When you start a business you’re faced with the decision of what type of business to form: sole proprietorship, LLC, S-Corp, and others. The most basic business entity, the sole proprietorship, may offer you more tax benefits than any other business type.
1. The $500-to-$1000-A-Year Tax Benefit: Easy Returns
A sole proprietor reports his or her business profit to tax authorities on simple one- or two-page form called Schedule C. For many sole proprietorships, in fact, all the IRS requires is a crude listing of revenue and expenses. In comparison, a corporation tax return is at least eight pages in length-and the return (typically either an 1120 or 1120S form) can it can be much larger if there’s a bunch of complexity.
2. The $1500-to-$2,000-Per-Kid-Per-Year Tax Benefit: Hiring Junior
Here’s another often-missed tax-saver unique to sole proprietorships. A sole proprietor can hire his or her minor children and not pay any payroll taxes. Other employees and employees of corporations would trigger payroll taxes-typically of at least 7.65% of wages paid.
In addition, the earned income of minor children typically isn’t subject to federal income taxes if the child earns less than $5,000 a year because of the child’s standard deduction.
If your minor kids help out in your business and the business is operated as a sole proprietorship, the family tax bill can drops by one to two thousand dollars annually for each child employed.
3. The $5,000-a-year Tax Benefit: Healthcare Reimbursement Arrangements
What this means is that if your proprietorship employs your spouse, the sole proprietorship can establish an HRA that reimburses all or some huge portion of employee’s family medical costs. The reimbursement is a business deduction for both income tax and self-employment tax purposes. That double deductibility often saves big taxes.
Let’s say that your family pays $9,000 a year for health insurance and another $9,000 for uncovered medical expenses. Say a family member has an expensive long-term illness. Or simply that you’ve got teenagers with big orthodontia bills.
Because you’re self-employed, you would get to use the $9,000 of health insurance costs as a business income tax deduction in most cases anyway. (Self-employed individuals can write off medical insurance if their business is profitable.) However, with an HRA, you’ll also be able to use the $9,000 of health insurance costs as a self-employment tax deduction. That saves you roughly $1350 annually.
In addition, you’ll be able to fully deduct the other $9,000 of uncovered healthcare costs as both an income tax deduction and as a self-employment tax deduction. This deductibility could easily save you another $1350 in self-employment taxes and then another $2250 in income taxes. Total savings: $4950 annually.
4. I got a suprise in the mail the other day! It was a Cubbie Cup, and I am one of the first moms to get one. Tiara R. the creator, had just got them in and wanted me to try it out and see if my 2yr old, or 4 yr old like it. Well, so far so good. No liquid stains on the furniture or Cheerios all over the floor. We have been able to locate it without having to look to hard for it. What can I say? It’s a winner, even at $10.00. Oh yeah, it’s my 10 and 11 yr old that loves it the most. My friends at the Health Department thought that it was pretty cool too!
Today I went to a meeting at the Health Department. All I can say is wow! I learned some great news about CMS lunch, WIC, SNAP, farmer markets, and yours truly, QC Super mom! More news coming soon!