Tax Strategies For Profitable Businesses

S Election

When your net profit gets past $40,000 a year, your self-employment (SE) tax will exceed $6,000. You can reduce your SE tax by perhaps 50% ($3,000) depending on the “reasonable compensation” for your work. If your business profit continues to increase, you should make the S Election because the savings exceed the additional costs.

Payroll

When you’re unincorporated, and when you’re operating an S corporation but not taking payments from your corporation, you shouldn’t put yourself on the payroll. That’s because payroll adds fees and taxes. But when you do make enough to pay yourself, you are required to treat a reasonable amount as W-2 compensation, a.k.a. payroll. Don’t try this at home.

We recommend that you outsource your payroll to either Paychex or ADP. These two companies are capable and comparable to one another.

Vehicles

The simplest way to take deductions for the business use of a personal vehicle is the mileage allowance.

Each year, the IRS publishes a business mileage rate that you should use to reimburse yourself. The business rate covers fuel, maintenance, repairs, insurance, even the depreciation of the typical vehicle’s purchase price. Once a month, the vehicle owner (you) should add up the business miles driven, excluding the drive to and from your regular place of work. Then write a check from your business to the vehicle owner (you) using the published rate.

The reimbursement is a deduction for the business and it’s not taxable income to the vehicle owner.

Home Office/Shop/Storage

If you use part of your home for business (1) regularly and (2) exclusively, and (3) it’s your principal place of business, you can take a $5 deduction for each square foot up to 300 square feet. A separate building on your property that you use regularly and exclusively for business does NOT have to be your principal place of business.

Business Meals

If you pay for meals that you take with a business associate (customer, vendor, employee, advisor, actual or potential), you can normally deduct 50%. For 2021 and 2022, meals provided by restaurants are 100% deductible. For a deduction, you must keep receipts (for restaurant name, date, and cost) with a notation of who ate and what business was discussed.

1099s For Services

If you pay an independent contractor $600 or more for services, you’re required to report those payments by January 31 on Form 1099-NEC. If you didn’t get the contractor’s tax ID (SSN or EIN) before making payment, you might never get it. Use Form W-9 to collect the tax ID; use a service like yearli.com to e-file your 1099s in January.

Sales Tax

If your sales are subject to sales tax, you’ll owe the state up to 8.25% — whether you collect the tax from customers or not! Call the Texas Comptroller of Public Accounts at (512) 463-4120 and ask whether sales tax applies. If so, apply immediately for a permit to collect sales tax.

These tax strategies are just the basics! Reach out to us if you have any questions.