Entrepreneurs work hard for their money. Unfortunately, many don't pay themselves in a way that maximizes their total income and minimizes federal taxes, says Catherine Gordon, a small-business analyst for CCH Business Owner's Toolkit.
Unless your company is set up as a C corporation, your net income each year is simply the revenue you took in minus your expenses, says Gordon. Only C corp owners get paid a salary on which they can then postpone taxes by deferring income or issuing a year-end bonus in the next tax year.
Here are a few key ways that owners of all other business types can increase their total compensation.
- Health insurance: Premiums for health plans are tax-deductible and the health benefits paid out are tax-free. If you have a plan, consider enhancing its coverage or perhaps adding mental health-care options, alternative therapies or better drug coverage.
- Retirement plan: Company matching contributions give your business a tax break, and the amount you put aside for your retirement lowers your taxable income for that year.
- Other benefits: Your company could add perks, such as dependent-care subsidies, employee discounts, education assistance or travel reimbursements. In most cases, these are tax-deductible expenses for the business and tax-free compensation for you.
A cafeteria-style benefits program, which allows participants to pay for child care, prescriptions, medical premiums and co-pays with pretax dollars, can also offer substantial tax savings. In February 2007, Julissa Carielo, 37, president and owner of Tejas Premier Building Contractor Inc. in San Antonio, instituted such a plan for her 18-employee company and says she saved more than $9,400 on this year's tax bill because of it. And with 2007 sales of $2.5 million, she was in the 33 percent tax bracket. Says Carielo, "For child care alone, I was able to pay $5,000 of the cost pretax."