Whether you look at paying taxes as part of your civic duty as an entrepreneur in America or as a distasteful requirement of doing business in the U.S. (or you’re somewhere in between), you likely want to take care that you don’t pay more taxes than necessary. After all, you work hard and you deserve to keep as much of your earnings as possible, after expenses.
That’s why we have laid out for you five ways you can reduce your payroll taxes legally. Think of these strategies along the lines of the hacks you might see on social media about how to peel garlic faster, how to get super glue off your hands or how to convert a Word doc to a pdf. Why struggle or suffer if you don’t have to?
1. Find out which tax credits you’re eligible for.
If you’re thinking that finding out what tax credits you can take is a job in itself, you’re not wrong, and if you have an accountant or financial advisor, absolutely lean on them to perform this task for you. But it doesn’t hurt to be informed on the topic yourself, whether you have a professional on your side or not.
For instance, are you familiar with the Work Opportunity Tax Credit? This IRS program provides tax credits to employers who give jobs to certain segments of the population who may be marginalized. Examples include convicted felons, disabled people and veterans. This program has done a lot of good in communities across the U.S., giving former prisoners an acutely important second chance at life, and allowing individuals who may not be suited to skilled labor the opportunity to contribute to society through work such as collecting shopping carts, stocking retail items or other types of jobs they may be well-suited to, be it part time or full time. Employing such people is a win-win — you get a tax credit while helping someone earn money and feel better about themselves.
2. Offer access to flexible spending accounts.
Employees can only participate in an FSA through their employer, so it is a crucially important benefit. But it’s not only the employees who benefit — it applies to employers as well.
Currently, the IRS allows for three types of FSAs — two for health care and one for dependent care. Employees may designate a certain amount of their pretax income to be funneled into a separate account to pay for uncovered expenses such as prescription medications, doctor visits, eyeglasses, dental care, caregiver expenses, summer camps and more. Employers that offer these programs at their business are eligible for reductions on the payroll taxes they must pay for workers who contribute to these accounts. Employers are exempt from paying Medicare and Social Security tax on every dollar that employees divert to their FSA. You may not get rich on this benefit, but every little bit helps, and when you offer these programs, you have the bonus of providing employees a valuable benefit (and hopefully their appreciation for doing so).
3. Take a closer look at your employee classifications.
In recent years, the labor force has seen an uptick in the number of workers classified as independent contractors, rather than employees. Classifying workers as ICs can save employers a ton of money in taxes, benefits and administrative costs. Employees need to be trained, onboarded and (usually) provided a space in which to do their work. ICs often work from home and already have the skillset necessary to complete the work. Using ICs gives employers flexibility to pay workers only when they need work done, versus 40 hours per week.
Plus, they save tremendously in not paying benefits such as health insurance, vacation and sick days. Additionally, employers do not have to pay their 7.5% share of Medicare and Social Security tax — the ICs are responsible for paying these themselves. Sounds like a dream, right? Many employers thought so, and that’s how it turned into a nightmare for them.
Classifying workers as ICs comes with a list of requirements, and if your ICs don’t meet these requirements, you could be looking at fines into the hundreds of thousands of dollars. For example, if you want to classify a worker as an IC, you can’t require them to be on your premises during any pre-set hours. You also can’t pay them by the hour — they must be paid by the project. These are only two examples — classification rules are extensive.
So while you can save lots of money classifying workers as ICs legitimately, you can lose a lot of money by doing it nefariously. If you’re not sure how to classify your workers, get the advice of a professional.
4. Offer retirement plans.
Offering retirement plans is a great way to attract top talent to your industry and business, but these plans don’t only benefit employees — they benefit employers too. For instance, employer matching contributions are tax deductible. Employees appreciate employer matching contributions, and they won’t cost you as much as you thought when you factor in the tax credit.
Additionally, you can get tax credits of up to 100% of your administrative costs for three years if you don’t already have a retirement plan in place. Because these costs can sometimes be higher than a small-business owner counted on (and the timeline for getting the plan up and running can be long), 401GO offers easy and low-cost startups for retirement plans for small businesses.
5. Stay updated on changes to tax laws.
You can do this by subscribing to reliable small-business publications, joining your local chamber of commerce or working closely with a financial advisor or certified public accountant. Some small-business owners love staying up to date on important developments in their industry or the administration of their business, while others prefer to focus on day-to-day operations or creative brainstorming sessions. There’s no one right way. Whether you rely on yourself or someone else, make staying abreast of how tax laws affect your business a priority.
Protect Your Profits
While more money doesn’t necessarily lead to greater success or happiness, it can make it easier. And when you pay less in taxes, you have more cash on hand — money that can be used to reinvest in your business, reward loyal employees, fund a local youth sports team or pay for a well-deserved vacation. Count on 401GO for great advice about how to improve the bottom line at your small business.