Many business owners and freelancers struggle to retain profits with inflation, higher taxes, and a more hostile business environment. As a former business owner in NYC, we were at one point paying up to 58% in taxes when you include Federal, NYS, New York City, and self-employment taxes! Below, we review practical and operational tips based on our experience and discussions with our financial team on how to better manage your money.
What approaches can be evaluated for business owners and entrepreneurs?
Business Entity Planning
1) Evaluate S-Corp entity status vs. LLC partnerships to identify opportunities to save on self-employment taxes.
2) Explore inter-company billing for specific services by a sister business, located in a more tax-favorable state. This would capitalizing on differences in local tax treatment. For example, outsource your back-office operations (e.g., bookkeeping, accounts payable, and HR) to a company that would bill the parent company for services.
Tax Optimization
3) Delay invoicing and deposit checks during the last month of the year assuming you are using cash accounting. This would allow you to recognize revenue in the next calendar year and exclude it from your taxable income for the current calendar year.
4) Pre-pay any expected expenses at year-end and document any business expenses for deductions. For your vendors, consider negotiating discounted rates because you are pre-paying them for their services and providing financial predictability for the following year.
5) Recognize contributions to tax-advantaged retirement accounts in December, but delay funding until March of the following year. This would allow you to take the tax deduction, but help with near-term cash flow needs.
6) Research and apply for any eligible business tax credits to reduce your taxable income. This can be significant depending on your industry and type of business.
7) Limit your full-time employees to only key personnel directly contributing to revenue-generating activities. For other ancillary roles, consider hiring temporary contractors (as needed) to lower tax withholdings and incremental expenses.
8) Hire spouses and family members as W-2 employees. First, depending on the salary, spouses and kids could pay very little taxes (e.g., pay each child $11,000 since this would put them in the lowest tax bracket of 10%). Second, you would be able to contribute more pre-tax dollars into tax-advantaged retirement accounts, increasing deductions and lowering your overall taxable income.
9) Buy real estate for corporate office space to leverage depreciation to offset your earned business income.
10) Set up offices in no or low-income tax states or countries so that you can allocate revenue more favorably.
Cash Management
11) Manage excess cash in cash management accounts or money market funds to earn interest.
12) Analyze employee expense reimbursement, require receipts, and define limits based on expense category.
13) Re-evaluate employee benefits and prioritize the most valuable benefits. Focus on building strong relationships rather than “transactional” benefits.
14) Hire hungry and intelligent interns, and invest in training. If you teach them early-on, they will want to work for you when they graduate. This helps you save future money on recruiting fees.
15) Get a great cash-back, points business rewards credit card aligned with your regular business activities.
Business Accounts & Associations
16) Join a buying group or association for better group pricing on health insurance and other similar benefits.
17) Set up business accounts with vendors and negotiate discounts for bulk purchases as you scale.
Hope these tips were helpful and please consult with your professional CPA to understand whether you can apply these to your current situation!
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