• Running a small business can provide several lucrative opportunities to lower your tax bill.
• Compared to filing taxes as a W-2 employee, small business owners can deduct more expenses to keep money in their pockets.
• Self-employed people can split some expenses shared for business and personal use as deductions on their tax returns.
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7 ways to lower your tax bill as a small business owner
Owning a small business means wearing multiple hats. You’re likely more focused on running the business than optimizing your tax efficiency. However, you’ve got several options for lowering your tax bill through popular small business tax deductions. In turn, you can reinvest these savings back into your business.
Below are seven small business tax deductions you can use to lower your tax bill.
1. Pay for health insurance
There’s no denying it, buying health insurance can be costly. Fortunately, the IRS has special advantages for self-employed people who pay for their own insurance. If you work for yourself and pay for your own health insurance, you may be able to lower your tax bill.
Workers who receive health insurance coverage through their employer often share the cost of those premiums. But if you work for yourself as a freelancer, independent contractor, gig worker, or generally as a self-employed person–and you can’t receive health insurance coverage through your spouse–you may be able to claim the self-employed health insurance deduction.
If you meet the requirements for claiming this deduction, you may be able to deduct all or part of your insurance premium. The adjustment you claim might be limited to your net profit and any other earned income from the trade or business under which the insurance plan is established. This can lower your tax bill, saving you money each year you qualify for claiming the deduction.
The deductibility extends to self-employed individuals for medical, dental, vision, and long-term care insurance premiums. You can also claim the deduction for your spouse or any qualifying dependents age 26 or younger at the end of the tax year.
2. Save for retirement
As a small business owner, you have several tax-advantaged retirement savings options to consider for maximizing your retirement savings and reaping tax benefits. If you are self-employed without any employees, you might consider establishing a single-participant 401(k) plan, often called a “Solo 401(k).” This allows you to save up to 100% of your income as an employee contribution, up to the annual limit. In addition to the employee contribution, you might also be eligible for an employer contribution based on your net income from self-employment.
In 2022, you may be able to contribute up to $61,000 to your solo 401(k), up from $58,000 in 2021. Additionally, you can contribute an extra $6,500 if you’re 50 or older through a catch-up contribution.
Another option to consider is the Self-Employed Person Individual Retirement Account, or SEP IRA. This retirement account allows you to save up to 25% of your …….