Tax season is not a time any taxpayer particularly relishes, and small-business owners are no exception. However, entrepreneurs who play their cards right can ensure tax time is a little less burdensome.
Here are seven ways to reduce your small-business tax burden:
1. Hire Family Members:
Uncle Sam is especially friendly to family businesses when it comes to wages. You won't need to pay federal unemployment taxes if you hire your spouse or parents, and you may not have to withhold income taxes and Social Security if your children work for you. You must still follow child labor laws, pay reasonable wages and make sure that the work benefits your company to qualify for these exemptions.
By hiring independent contractors, you won't need to withhold federal or state income taxes from their earnings, nor will you have to pay the employer’s share of Social Security and Medicare taxes or provide unemployment benefits. Just make sure that the IRS doesn't consider your contractor an employee, or you'll have to pay back taxes and fines. Seek the advice of a tax professional before you classify someone as an independent contractor.
Two ways of maximizing deductions are keeping excellent records and receipts and relying on a tax professional for guidance. Here are some key categories to consider for write-offs: start-up costs; office expenses; furniture; education; travel; insurance; memberships; and conferences.
If your business-related bills (rent, phone, electricity, etc.) are due in early January but cover expenses incurred in the previous year, pull out the checkbook before the start of the New Year. All of those expenses can help reduce your tax burden in mid-April.
5. Purchase What You Need – Now:
You may be waiting for a tad more revenue to trickle in before you replace your old computer or subscribe to that impressive new industry magazine. But tax-wise, it's smarter to invest in your business now rather than waiting for the New Year. Poor equipment in particular can cause headaches for small businesses: Help yourself by fixing or replacing worn-out products next week and get some of that investment back in deductions that could return you money next year.
6. Give to Charity:
That old computer you just replaced could aid a non-profit organization that can’t afford new equipment while reducing your small business's tax burden. The IRS gives tax incentives for donations, so take advantage of them. Before making a donation, check to ensure that the charity is qualified and that donations are tax-deductible. The IRS also requires that you have written acknowledgment from the organization for contributions of or valued at upwards of $250.
The “Work Opportunity Tax Credit” (WOTC) program, which incorporates the “Welfare-to-Work” federal tax credit, are incentives designed to encourage the hiring of individuals from certain groups that have an especially high unemployment rate or other special employment needs, such as veterans, ex-felons and high-risk youth. That credit has been expanded to include persons affected by Hurricane Katrina. Businesses that qualify to participate in the WOTC program can reduce their federal tax liability up to $2,400 per hire. The Welfare-to-Work tax credit provides an incentive to businesses to help individuals move from welfare to work, and companies that hire under this category of the WOTC can reduce their federal tax liability up to $9,000 over two years for each qualified new employee.
Tiare Rath is a freelance journalist and a former personal finance columnist for MarketWatch.com.