If you have an independent mind and a great idea, starting a small business could be the road to personal satisfaction and financial independence. Being self-employed or a small business owner can be a great adventure, and many who have gone before you would not dream of going back.
For those ready to make the transition from wage slave to small business owner, a little preparation goes a long way. One of the most important, yet often overlooked, aspects of small business ownership is taxation, and if you are not prepared, you could end up with a big bill at the end of the year.
The good news is you do not have to take those high taxes lying down. If you take a proactive approach and plan carefully, you can protect yourself while you build your business. Here are some winning tax-saving strategies every small business owner and self-employed individual should consider.
Take Charge of Your Future with a Small Business Retirement Plan
While many employees can rely on company pensions and 401(k) plans, small business owners and the self-employed do not have that luxury. If you want to enjoy a better and more financially secure future, you need to pave the path for yourself.
Luckily for you, the IRS provides some very generous tax deductions for self-employed individuals and small business owners who open and fund their own retirement accounts. The contribution limits on these accounts are among the highest around, in some cases exceeding the already generous 401(k) and 403(b) contribution limits. Those high limits mean you could significantly reduce your current tax bill, all while putting money away for your retirement.
Teach Your Kids the Value of a Dollar by Putting Them on the Payroll
If you need help with your small business, your next employee may be closer than you think. Hiring your kids is a good idea on many levels, from teaching the little ones the value of a dollar to netting yourself some tax savings.
It is always a good idea to run these family hiring decisions past your accountant or tax preparer, just to make sure you are on the right side of all IRS regulations. Even so, the tax benefits alone could make this small business move more than worthwhile.
Protect Your Health (and Your Wealth) with a Health Savings Account
Health insurance is one of the biggest considerations for small business owners and the self-employed, and it is easy to see why. While workers at large companies often have access to lower cost group plans, those who strike out on their own are forced to shop in the individual market, where premiums are much higher and coverage is often lower.
Opening a health savings account, or HSA is a great way to protect your health and your wealth. By pairing this account with a high-deductible health plan, you could reduce your premiums while gaining some important tax benefits.
The IRS provides a generous deduction for HSA contributions, and the limits are even higher for family coverage. If you have a family to protect and taxes to reduce, you owe it to yourself to check out a health savings account.
Do Not Be Afraid of the Home Office Deduction
There is a great deal of misinformation and paranoia about the home office deduction, so much so that many small business owners and self-employed individuals are afraid to take it. From fears of an audit to worries that the IRS will require exhaustive paperwork and dozens of photographs, these concerns cost business owners millions of dollars in lost deductions.
If you legitimately have a dedicated office in your home, you should not be afraid of the home office deduction. As long as you follow the rules, you should be fine even in the unlikely event of an audit. So don’t worry, but read the rules carefully, make sure you follow them and get the deduction you deserve.
Being self-employed is great, but paying high self-employment taxes is not. If you love the flexibility and freedom of working for yourself but hate the high taxes, it is time to take action. The strategies outlined above could save you money, protect your health and keep you on the right side of the IRS.
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