High Income View:

Lessen Your Taxes by Owning Your Own Business

The only way the IRS makes money is when you make money. In the case of small businesses this statement can’t be truer. Every year IRS collects close to 50% of their taxes from them. Some of this money results from penalties and fees that many small businesses have to make to the IRS after they get audited. The reason for getting audited has very little to do with the fact that many of them were trying to cheat the IRS. Most of it has to do with the lack of understanding of different laws and changes that the IRS introduces every year.

One thing true about most small businesses is that they all usually have one owner. This is the same guy who has to worry about payroll and employee’s health care. On top of that he has to calculate his taxes four times a year. The IRS asks all small businesses to file form 941 quarterly to report wages you have paid, any tips your workers made, federal income tax withheld, social security and Medicare taxes withheld, your share of social security and Medicare taxes, and advance earned income credit (AEIC) payments. Somewhere along the way, he/she is bound to make a mistake. One solution for him/her is to hire some help. Someone who will work the payroll and has to figure out how much FICA (social security and Medicare) taxes to withhold. For this year the tax to withhold is 6.2% for social security and 1.45% for Medicare taxes. The same percentage needs to be paid to the IRS by you. Medicare taxes are usually constant but social security taxes change every year accordingly with the inflation. This year it’s $76,200; in 1999 it was $72,200. So this year you’ll be paying more in taxes to the government. Self-employed individuals who make up to the above stated limit must pay 15.3% FICA taxes all by themselves, although they can claim a deduction for half of it.

The IRS has set two schedules for depositing social security taxes, Medicare taxes, and income taxes that you have withheld. One is the monthly deposit and the other is the biweekly deposit. Whichever one you choose, you have to be careful to make the deposits on time. The penalties for late deposits range from 2% to 15%.

Some of the ways to save money on taxes for small business owners:

• For the 2000 tax year, the small business deduction for equipment is up to $20,000. That means instead of repairing old tables, replace them with new ones and claim the deduction on your taxes.
• The mileage rate for your business car is back for 2000. It is up to 32.5 cents per mile that you drive for business purposes.
• The luxury car tax has been reduced to 5% from 6% in 1999.
• You can deduct 60% of the cost of your premiums for medical insurance for yourself, your spouse and dependents for the year 2000.
• Set up a medical savings account. The contributions that you make to this account are tax-free and the money in these accounts rolls over from one year to the next. The money can be used when you need to go to the hospital. Other than that it stays in the account untouched by IRS. The money can be used over the years to buy stocks, mutual funds, bonds, etc. It grows tax-deferred like an IRA over the years. This was a pilot program started by Congress in 1996 and it is supposed to end by Dec. 31st, 2000.