How Business Owners Can Keep More of What they Make

You need to pay your fair share; you don’t need to leave the IRS a tip

I have heard that the person who pays the most in taxes is winning. I get it, if you are paying a lot in taxes each year you probably have a high income, earning a significant living.  While I understand the premise, I also know that no one likes writing a big check to Uncle Sam each year.  The purpose of this post isn’t to tell you how to avoid paying taxes on what you owe. My intention is to give you a few ideas that could help you reduce the amount of that check.

One of the first things you may want to consider is a business retirement plan. You don’t need to have 20 employees before it makes sense to do so, you can create a business retirement plan even if you are your business’ only employee. The best part is that because you are the one setting up the plan you can design one that makes sense for you personally.  With some plan types you may be able to defer up to 25% of your income each year. For someone in an upper tax bracket that can amount to significant tax savings on a given year. Take a business owner who is earning around $250,000 per year. Through the use of a profit sharing plan they may be able to contribute up to 25% of their earnings into a personal retirement plan. By maxing out their qualified plan contributions that earner could reduce their tax bill by close to $15,000 in one year alone! After 10 years that would add up to $150,000 in tax savings not counting any potential investment earnings on those funds.  I think most people would rather have that $150,000 to help secure their retirement rather than sending it off to Uncle Sam each year to spend as he wishes.

Does your spouse provide meaningful support for the business? It may be possible to include your spouse on your payroll and have their compensation flow directly into a qualified retirement plan. By adding your spouse to the payroll and having their paychecks flow into a retirement plan you may be able to essentially double the amount of tax deferred contributions available to you in a year.

Setting up a business retirement plan has other benefits outside of tax savings. So many times, I see business owners who are good at what they do, love doing it but have no exit plan. Having something saved for retirement provides you with more options and security when it comes time to move on to the next stage in your lives. If your entire financial future is reliant on what you can sell your business for, you may be putting yourself in a tough spot. The way that we see it having more options is better when it comes to retirement planning. Having an account or investments to live on when you are no longer able to run your business may give you those options.

 

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.