Running a business is never simple. Entrepreneurs must diligently maintain their company’s financial health regardless of how well it is doing. It’s their responsibility as business leaders, especially in the early stages.
Profitability is the ultimate goal of any business. However, no matter how good your firm is, poor money management can stop you from reaching this goal. Therefore, every entrepreneur must be involved in their company’s finances.
On the other hand, taxes are a crucial component of business financial management. Hence, you must examine your country’s tax regulations and accounting standards. Every nation has a designated financial reporting institution that supervises financial matters, similar to the Internal Revenue Service (IRS) in the USA.
Fortunately, there are methods by which business leaders can lower their year-end tax obligations. Note that you might require a tax expert’s help to take advantage of these opportunities. That said, here are some suggestions for lowering your tax liability.
1. Employ Family Members
Family-run enterprises are quite common in several nations and cultures. In addition, family businesses foster continuity. However, from a financial standpoint, employing family members is far less expensive than hiring actual employees. You may be able to lower your year-end tax obligations by hiring family members, depending on your business.
For example, you won’t have to fork up the money that would have been required for a team member’s standard compensation. Or, if you hire your spouse, your company may not have to pay unemployment taxes.
Additionally, your company won’t be obliged to pay wages or employment taxes if you decide to employ your kids. Yes, you could pay your kids, but there’s no legal obligation. The main benefit is that it lowers your year-end tax obligation.
2. Build A Retirement Fund
Putting money aside for retirement is a wise decision. However, you should realise that you’re permitted to contribute up to USD$57,000 per year to retirement accounts if you’re an entrepreneur. Plus, the fact that all of these retirement contributions are tax-free is fantastic.
You can create a refund using various methods. Examples include simplified pension plans, Roth IRAs, and Simple IRAs. However, the alternative solutions available to you will vary depending on where you live.
Therefore, you must conduct research to determine which local options to consider. If you’re in Pennsylvania, you might want to consult with an experienced tax accountant Philadelphia-based, or tax expert in your region to identify the right solutions for you.
3. Get Incorporated
If you manage your firm as a sole proprietor, you should consider converting it to a limited liability company (LLC). The reason being that, as an LLC, you can reduce tax obligations by forgoing the employer option of Federal Insurance Contributions Act (FICA) taxes.
In addition, as an LLC, you have the option of being taxed as a C corporation. Therefore, being incorporated significantly increases your chances of receiving tax benefits.
4. Maximise Deductions
Ideally, you need to consult with a tax professional for this. But you could also conduct some research of your own to see which deductions could apply to your business. Mind you, there are plenty of ways you can maximise deductions to reduce your overall tax burden.
Deductions can decrease your taxable income and, subsequently, your tax liability. However, you must know the ones that pertain to your company. Some common deductions are business cell phone bills, expenses for running personal vehicles for business, and costs of purchasing business equipment, such as computers or printers.
Depending on the country or state, there are varying regulations on how much and what you can deduct. This is why you need the assistance of a tax expert. Plus, you ought to ensure that your financial records are accurate to deduct your expenses appropriately and apply for tax credits.
5. Hire Independent Contractors
Thanks to the booming outsourcing services industry, you can now outsource many different jobs. Additionally, due to globalisation, businesses located far apart from one another can outsource work due to advancements in communications technology. Nevertheless, if you want to pay less tax, work with these independent contractors or freelancers.
In addition to being less expensive, outsourcing eliminates the need to pay for healthcare and employment taxes. Even better, these contractors can provide you with services that are on par with or superior to those offered by others.
6. Charitable Contributions
Donating to charity does more than just promote your business. You develop customer trust as well. Furthermore, donations to charities could be viewed as a component of corporate social responsibility. Additionally, because of these donations, you have the opportunity to deduct up to 25% of your taxable income. This significantly lowers your tax obligation.
Meanwhile, giving to charities has two benefits: it helps you establish a good reputation and lowers your tax liability. Furthermore, for easier tracking, it would be wise to stay with only one or a few charities.
Significantly, it would be best to be cautious about how much you put up for contributions because you don’t want donations to hurt your bottom line. Make sure that your philanthropic gifts make financial sense.
7. Stay Up To Date On Tax Laws
Tax laws differ between states and countries. Moreover, tax regulations are constantly changing. Therefore, you must always keep yourself informed about the tax regulations that apply to your industry. For instance, the list of deductions you’re eligible for could change at any time.
Besides, you never want to be caught on the wrong side of the law. Consequently, tax audits will reveal any negligence. This is also why you should have a tax professional to advise you on tax law changes. You might not be able to keep up with changes on your own, but they will.
Realise that there are several choices you could use to lessen your tax burden depending on where you live. The above is a general overview of the possibilities you could consider. However, if you investigate further, you can find alternative solutions for your company.
In any event, make sure everything you do is legal. Learn as much as you can about tax regulations. But more significantly, seek out tax professionals or financial consultants who can advise you on how to handle your annual tax obligations.
About Author: Luke Prinsloo is a business consultant with 14 years of experience in the consultancy business. He has worked with dozens of high-profile individuals and reputable companies in his career. Luke enjoys writing blogs to share his insights. He also enjoys playing basketball and spending time with his family in his spare time.