. Start a Retirement Plan
Retirement plan? What is it even for?
Well, this plan is possibly one of the wisest decisions you can make in your life. After all, you are not only securing your future, but at the same time, you are also lowering your tax liability.
Didn’t understand?
For example, in the world of entrepreneurship, every dollar is like a soldier in the financial army, with the retirement plan being the commander, paving the way to victory.
That is, if an individual has a 401(k) plan, then you can contribute about $66,000 to your plan. Moreover, the limit can be increased by an additional $7,500 if a person is 50 or older through a catch-up contribution.
Another popular option is the Self-Employed Person Individual Retirement Account or SEP IRA. This retirement plan allows one to save up to 25% of their income in their account and has the same kind of contribution limits as the solo 401(k). Hence, whether it is a 401(k) or a SEP IRA, they always provide double benefits.
3. Save Money For Healthcare Needs
As the famous reverb goes, “Health is wealth.” Similarly, it just couldn’t get more true in the entrepreneurial realm.
For example, you have built up your empire from scratch, and now you are finally scaling up your business to new heights. However, all of a sudden, an unexpected health expense joins the party, leaving you with almost no choices. What will you do at that time?
Seems scary, right?
And all of us know how expensive the healthcare needs are getting every day. Hence, one of the best tactics to lessen the taxes is saving up for unexpected or future healthcare situations through a Health Savings Account (HSA). Besides, the IRS always has special benefits for people who pay for their health insurance.
In this way, you will be fully prepared and have fewer things to worry about. The business and the employees will also potentially have less taxes associated with medical expenses. Ultimately, it will save you tons of money each year.
4. Change Your Business Structure
Picking the right business structure is one of the most important things entrepreneurs fail to realize. In fact, you will be surprised to know that by choosing the wrong tax structure for your business, you will fall into the trap of tax debts.
So, if you are a business owner, you will not have the benefit of an employer having to pay a portion of the taxes. Instead, you will be on the hook for the whole amount of Social Security and Medicare taxes.
This is where changing your business structure comes to the roleplay!
For instance, if your business is taxed as a limited liability corporation (LLC), you can cut off the employer half of those two tax liabilities. Besides, this kind of structure also comes with a built-in shield against all kinds of personal liability.
What can you possibly ask for more?
However, that’s not the end. The LLCs and S corporations also offer opportunities for deductions and credits, ultimately giving you a strong edge while fighting off the tax villain.
However, make sure to consult with a tax specialist to be on the safe side. After all, they are the experts in this field who can always guide you in lowering your tax liability.
5. Use Contract Employees
Have you ever heard of the saying “less commitment, fewer problems?”
Well, that’s what you will get upon hiring contract employees.
Besides, we all know that hiring full-time employees is always expensive compared to employing contractual employees. And, for the best record, in most cases, the contract employees deal with their tax obligations while keeping you clean.
So, if you want to keep those burdens less, opting for freelancers or contract employees is a good idea. This way, you can get all the quality work done and reduce the overall tax burden.
6. Deduct Travel Expenses
Do you have to travel a lot due to your various business purposes?
If so, there is good news for you. You can keep those taxes in check by purchasing a company car.
How?
Unlike personal travel, business travel is completely deductible, including expenses like gas, oil, repairs, rental/lease payments, and so on.
The IRS also lets you deduct the overall expenses related to the operation and car maintenance per mile driven. As per the latest one in 2023, the standard mileage rate is 65.5 cents per mile. Last but not least, any kind of frequent flier miles earned from business travel can also be reclaimed for personal travels later on.
Wrapping Up
There you have it – the top six ways entrepreneurs can prevent a tax debt.
Without any doubt, this tax thing is very stressful for every entrepreneur out there. After all, most of their hard-earned business income goes to the government.
However, by following the six ways mentioned above, you can protect your business from falling into these traps of tax debt. And, for any kind of queries, make sure to get in touch with a tax professional. Remember, the key to success is not just to make money but to keep it as well.
Best of Luck!