Tax-saving Tips for Small Business Owners

Small business owners deal with many challenges, and effectively managing finances has always been a big task. Being well-informed and making smart decisions can maximize savings and keep your business going.

Here are seven tips to save on taxes that might give you financial relief and help your business grow.

1. Hire Family Members

Hiring your spouse, children, or parents allows you to shift income within the family. For example, if you hire your child to help with tasks, their earnings can be a deduction from your business income. This lowers your business taxable income and puts money in your child’s pocket at a lower tax rate. If your child is under 18, their earnings may be exempt from Social Security and Medicare taxes.

Similarly, employing your spouse enables you to establish a healthcare reimbursement plan. This lets you deduct health expenses paid for your spouse, leading to potential savings.

To maximize these deductions, follow all rules and regulations. Ensure family members have legitimate roles with reasonable, industry-standard compensation. They must fulfil their work responsibilities like any other employee. Keep simple records of their employment and document all transactions properly.

2. Consider Home Office Deductions

This tax-saving tip lets you claim a portion of household costs for your home-based office, covering rent, mortgage, property taxes, and utilities. To unlock these deductions, ensure your home is your business’s primary location, where essential tasks happen. The claimed area must only be used for business, whether it’s a separate room or a dedicated corner.

The size or cost of your office doesn’t matter; it must be a legitimate workspace. A well-defined home office creates a professional environment and justifies your claim.

Keep accurate records of expenses for documentation. This helps maximize your deduction. Home office deductions managed well significantly reduce your tax burden, leaving more money in your business.

Also read: Tax Planning Tips for MSMEs

3. Use Health Savings Account (HSA) to Your Advantage

An HSA is a powerful tool for saving on taxes, especially if you’re in a high-deductible health plan. Here’s the deal: Contributions to your HSA are tax deductible. Yes, the money you put in lowers your taxable income, cutting down your overall tax liability.

But wait, there’s more! When you use the money for qualified medical expenses, your withdrawals are entirely tax-free. This means you’re using pre-tax dollars to cover healthcare costs, leading to significant savings.

And what if you don’t use all the money in your HSA during the year? No problem. The balance rolls over to the next year; there’s no use-it-or-lose-it rule. You can keep growing this tax-free money for future healthcare costs, creating a stash for unexpected medical expenses down the road.

The goal is to reduce taxable income in every legit way, and using an HSA is an excellent strategy. It’s not just about having a safety net for healthcare expenses; it’s smart tax planning. If you’re eligible for an HSA, seize the opportunity. You’ll be ready for future medical costs and chipping away at your current tax liability—one contribution at a time.

4. Hire Freelancers Instead of Employees

When hiring for your small business, consider hiring independent contractors instead of full-time employees for potential tax savings. It’s not just about cutting costs; it’s a strategic choice for financial flexibility.

Freelancers don’t receive employee benefits like health insurance or paid vacations, and you’re exempt from employer payroll taxes. This flexibility lets you control costs, reinvesting savings into your business.

However, understanding the difference between employees and independent contractors is vital. The IRS considers behavioral control, financial control, and the type of relationship. Independent contractors have more control, providing their tools and often working on specific projects or for a limited period.

Ensure a well-drafted contract outlining your relationship. Clearly define terms and keep accurate payment records. While hiring freelancers can be a significant change, reducing payroll and benefit costs, it requires responsibility.

5. Make Estimated Tax Payments

Paying taxes bit by bit during the year is a smart way to avoid a big financial burden. It’s like planning ahead to make sure you have enough money and make tax time less stressful.

This practice prevents sudden financial stress as the tax deadline approaches.

Wondering who should make estimated tax payments? If you expect to owe at least $1,000 in taxes after deducting withholdings and credits, you’re required to make these payments to avoid penalties. Payments are due quarterly in April, June, September, and January, not annually. Figuring out how many taxes you need to pay might seem overwhelming, but you don’t have to do it by yourself. Get help from experts like tax advisors or accountants. They can guide you through the process, help you figure out the right amount to pay in taxes, and make a plan for paying on time.

Also read: Powerful & Effective Cashflow Management Strategies for MSMEs

6. Invest in Business Equipment

Thinking of upgrading your business equipment? Consider the Section 179 deduction, a unique tax provision for small business owners. It encourages investment in business growth and stimulates the economy.

Here’s the scoop: Section 179 allows you to subtract the entire cost of eligible equipment that you buy or finance in a tax year. This means you might take off the whole expense right when you buy it, instead of spreading it out. It’s like getting an instant discount on your purchase, which makes it a perfect time to upgrade your equipment if you’ve been thinking about it.

Qualifying equipment includes computers, software, office furniture, vehicles, and machinery—basically, tangible personal property used in your business. Whether it’s a new espresso machine for your café or an office computer upgrade, significant tax savings could be in store.

Keep excellent records of what you buy and spend to show that the equipment is necessary for your business. But there are limits to how much you can deduct under Section 179. For example, in 2021, you can deduct up to $1,050,000 of equipment, but if you spent more than $2,620,000 the deduction decreases.

Also, remember that the equipment has to be active in your business during the same tax year you claim the deduction. You can’t buy something now and claim the deduction in a later year.