As the year draws to a close, the inevitability of taxes looms. Employers and employees alike want to reduce their obligation to Uncle Sam. Planning ahead can yield tax savings to both.
Maximizing tax deductions is key, especially for small businesses. Rein in your tax expenses with a number of strategies:
- Ensure that you're taking every deduction available. If you don't already use an experienced tax preparer — one who keeps abreast of the complex and fluid tax laws — it's likely a worthwhile business expense.
- Shelter revenue from profits in a qualified retirement plan that gives a tax deduction for your contributions, and defers taxes on earnings until you withdraw from the plan.
- Consider an accountable plan to save the company and employees taxes if you reimburse staff for using personal vehicles for company business. IRS Form 463 describes accountable plans and their use.
- Defer income to the following tax year and boost deductions in the current tax year by sending out bills a few days later in December. You'll get paid in January, putting the income in the next tax year. Take more deductions in December by paying bills due in January.
- Ensure that your business is structured properly. Can you gain tax advantages as a C corporation? Another structure? Your company's structure determines your tax bracket.
- If possible, increase your contribution to workers' health insurance premiums. Doing this in lieu of salary raises means that you and your employees save the attendant income, FICA, and Medicare taxes on bigger paychecks.
- Offer to match a percentage of employee contributions to the company 401(k) plan — the business' share is deductible. You'll save on taxes and your workers will certainly appreciate the benefit.
- If it fits your company, establish a Section 125 benefit plan allowing employees to pay medical and dental premiums with pretax dollars and set aside pretax funds for qualified medical and dependent-care costs. A Section 125 flexible spending account can save employees an average of 30 percent in federal, state and local taxes they already pay out-of-pocket. Your company can save an average of $115 per participant through decreased payroll and tax liabilities for social security, Medicare, and unemployment insurance.
Note: You may want to consult your company tax expert for more information.
Employers want to help their employees in every way possible, and assistance with tax savings ranks high on the list. At year-end, you may help workers reduce what they owe the IRS by:
- Suggesting they maximize their 401(k) contributions, as these are pretax funds. Reducing reportable income means a smaller income tax bill.
- Postponing bonuses until January to keep workers' current year's taxable income lower.
- Suggesting that staff convert a traditional individual retirement account (IRA) to a Roth IRA, which grows tax-free.
- Reminding workers to consider end-of-year charitable contributions that provide tax deductions, if they itemize — unless the alternative minimum tax applies.
- Reminding them to use flexible spending account funds by year-end. These funds let employees set aside pretax money to offset healthcare or childcare expenses. As an employer, you can opt for the IRS-permitted grace period, allowing workers to spend accounts up to March 15, 2016.
No one likes to see the taxman walk away with hard-earned money. Whether you're a boss or a staffer, think smart as the year winds down and keep more cash in your pocket.