The Family Business - Things To Do Right Now to Reduce Your Tax Bill

Things To Do Right Now to Reduce Your Tax Bill

By Eva Rosenberg

Eva's picture

Another business year is about to end. Same President and Congress. Don't expect brave new tax laws. One thing I want from our government - face reality about offices-in-home. Make them fully deductible - without games! Get people off the highways and encourage them to work at home - the technology is here!

HELP YOURSELF - USE YOUR RESOURCES

Meanwhile, what can you do to cut them out of your pocket? Schedule an appointment with your tax professional NOW - Being self-employed doesn't mean working alone. A business management team includes a tax professional who understands the special idiosyncrasies of small businesses. Add a good insurance agent - one who understands the difference between what your business must have and should have - and can save you money in the process. Add a good benefits administrator and an attorney who specializes in small businesses . Then milk these `pros' for information! Start by asking about these things:

LET'S KEEP IT IN THE FAMILY

Hire your family - If your children are old enough to read, they can be of help. They can file, put checks in order, many things. Instead of an allowance, compensate them.
Why? So you can take deductions for money you spend anyway:
1. Wages to your children are fully deductible to your company. Allowances are not.
2. You do not need to pay Social Security taxes for children under 18. You would have paid self-employment taxes on that money.
3. No Federal Unemployment Taxes assessed if they are under 21.
4. If your child and spouse have cars, have them submit mileage reports to you for errands they run. Reimburse them based on the IRS mileage rate. That's more money you can give them tax free.
Note: If your children are under 14, you'll be paying taxes on their wages over $500. So where's the savings? No payment for either Social Security or Self-Employment taxes. You save 15.3% by converting allowances to wages. If they're 14 or over, you'll pay tax at their tax rates - the lowest bracket of 15%. This saves you at least 13% - even if YOU pay their taxes.
Call the BizPlan folks at 800-626-2846. They can set you up to deduct the health insurance you're already buying for your child, spouse and yourself. This is why you put your spouse on payroll -Your spouse can provide deductible medical coverage for his/her spouse - you! In addition to deducting the costs of medical insurance, you can deduct the out-of-pocket medical expenses you expect to incur. Believe me, even with the increase in the amont self-employed people can take as an adjustment to income, you're better off reducing your business profits. (Again, your save the 15.3% of self-employment taxes on the insurance expenses.)

Buy an IRA for your child - put savings away for college. Buy a spousal IRA for the full $2,000, even if your spouse's earnings after deducting the medical expenses are less than $2,000. (Note, new law lets you pull money from IRA for medical expenses under certain conditions.)

Potential business deduction for child's earnings = $6,000 wages translates to an allowance of only $30.00/week. What happens to the rest of the money? You put $2,000 into an IRA, $100/month for car the expenses= $1,200 and $1,200 health insurance/medical expenses you're stuck paying anyway.
Potential business deduction for spouse's earnings = $10,000 wages consists of $2,400 medical Insurance + $1,200 family medical/dental/vision out of pocket costs + $200/month auto expenses + $2,000 IRA. This leaves only $2,000 of the wages as taxable income.
Federal Tax savings in a 28% bracket = $5,000 - $5,500

As you can see, it's definitely worth the inconvenience of setting up a family payroll and paperwork trail. Incidentally, this only works for sole proprietors. Family members working for partnerships and corporation pay all taxes and withholding.

IRS ACTIONS - Warning - the IRS is already auditing prior year personal income tax returns - they were just filed! If you had any foreclosures, relief of debt, Schedule C's with losses or anything unusual, start getting your records in order.

Mark these dates:

January 15th	prior year 4th Quarterly Estimated Tax Payment Due
January 30th	Quarterly Payroll Tax Returns Due Federal Unemployment Tax Returns Due Send out W-2's to employees Send out 1099's to consultants, etc. Quarterly Sales Tax Reports Due
February 28th	File W-2's with Social Security Admin File 1099s with IRS
March 15th	S-Corp Election Due for Calendar Year Corps Corporate Returns Due - or File Extension
April 15th	Personal Tax Returns Due, or File First Extension

Eva Rosenberg, EA, MBA, has been preparing taxes long enough to remember income averaging and interest deductions. Her Encino, CA, tax practice focuses on non-filers and the self-employed. The Tax Tips columnist for Self-Employed America, Eva is also the resident tax expert for several organizations on the Internet, the author or co-author of several books and articles. She has taught at UCLA, USC, UCI, CSUF and is a sought-after speaker at conventions, tax seminars, workshops, radio and television. She does a "stand-up tax" routine that is both informative and funny. Eva is frequently consulted by EAs, CPAs, attorneys and her former students regarding audits and Tax Court petitions. A Member of NAEA for over a decade, Eva has served on the CSEA state board and the San Fernando Valley Chapter's board.

Eva has also created a fanciful gift registry on the Internet at URL: http://www.mywishlist.com and can be reached by e-mail at taxwriter@taxmama.com

Return to TaxMama.com