Give Yourself a Raise

How to get an income boost and cut taxes at the same time.
This story first appeared in the June 2008 issue of Entrepreneur. To receive the magazine, click here to subscribe.

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."

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