All small business owners want to save on their taxes. The question is, how? There are many different strategies you can adopt to help you reduce your tax bite. The important thing is to not wait until December 31 before deciding to take action. Some pre-planning can go a long way to reducing Uncle Sam's take come tax time.
The first and main strategy of course is to set up a tax-free retirement account if you don't have one. Here are your choices:
1. KEOGH Plans. A KEOGH retirement plan allows self-employed taxpayers to contribute significant sums (it varies) every year into a tax-free account. KEOGHs are fairly complicated to create and the assistance of a financial advisor is required. There are several benefits to starting a KEOGH retirement plan:
- Contributions are deducted from gross income.
- Taxes are deferred until the money is withdrawn.
- Interest earned is also tax deferred until withdrawn.
- Contribution amounts are more liberal than with IRAs.
2. Solo 401(k). This plan is great because of its high contribution limits. Like a KEOGH, a solo 401(k) allows you to contribute up to $49,000 a year into your retirement account ($54,500 if you are 50 or over).
3. SEP IRAs. A Simplified Employee Pension Individual Retirement Account (SEP IRA) is a plan that allows you to contribute and deduct up to 20 percent of your income into a tax-deferred retirement account. SEPs are indeed simple: They can be created in a few minutes at a bank or brokerage house with no professional help required and no annual government reports are required. They beat regular IRAs because they allow for larger contributions.
ROTH IRAs: You may be tempted to also set up a traditional ROTH IRA. While that may be good for retirement purposes, it does little for you business-wise as contributions are not tax deductible.
One thing to understand about your retirement plan: If you do set up a SEP, Solo 401(k) or KEOGH, you have to offer it to your employees as well. This means you will likely need to make contributions that don't just cover you. Because of this, you should consult with an employee benefits pro before setting up any sort of retirement plan for you and your employees.
One last bonus for creating a business retirement plan: You can get a tax credit of up to $500 for the first three years of the plan if you have less than 100 employees.
In my next blog we will look at some other ways to save on taxes.
(For even more business tips and strategies, check out the new podcast on iTunes that I am doing in conjunction with Greatland called Small Business Success with Steve Strauss, Powered by Greatland.)