Our Mac Kid Accounting Expert Shares Top 3 Tax Strategies
Sarah A. Fox
November 13, 2020
MY TOP 3 TAX STRATEGIES
Tax Payment Plan: In the U.S., we have a “pay as you go” tax system, meaning you’re required to pay federal tax on your income as you earn it. For employees, that means having taxes withheld from their paychecks. As a small business owner, you need to make estimated quarterly payments. If you don’t make estimated payments or pay too little throughout the year, the IRS will charge penalties and interest. The IRS calculates those penalties by figuring out how much you should have paid each quarter, then multiplying the difference by the effective interest rate for the period. The effective interest rate is set quarterly at the federal short-term rate plus 3%. This would apply to individuals, sole proprietorships, and S corporations; only C corporations would pay a different rate. Estimating how much you’ll owe can be a challenge. But fortunately, the IRS provides a safe harbor rule. When preparing your return, I will set you up for safe harbor quarterly estimated payments. But remember, the safe harbor doesn’t mean you’re fully paid up for the year. It just ensures you won’t be penalized. If your income is significantly higher this year than it was on last year’s tax return, you’ll want to set aside a little extra.
Change your tax status: If you're a small business owner, you have several options when it comes to structuring your business . You can operate as a sole proprietor, partnership, LLC, S corporation or C corporation. Each business structure has different pros and cons and changes the way that your business is taxed. If you outgrow one type of business structure, you can usually change it to one that’s a better fit. I am happy to set up a call to discuss if your current status is the correct one for you!
Retirement Savings: While I believe fundamentally that it’s always a good idea to set up or contribute to a retirement account , doing so can also reduce your taxable income. Small business owners can set up a 401k plan for themselves and their employees or they can take advantage of a SEP or SIMPLE IRA. It’s important to contact a financial advisor to discuss the different options available to you. While these plans do not have to be funded until tax time, you will want to have them created before year end. If you are a traditional employee, a great tax savings tool is to contribute the maximum allowed into your 401k to reduce gross wages. It's not too late, you can still make adjustments to your final few paychecks of 2020.
Sarah A. Fox, CPA is a Richmond, VA based boutique accounting firm serving small business and individuals locally and across the country. We work collaboratively with our clients to provide tax preparation, planning and consulting services through a simplistic approach.