Taxes are a necessary part of being in business, but you should ensure that they don’t unnecessarily cut into your bottom line. While you have to pay taxes to be legally compliant, you should also look for ways to cut your tax bill and avoid unnecessary taxes whenever possible. Wondering how to save on taxes in 2022? Then, check out these tax-saving tips for employers.
1. Stay on top of estimated tax payments
Most businesses need to make estimated tax payments. You typically don’t have to make them during your first year in business or if you owe less than $1,000, but after that, you must pay at least 90% of the previous year’s tax due. Or, if your current year’s tax due is less than last year, you should pay 100% of that amount.
If you pay less than these amounts, you will incur penalties for not paying estimated quarterly taxes. To ensure you pay the right amount, the IRS publishes a form that can help you calculate your estimated tax. Not that c-corps that file their own returns usually must pay quarterly if they owe more than $500 for the year.
2. Don’t miss tax deadlines
Missing tax deadlines can lead to unnecessary penalties. As a business owner, you must file an annual income tax return and pay quarterly taxes as explained above. But those are not your only tax deadlines. If you sell items or certain services, you may also need to collect and remit sales tax. Employers also need to pay payroll taxes and file payroll tax returns.
If you fail to deposit payroll taxes on time, you can incur penalties of 10% of the tax due. These penalties are assessed every month you are late. Penalties for late sales tax returns vary based on the rules in your state, but they also tend to be around 10% of the tax due. Staying on top of these deadlines can save you a lot of money in penalties and fees.
3. Claim eligible employment credits
The government offers many different tax credits to employers. To reduce payroll costs as much as possible, research and claim available credits. If you’re not sure what’s available, you may want to consult with a payroll specialist.
For instance, during the COVID pandemic, the IRS offered credits for certain employers who paid sick leave. The government also offered credits to employers who continued to pay wages in spite of losing business or shutting down during COVID. In some cases, you may be able to claim these credits retroactively.
4. Optimize your business structure
Your business structure also determines some of your tax bills. If you have a sole proprietorship, all of the profits flow to you as an individual, and you will incur self-employment tax as well as income tax on your profits.
Self-employment tax consists of Social Security contributions and Medicare premiums, and as of 2022, the rate is 15.3%. Social Security is 12.4%, and it doesn’t apply to earnings over $147,000. Medicare is 2.9%, and it applies to all earnings. However, you can reduce these taxes by electing to be taxed as an S-corp.
When you own an S-corp, you pay yourself a salary, and self-employment tax only applies to your salary. Then, the remaining profits flow to you, and they don’t incur any self-employment tax. Note that both your salary and your profits incur income tax.
To illustrate how this saves you money, imagine that your business earns $100,000 in profits. As a sole proprietor, you pay both self-employment tax and income tax on that whole amount. In contrast, imagine that your business is an s-corp, and you pay yourself a $60,000 salary.
You incur self-employment and income tax on this amount, but you only face income tax on the remaining $40,000 in profits. In other words, you have avoided paying the 15.3% self-employment tax on $40,000.
5. Consult with a tax specialist.
The tax code is extremely complicated, especially for small businesses. Even if you feel comfortable handling your own books or doing your own taxes, you should consult with a tax professional.
Contact an accountant and have them look over your business’s tax return. They should be able to tell you if there are any places where you can maximize your tax savings.
You may also want to work with payroll specialists or other tax pros who can help you stay on top of tax rules and deadlines. Although it costs money to hire these professionals, they are an investment in your business. They save you money in the long run.
When you’re in business, you have to spend money to make money. But you certainly don’t want to spend money on excessive taxes. To safeguard your bottom line, you should always be looking for ways to cut your tax expense. Therefore, we encourage all size of businesses to implement payroll software as a good payroll can help your business save money.
Keep in mind this isn’t a one-time process. Throughout the life of your business, you should continuously monitor your tax position and look for new ways to save.