August 2020

Hiring Your Kids to Cut Taxes, Part 6: Small Business Guide to Reducing Your Tax Burden Legally

By Office Staff|2020-10-08T20:49:28-07:00August 25, 2020|Categories: Small Business Guide to Legally Reducing Your Tax Burden, Uncategorized|Tags: Cutting Taxes, Hiring Your Children|0 Comments

Do you ever get the feeling that your kids are taking you to the cleaners? We’re not talking about the cost of necessities such as daycare, living space, food, school supplies, and clothing. It’s those discretionary expenses, like cell phone service, sports leagues, music lessons, games and entertainment, outings with friends, and car and driving expenses.

If you’re paying for all that, you’re doing so with after-tax dollars. And you should be putting the brakes on that habit immediately if not sooner.

As a small-business owner, you’re allowed to hire your family members (including children, grandchildren, parents, siblings, nieces, nephews) to work for your business, pay them a fair and reasonable wage, and then have them pay for their own bells and whistles. In addition, they can sock away some of that money to use later for college or to buy a car, pay for their own lavish wedding, start a business or support the start-up costs associated with starting a family, retire, pay for college or whatever else they decide to do when they’re ready to do it.

Even better, you won’t have to pay income tax or self-employment tax on the wages you pay them, and chances are good, in the case of your children, that neither will they. Also, when you hire your own children to work for you, the wages you pay them are exempt from FICA (Social Security and Medicaid) withholdings and federal unemployment (FUTA) tax unless your business is incorporated. Some restrictions apply, of course, but this tax loophole is perfectly legal and something that all small-business owners with children should consider.

So, How Does This Work?

Here’s how it works: You hire your child and the business pays them. Their first $12,400 of earned income is taxed at zero. That’s because $12,400 is the standard deduction for a single taxpayer, even if you claim them as your dependent. Their next $9,876 of taxable income is taxed at just 10 percent.

Here are the basic rules: Continue reading… Continue reading… Continue reading…

Leveraging the Tax Savings Power of Retirement Accounts, Part 5: Small Business Guide to Reducing Your Tax Burden Legally

By Office Staff|2020-10-08T20:50:40-07:00August 20, 2020|Categories: Small Business Guide to Legally Reducing Your Tax Burden|Tags: Defined Benefit Plans, IRA, Retirement Accounts, Roth IRA, Savings Incentive Match Plan for Employees (SIMPLE), SIMPLE IRA, Simplified Employee Pension (SEP), Tax-deferred Retirement Accounts|0 Comments

Some of the most powerful tools for cutting taxes are tax-deferred retirement accounts, which enable you to invest money tax-free now, then pay taxes on it when you withdraw it in your retirement years. As a small-business owner, you can take advantage of several different types of tax-deferred retirement accounts, including individual retirement accounts (IRA), a simplified employee pension (SEP), a Savings Incentive Match Plan for Employees (SIMPLE) IRA, 401(k), Defined Benefit Plans, and even the option of a hybrid plan. Roth IRAs and permanent life insurance plans are two more tools that can benefit you when planning for retirement.

Many people have one or more retirement accounts, which is great, but few have a retirement plan — a highly specific approach for using retirement accounts to maximize their tax savings and achieve their retirement goals. Without a properly crafted retirement plan in place, mistakes are more likely, such as choosing an account type with a contribution limit that’s too low, exposing yourself to high taxes when you retire, or paying too much in account/plan management fees.

For example, depending on your income and the type of retirement account, your contribution limit varies considerably. If you earn $90,000, for example, you can contribute $16,200 to a SIMPLE IRA, or $22,500 to a simplified employee pension (SEP), or $42,000 to a 401(k). (Note: That’s before any catch-up contributions you can start making at the age of Continue reading… Continue reading… Continue reading…

Deducting a Percentage of Your Qualified Business Income, Part 4: Small Business Guide to Reducing Your Tax Burden Legally

By Office Staff|2020-10-08T20:51:38-07:00August 6, 2020|Categories: Small Business Guide to Legally Reducing Your Tax Burden|Tags: Qualified Business Income|0 Comments

The 2017 Tax Cuts and Jobs Act (TCJA) lowered the top tax rate on C corporation income from 35 percent to 21 percent. This is considerably lower than the top rate of 37 percent on pass-through income from sole proprietorships, partnerships, and S corporations.

Cutting taxes for C corporations without also cutting taxes for small businesses, would probably have caused a stir with small-business owners justifiably exclaiming, “No fair!” To balance the scales, the TCJA allows small-business owners to deduct up to 20 percent of their qualified business income (QBI) from their taxable income for the year, calculated on an activity-by-activity basis.

This is a major change for most small-business owners, but it may leave you wondering what QBI is, how this change is likely to impact your taxes, and what the heck “calculated on an activity by activity basis” means? In this post, the fourth in our Small Business Guide to Reducing Your Tax Burden Legally series, we bring you up to speed on the QBI deduction.

Understanding the Different Income Types

The tax code has always distinguished different types of income and taxed them differently. TCJA created an entirely new type of business income, called qualified business income (QBI), and taxes it in a unique way. In this section, we define and compare the different types of income, including QBI.

Ordinary income

Ordinary income is what you earn from your work or your business. If you draw pension or IRA income, that’s ordinary income too. Here are a few key points about ordinary income:

Ordinary income is taxed at ordinary income tax rates.
Any salary you earn from your small business is ordinary income.
If your small business is a sole proprietorship, your entire net profit from the business is taxed as ordinary income. (You can change your business entity from sole proprietor to S corporation to reduce the amount taxed as ordinary income. See Part 3 in this series to find out more about business entities.)
You pay taxes on net So, for instance, if you file as married, you earn a salary from a job, and should your spouse lose money in a business, your spouse’s business loss reduces your net income (subject to tax) as a married couple.

Investment income

Investment income is money you earn from your investment portfolio, and different types of investment income are taxed at different rates: Continue reading… Continue reading… Continue reading…