Tax Strategies: Self-Employed / Business Owner

Self-Employed / Business Owner

1. Consider a business retirement plan: Consider a retirement plan (e.g., SEP or solo 401(k)) for your business as a powerful way to reduce your taxable income and save for retirement.
   
   External Guide: https://www.nerdwallet.com/article/investing/retirement-plans-self-employed

2. Take control of your (potential) business exit: Assist in implementing income tax minimization strategies depending on the specific terms of a potential exit (cash or stock sale, holdbacks, new benefits, etc.).
   
   External Guide: https://www.kiplinger.com/business/small-business/604940/how-to-control-your-business-exit

3. Deduct business expenses: Basically, if you need it to run your business, you can deduct. This can include computers, phones and phone plans, travel costs, business (not commuting) miles, and lots of other things. If it is legit, deduct.
   
   External Guide: https://www.thebalancesmb.com/deductible-business-expenses-3192959

4. Deduct work-related education as business expense: Self-employed people generally can deduct the cost of work-related education as a business expense.
   
   External Guide: https://www.kiplinger.com/slideshow/taxes/t054-s001-tax-deductions-and-credits-to-help-pay-for-college/index.html

5. Deduct car-related expenses: Any self-employed person who makes deliveries, drives to a client's location or otherwise uses a personal vehicle for work-related purposes can claim this deduction.
   
   External Guide: https://www.fool.com/the-ascent/small-business/articles/cars-tax-deduction/

6. Rent Out Your House to Your Business: Rent your house to your business for up to 14 days per year. Keep careful records on this one, but basically you're allowed to rent your house out to anyone you like, including your own business, without paying taxes on that rental income, while the cost becomes a deduction to your business. Make sure you charge a fair rate and cleaning fee to yourself.
   
   External Guide: https://www.thebottomlinecpa.com/legally-rent-home-for-tax-deductible-business-purposes/

7. Self-Employed Health Insurance Deduction: You can deduct what you pay for medical insurance for yourself and your family, whether or not you itemize and without regard to the 7.5% threshold. You don't qualify, though, if you're eligible for employer-sponsored health insurance through your job (if you have one in addition to your business) or your spouse's job.
   
   External Guide: https://www.thebalance.com/what-is-the-self-employed-health-insurance-deduction-5213734

8. Qualified business income (199A) deduction: The qualified business income deduction (a.k.a., the Section 199A deduction)—available for owners of S corporations, partnerships, LLCs and other "pass-through entities", and self-employed sole proprietors—allows you to deduct 20% of qualified business income with a 2022 income threshold of $340,100 for married couples filing jointly, $170,050 fo couples filing separately or single filers. It is limited to an amount equal to 50% of wages paid by the business.
   
   External Guide: ​​https://www.nerdwallet.com/article/taxes/qualified-business-income-deduction
   Video Guide: https://www.youtube.com/watch?v=oj2SSXWKbwY

9. Deduct equipment expenses: The Section 179 deduction lets you deduct 100% of the qualifying cost of equipment in year one vs. writing it off as it depreciates over time, and for the 2022 tax year, up to $1.08 million worth of equipment is eligible for the immediate write-off of expensing (although that amount is reduced if you place more than $2.7 million of new assets into service during any single year).
   
   External Guide: https://www.thebalance.com/a-beginner-s-guide-to-section-179-deductions-5218624

10. Hire your children: If you have a non-incorporated business and you hire your minor children as employees, what you pay them is a deduction to the business. Neither the business nor your children have to pay payroll taxes like Social Security and Medicare on that income, and up to $12,200 in income can be earned before any federal income tax is due.
    
    External Guide: https://www.whitecoatinvestor.com/use-your-kids-to-lower-your-taxes/

11. Take Distributions: Split your income into salary and distributions. By forming an LLC or a corporation and making an S election, the business is taxed as an “S Corp”, and the portion of the income of the business that is determined to be a distribution is not subject to payroll taxes like Social Security and Medicare.
    
    External Guide: https://www.financialsamurai.com/whats-the-right-ratio-between-salary-and-distribution-to-save-on-taxes-and-avoid-an-audit/

12. Tax preparation deduction: Deduct costs associated with preparing returns by itemizing deductions.
    
    External Guide: https://www.thebalance.com/tax-preparation-fees-deduction-3192843

Other Tax Strategy Guides:

Tax Efficient Portfolio Management
Income Tax
Homeowner / Real Estate
Gifting / Charitable Donations
Estate Tax

Ready to implement these strategies, but don’t know how to execute the plan? 

Check out our blog post on finding the best tax providers here.

We are often asked for recommendations for tax preparation (actually doing the forms) to complement the work we do with families on tax strategizing (planning in advance to lower future tax bills.) We were frustrated that no "Yelp" existed for accountants/CPAs/tax preparers, despite the fact that wealth advisors so often traded recommendations amongst themselves!  So we put together this list based on recommendations from various advisors. Check it out here.

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Do you want someone to guide you and your partner through saving taxes and reaching financial freedom? Reach out to me at ami@oursteward.com or schedule a free 15 min consultation to see if we’re a good mutual fit.

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