There are a number of things you need to do by 12/31/2020 if you want to pay less taxes:
Buy business items you want/need anyway,
Prepay business expenses,
Check basis in your business Link to Saturday’s basis blog.
Make sure your business has started and your real estate is in services, and
Write paychecks you need to write.
The last one is the topic of today’s blog. Making sure you write certain paychecks before 12/31/2020.
Pay Your Kids
Pay your kids, or any dependents for that matter, for work they legitimately do for your business.
You can pay them up to $12,300 this year (2020) and they won’t pay income tax. You can even increase that to $18,300 and give them the $6,000 they need to fund an IRA of their own.
Still no income tax
They (and the business) will need to pay payroll tax. Other than that, no tax. There are a number of benefits to doing this
You move income from your higher tax bracket to their lower (in this case, zero) tax bracket,
You can provide employee benefits for your child,
Education costs that help with your child’s job are deductible,
Your child learns about business, and
If your child sets up an IRA, they have money building for the future.
Remember, it’s work they legitimately do for the business. Additionally, I like to have my clients do 3 other things:
Write a job description,
Pay a reasonable wage for the work performed, and
Have your worker keep track of hours and days worked.
Remember this is payroll, which means you need to withhold some taxes and you need to pay some. You will need to furnish a W-2 in January and you’ll have quarterly payroll reports to file.
And you have to have it all set up before the end of the year.
Pay Payroll to Get Benefits
Maybe you want to increase or start your pension savings. You’ll need to have earned income in order to set aside money for a pension. That could come from a Sole Proprietorship net income (for the owner) or it could come from payroll that you pay family members or, in the case of an S Corp, you pay yourself.
Pay Your Spouse to get a MERP Plan in Your Schedule C Business
One of the best benefits for Solopreneur or Family only Businesses is a MERP (medical expense reimbursement plan). Once you set that up, you can have the business pay for all medical expenses.
However, there is a catch.
It only works for C Corporations and Schedule C (Sole Prop) where your spouse is employed.
Pay Yourself a Salary Because You Have To
If you have a profitable S Corporation, you will need to take a salary. If you take all your profit in salary, you’ll overpay your payroll taxes. A good rule of thumb is to take 1/3 to ½ of the net income in salary up to the amount that is reasonable for the work you do.
If you haven’t taken a salary, the IRS could come in and say ALL of the income is subject to payroll taxes and you’ll have to overpay.
Pay some salary because you’ll pay too much in payroll taxes if you don’t.
Those are just some of the reasons why you should pay some salaries before year end. It could be to you, your spouse, or your dependents. Your own circumstances determine what will be required.
Talk to your CPA before year end!
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