Top 5 Tax Tips For Business And eCom Owners Making More Than 500K A Year
Following one of these tax tips can save $56,000 in tax deductions for your business this year! And if you are married, that number doubles to 112,000 in tax deductions.
How does that sound?
This lesson will give you the top 5 tax tips for those making 500K a year or more. We specifically geared this video so that all the tax tips will benefit most if you fall into this revenue range between 500K to around 1M a year.
Of course, if you are outside of this range, you can still benefit from some of the tax tips mentioned, but we can create videos for those in other fields if you are interested.
So let’s start with tax tip #1!
Family Income Splitting Tax Strategy
Tax Tip #1 has the Family Income Splitting Tax Strategy. When making around 500K, you are right around the highest tax bracket; that is the optimal level to consider how family income splitting would greatly benefit your business. So what is the Family Income splitting rule?
It is a tax strategy where you can allocate some of the net profit/income in your family among family members, such as your son, daughter, nephew, niece, uncle, etc., by giving them a position in your company and letting them earn a reasonable salary. For any business with more than 300K in net profit, this can make a significant impact as it can move some of your income taxed at the highest bracket to possibly the lowest shelf, netting you immense savings in between.
So things to watch out for:
The IRS is aware of abuse from this tax law as, believe it or, some businesses hire over 20 members to join their family business..and give them all kinds of odd titles like stamp boy or greeting lady when they have no need for those jobs at all for their business. So the IRS has imposed what they called a kiddie tax.
It limits the amount of unearned income a kid can earn. Now it used to be that you could pass on payment to your kid without them having to do an honest day of work as long as you give them some bogus title in the company or sometimes not even that.
Well, congress has cracked down on that.
But it’s okay, as long as you are paying your child for legitimate work you are doing and giving them a reasonable salary (for example, paying your 10-year-old 30/hr to copy papers will probably raise some flags).
But if you involve some family members and your son can take over operations for you, then this is an excellent opportunity for you to save a lot of money on your taxes.
Michael is an….e-commerce owner making 500K/Year
In Tax Tip #2, We have the Solo 401K. First, let’s talk about the fantastic Solo 401K plan. This plan is “solely” created for small business owners operating by themselves. You can have up to one business partner with limitations and have your spouse working in your company, but that’s it. The crazy thing about solo 401K plans is they operate on a self-directed custodian.
What does this mean?
So a traditional custodian is one such as Fidelity or Vanguard that would only allow.
So what makes a solo 401K amazing is the crazy rule that you can contribute as both the employee and employer of the business.
The employee part of the business is called the elective deferral, which for 2021 is $19,500 if you are under 50. The employer portion is called the profit sharing, and the max you can take is $38,500.
So if you add these amounts together, you can contribute a maximum of $58,000 to this plan, which is insane as a traditional 401K, say if you work for an employer that only allows for 19,500 a year.
And this is why they encourage people to start businesses; these special incentives the government has set up to stimulate entrepreneurship make it all worthwhile. And get this – if your spouse works for you, this amount DOUBLES!
Technically, you can deduct $116,000 of your income into this solo 401K retirement plan and have it shielded from income each year! It’s pretty incredible. Remember that the profit-sharing program has a limitation- if you are a sole proprietor or partnership, you are limited to 20% of net income.
You are limited to 25% of net income if you are an LLC or S Corp. Nevertheless, something you want to implement today and now.
EMPLOYER BENEFITS VS RAISES
IN tax tip #3, Look at benefits vs raises. A valuable employee perk may be the better way forward if you want to save on employer payroll taxes. The IRS has a guide on what’s taxable and what’s not, but some of the benefits that your employees won’t pay taxes on include:
- Company cell phone
- Up to $50,000 in life insurance coverage
- Some employee meals
- Occasional tickets to sporting or music events
The IRS considers gift cards (even small ones) taxable as income. To avoid additional tax burdens, giving a small birthday gift like a fruit basket may offer tax savings.
Anything considered a de minimis benefit (too trivial or minor to merit consideration) carries no tax burden. Ask your tax professional how additional benefits, like tuition assistance or retirement planning services, can count as expenses during tax time without triggering other payroll or income tax liability for you and your workers.
Sales Tax Threshold
IN tax tip #4, pay attention to your sales tax threshold and where you might cross the threshold. As you travel the 500K Mark, you are getting to the point where you will likely need to establish sales tax permits everywhere you go.
You should start with your state of residence or where your business is, and then the next one you check will be anywhere you have a physical nexus.
A question we often get at the firm is, what is Nexus? What does it mean?
Nexus is a connection or affiliation to an area that triggers sales tax. That’s all. There are two main ways that you can start Nexus. One is a physical presence, and the other is an economic condition. Here are some everyday activities that will trigger physical Nexus
- Office, store or other location in a state
- Employee, salesperson, contractor, etc.
- Owning a warehouse or storage facility
- Storing inventory in a state (i.e. Amazon FBA warehouses or other 3rd party fulfilment centres)
- Having a 3rd party affiliate in a state
- They temporarily do physical business in a state for a limited time, such as at a trade show or craft fair.
After this level, you would want to check for economic Nexus; when you have enough concentration sales in a particular state, you would also need to remit sales tax to that state’s government.
It is essential to be proactive here and not wait until that state comes after you as, at that point, you will have to incur penalties and fees, and you don’t want that to happen as that is just giving free money away.
So make sure you stay ahead of the game there.
By knowing what’s each state threshold you are more likely to be able to implement tax planning strategy around it and possibly NOT have to pay for a specific state’s sale tax if you can stay right under it, and that’s something we are very eager always to help clients on to make sure they can minimize their taxable liability in the most legal way possible.
Qualified Business Income Deduction
IN Tax Tip #5, we want to talk about something no small business should pass up on, and that is the qualified business income deduction (QBI)- QBI is a tax deduction that allows eligible self-employed and small–business owners to deduct up to 20% of their qualified business income on their taxes.
After the Tax Cuts and Jobs Act was passed, the IRS allowed some business entities to deduct up to 20% of qualified business income and 20% for qualified real estate investment trusts (REITs). This may offer substantial savings in addition to itemized deductions or the standard deduction.
Most sole proprietors, partnerships, S-corps, and some estates and trusts qualify for this, but some business services are excluded. Total taxable income 2020 must be under $163,300 for single filers or $326,600 for joint filers to qualify. In 2021, the limits will rise to $164,900 for single filers and $329,800 for joint filers.
Once you are over this limit, the phase-out happens, and you are very limited in how much you can claim under the QBI. This brings up an important point. You should always try to stay under this taxable limit; the best way is to understand all the available tax deductions to lower your taxable income as much as possible to qualify for this deduction. So don’t forget to do so this year when you look at your business and ensure that you are doing the proper tax planning and evaluation to lock down a QBI deduction for your small business. 20% is a BIG deal, don’t miss out.