April 8th, 2011 Amanda Han CPA (Taxloopholes.com Tax Strategist)
Did you know that more new small businesses have started in recent years as it had in the past 14 years?
If you are someone who has been looking to start your own business to earn more money, achieve financial stability, and to control your own schedule, then you are in for a treat.
As a business owner, you not only have control over your own finances and scheduling, you also have more control over how much taxes you pay to Uncle Sam.
Let’s go into more detail as we share with you the top 3 Reasons to starting your own business in 2011.
Reason 1: Your business helps you to pay less taxes!
Is 2011 the year that you take control of your financial destiny? Are you ready to build financial freedom for you and your family? It’s a fact, that businesses get the best tax breaks from the IRS. That’s because businesses play a vital role in our nation’s (and the world’s) economy, through producing goods, providing services, and, perhaps most important, employing people to do the work! The government recognizes this, and that’s why businesses get the best tax breaks.
As a W-2 wage earner, your paycheck is taxed before you get it. You’re in what we call the Earn-Tax-Spend cycle. A business owner, on the other hand, has a different cycle – Earn-Spend-Tax. Instead of paying tax first and trying to live on what’s left, business owners pay their own expenses first, and share part of what’s left with the government.
Even a small, home-based business is entitled to use the Earn-Spend-Tax cycle, and that’s one of the best reasons I know to start a business. What if you could transfer a large portion of your after-tax expenses to pre-tax expenses? You would benefit by having your money go further, plus you’d be paying less tax, because after you’d paid out all of those pre-tax expenses your income would probably be lower than it is now, which would mean your taxes would be lower, too!
But to pay less tax, you need to be smart about how you run your business. We all know the difference between “talkers” and “doers,” and most of us prefer the doers, who get out there and do things.
Well, the government works in much the same fashion. Those who “do” in business – those who put proper, legal business structures into place, open a separate bank account for business funds and keep proper books and records for that business – are the ones rewarded with tax loopholes and lower personal risk.
On the other hand, those who “talk” in business – those who operate through sole proprietorship and general partnerships, co-mingle personal and business income and don’t keep good records – are penalized by paying higher taxes, being entitled to take fewer deductions, and being personally liable for the acts of their business and business partners.
Reason 2: It gives you the chance to design your own custom-fitted medical coverage!
Medical costs are one of the biggest expenses most employers today have besides salaries. And, because of those skyrocketing expenses, many employers are cutting back on the medical plans they offer to employees and their families – all at a time when America’s aging population is putting a higher demand than ever on the medical system.
So what’s a person to do? Well, for many of you, medical and other employment benefits are something you specifically look for when you are job-hunting. For others, it becomes a question of rearranging their lifestyle to fit the medical benefits offered – changing doctors to one on the plan, for example, or only going to the dentist once a year (if at all) where your employer’s coverage doesn’t include dental care.
But did you know that starting your own business can help you with medical coverage? As a small business owner, you can put a plan into place that will work for YOU. Even if you don’t leave your full-time employment, your small, part-time business can still help you to cover any gaps in your employer’s coverage.
A medical reimbursement plan is one very popular way to fill in the gaps (or provide coverage, period). With a medical reimbursement plan, employees and dependents are allowed to submit medical expenses to the business and have those expenses repaid. The payments made by the business are tax deductions, and, because the employees pay those expenses with after-tax dollars, they are not required to pay any additional taxes on the reimbursed monies.
You can set up a medical reimbursement plan to cover as much or as little as you like. As it isn’t dependent on an HMO or insurance company, you can tailor this plan to suit your personal needs. Contact us for a SAMPLE medical reimbursement plan. Please understand: it’s just a sample, and you should review it with your business or legal advisor first, to make sure everything works the way you want it to in your state.
To make the most of this tax-saving strategy, you need to be using a C Corporation. That’s because only C Corporations are allowed to deduct the entire cost of a medical plan with no impact on your personal taxes. On the other hand, an S Corporation can deduct the cost of the plan, but anyone holding 2% or more of that S Corporation’s shares must declare the amount of premium paid on his or her behalf as income and pay tax on it.
Reason 3: It gives you the ability to choose when you pay taxes!
Here’s another of my favorite things about running your own business – choosing when to pay your taxes.
In a normal employer-employee relationship, the government chooses when you pay your taxes. Payments for income tax, Social Security, Medicare and FICA are all taken off the top before you even see your paycheck.
But did you know that it wasn’t until 1943 that employers became required to withhold taxes on behalf of their employees? It’s a bit frightening how quickly we’ve become used to, and accepting of, the concept of paying the government when and how much it asks for.
However, business owners are treated differently when it comes to paying their taxes. First, businesses may arrange to pay their taxes once per year, when they file their tax returns. With strategic tax planning, businesses can hold off on paying its taxes until the time is beneficial for the business. If your business makes little or no money for the first part of the year and receives a large chunk of income in September, you may be able to delay paying the estimated taxes until after that income is earned.
If you are operating a C Corporation, you have even more control. C Corporations can select the ending of any month as their tax year-end. So, you could select a year-end for your C Corporation of June, giving your business the use of its money for 6 months longer than individuals or other business structures, who are all required to use the December 31st calendar year-end as their tax year-ends.
But even with a December 31st year-end there are still some advantages these business owners have that W-2 employees don’t. Owner-employees of these businesses can choose when they will be paid a salary, and when they will be receiving a profit distribution, which is not subject to payroll tax withholding. So, a carefully structured payment schedule could mean your business only remits payroll taxes once or twice per year.
If you are thinking of starting a business or if you already own a business, give us a call for a complimentary tax strategy session to ensure you maximize your tax savings potential at (877) 975-0975!