AccuPay has been helping employers implement tax savings strategies, via payroll, since our founding in 1994. Our Tax Director is a CPP/CPA, and our Tax Manager is a CPP/SPHR, and as such, we have considerable expertise in the “tax” aspects of payroll, tax, and HR services. HERE ARE 10 WAYS IN WHICH MANY OF OUR CURRENT CLIENTS ARE SAVING INCOME TAXES:
- Owners of “S” corporations should generally establish their salaries at the lowest “reasonable” levels. The “S” corporation and employee-owner pay FICA/Medicare taxes on wages/salaries, but not on “S” distributions/dividends;
- An individual’s spouse claims social security retirement benefits at the greater of his/her own social security account OR 50% of the spouse’s social security benefit amount. A common misconception is that a business owner’s spouse should “go on the payroll” from age 50 to 60 in order to build up his/her social security account. This generally is a very poor decision in which FICA/Medicare taxes are paid into the spouse’s account which generates no increase in otherwise available social security retirement benefits. Compensating the business owner’s spouse for services should be considered if your financial objective is maximum funding of your business’s 401k/profit-sharing plan;
- One of the most effective “tax shelters” for a business owner is selection of a “qualified” retirement plan. The qualified plan should be custom-designed to meet your specific objectives as to the level of owner pension funding, costs for employee participation, complexity of administration, flexibility as to annual funding requirements, and the like. It is common that the best plan choice for your business today will change as your business income and employee profit changes in future years (along with tax law changes);
- Many small businesses involve the time and efforts of various family members. A very common tax planning strategy is for a high income business owner to compensate children, parents and other relatives, which shifts income and the associated tax burden to lower tax bracket family members. It is important that a business owner can justify family payroll amounts as “reasonable” based on the value of the services. Putting family members “on the payroll” is an excellent tax-deductible way in which to provide financial support to children and parents;
- The very best way for a growing small business to minimize income tax obligations is to continually spend money to grow, improve and strengthen your business. Monies spent on prudent business expenses are tax-deductible and therefore lighten your tax load. Every small business owner should have a “list” of costs/expenses which will grow and improve their business. These expenses often include equipment, hiring talented people, education and training, marketing and promotions, consulting fees, etc.
- Employee fringe benefits provided as part of a written Section 125 “cafeteria” plan save taxes for both the employer and employees. A Section 125 plan enables employee payroll deductions for health insurance, HSA accounts, flexible spending accounts, etc. to be “pre-tax” for both income and FICA/Medicare taxes. Each employee saves income and payroll taxes, and the employer is not required to “match” the 7.65% “employer share” of payroll taxes;
- Business expense reimbursements made to employees, including owner-employees, should be made pursuant to an “accountable expense reimbursement plan”. Such a plan requires that the employee document/prove the expense reimbursement request, and the employer reimburse the exact documented expense request. Reimbursements made pursuant to an “accountable expense reimbursement plan”, including business vehicle expenses, are deductible to the employer and non-taxable to the employee. A fixed “allowance” for business vehicles, supplies, etc. is taxable for income and FICA/Medicare taxes, and the employer is required to “match” the FICA/Medicare taxes. An employee’s actual unreimbursed business expenses, including those paid from an “allowance”, are subject to deduction limitations on a personal tax return. Every “dime” of a business owner’s business expenses should be reimbursed from the business bank account;
- Most businesses require one or more vehicles to transport employees, including owner-employees, on business trips, to project sites, conferences and the like. Savvy business owners keep excellent records of business driving and vehicle operating expenses in order to claim business vehicle deductions which will “hold up” under audit. Most small business owners buy or lease vehicles in the company name and pay all vehicle expenses from the company bank account. Personal use of each vehicle is “tracked” and reported on the employee’s W-2 form, (based on IRS tables). Reporting “personal use” on your W-2 tells an IRS auditor that you are attempting to properly claim business vehicle expense deductions;
- A very recent PayDay (all of them are archived on our website) instructed “S” corporations to directly pay or reimburse the health insurance of their “on the payroll” “S” corporation owner-employees. The IRS has made it clear that they will challenge tax deductions for “S” corporation owner-employees which are not paid by the corporation. With monthly insurance premium amounts of $1,000 – $1,500 being common, every owner of an “S” corporation should pay health insurance in the manner instructed by the IRS. If you personally paid insurance premiums earlier in 2018, get reimbursed from your “S” corporation; and
- “Work opportunity tax credits” can save enormous amounts of income tax for businesses which hire employees who often have difficulty obtaining employment. Tax law details several categories of new hires eligible for the “WOTC”, which often include food stamps, disabled veterans, and “welfare” households, who are “disconnected” and unemployed. People who qualify for the tax credits can be found everywhere, but are common in low-paid unskilled jobs. Large employers such as Walmart claim millions of dollars annually in WOTC tax credits, whereas most smaller employers do not claim the hiring tax credits due to lack of awareness and know-how.
You should consult with your CPA/tax adviser about the application of these tax strategies to your unique tax structure and fact pattern.