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Tax Planning Considerations for Your Business

Posted by: Today's Tip Contributor on June 4, 2010

A common priority for business owners is attempting to reduce their tax liability during peak earning and profit-generating years. Below are a few tips that may help you minimize the tax hit:

• Hire. Do you have children under the age of 18? For a sole proprietor, there are no payroll taxes payable on your children’s wages. Three to four children earning $5,000 to $7,000 per year could result in payroll tax savings of approximately $4,000 and Federal tax savings of up to $10,000. For S corporations, the Federal tax savings are still in play, but payroll taxes on children are required.

• Spend. Younger, emerging businesses may reduce tax liability through capital expenditures and reinvestment. Many capital expenditures may qualify for a 179 deduction and be fully depreciable in the first year, significantly reducing profits and the corresponding tax liability. Depending on your situation and the amount of the capital expenditure, it may be advisable to depreciate over a number of years to maximize the tax benefit. Planned reinvesting may also produce increased profits—a benefit that makes additional taxes more palatable.

• Save. Depending on your age and the number of employees in your business, there are varying degrees of tax-saving opportunities associated with deferring taxable income to pretax defined-contribution plans, such as a 401(k). Today business owners may contribute $16,500—up to $22,000, if over age 50— to a 401(k) plan to reduce their taxable income. This may be increased to $49,000 with profit sharing substantially reducing taxable income. If you are older than your employees, a defined-benefit plan may be appropriate, where deferring significantly greater pretax dollars is possible.

• Grow. Consider forming an S corporation. Depending on the nature of the business and its offerings, an S corporation may result in significant savings with regard to payroll taxes. In 2009, business owners will pay approximately $16,500 in payroll tax on the first $106,800 in wages. Wages above $106,800 are taxed at 2.9 percent with no limit on earnings. Moreover, a dividend—which is payroll-tax free, if you are an S corporation—rather than compensation, will eliminate payroll taxes and have no impact on income tax.

Mike McGervey
President and Founder
McGervey Wealth Management
North Canton, Ohio

Reader Comments


June 10, 2010 12:13 PM

Isn't half of the $16,500 paid by the employee through withholdings?

If it is a high profit year issuing dividends from in S Corp will have no impact on the profit & loss. Wasn't the idea to reduce profits or am I missing something.

For the children do you still issue a W2 to them as a sole proprietor even if there is no withholdings?

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