How to Reduce Payroll Tax Obligations
- October 16th, 2014
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There are several ways for business owners to reduce payroll tax obligations. In our previous blog, we started listing some tips on how to reduce payroll taxes, such as forming an S corporation and hiring independent contractors, but that was merely the beginning. Here are a few more actions you can take to save your business some money when it comes time to pay your taxes.
Reduce Payroll Tax: Contribute to Retirement Plans
Not only is providing a retirement plan for employees a great way to reduce the amount of taxes you may owe, it’s an attractive offer for many prospective employees, and a way to retain current employees. Competitive benefits packages are an important factor in building a top-quality team. Contributions made to employee retirement plans aren’t considered “income,” and as such, they are not subject to payroll taxes. Additionally, you’ll be able to deduct your contributions from your taxes, which is another reduction in the amount you’ll have to pay at the end of the year. Lastly, for your own retirement plan, your personal contributions will be tax-deferred; this means that the money is taken from your income before taxes are deducted, and you only have to pay tax on the money when you take it from the plan, usually after you retire. At that point, you’ll likely be in a lower tax bracket because your income will have been reduced.
Reduce Payroll Tax: Increase Employee Benefits
Retirement plans aren’t the only employee benefit that attracts quality team members—health benefits are in tremendous demand, especially today. Instead of compensating employees by giving them raises, you can increase the benefits in their health insurance package. For example, if you were going to give everyone at your company a $500/month raise, everyone would have to pay income taxes on that, and you would have to pay payroll taxes on it. If you have 20 employees, that’s an additional $765 in employer FICA taxes alone, before you consider unemployment taxes. Instead, you could pay $500/month for each employee’s medical insurance coverage. They’re still getting the $500/month, but no one is paying income/payroll taxes on it, so it’s a win-win!
Reduce Payroll Tax: Establish Accountable Plans
Do you reimburse your employees for company-related expenses, such as using their personal vehicles for work or taking clients out for meals? If so, there’s a way to structure their reimbursement to save both of you money: your employee will save on income taxes, and your company will save on payroll taxes! Accountable plans are structured to verify that all expenses are related to the business, and are then reimbursed separately from the employee’s income. That way, the money doesn’t appear on the employee’s W2, so he doesn’t pay income tax on it, and you don’t pay payroll tax on it.
Do you still have questions about how to reduce payroll tax obligations? Call the tax professionals at JRH & Associates today at (516) 794-5752!