Business owners are often so busy trying to grow their companies that they don’t pay enough attention to what should be a top-priority issue: how to maximize what they pay themselves. Whether your business is big or small, there are ways to increase the net pay you receive. Let’s look at the strategies.
If your company doesn’t have a health-care plan, putting one in place can amount to a substantial raise in net pay. Premiums for health plans are tax deductible, and the health services the plan pays for are a tax-free benefit for which you previously paid with your own cash.
If you have a plan, consider introducing a better plan with lower deductibles, or adding vision, dental, alternative medicine, weight-loss programs, mental health, or other enhancements to your policy. Paying yourself more through a better health-care plan both lowers your taxable income and reduces the amount you must spend for health-care services with your own dollars. The difference in net income can be substantial.
Another aspect to health care is introducing a health savings account, or HSA, structure to your health-care plan. This move can save thousands of dollars from taxation. In an HSA plan, you’re allowed to deposit money into a special account to be used for the out-of-pocket medical expenses not covered by your health plan. The money you deposit reduces your taxable income, so if you put, say, $5,800 into an HSA account in one tax year, and you made $60,000 from the business, in the Internal Revenue Service’s eyes you made only $54,200.
Cafeteria plans allow you to avoid taxes on items other than health-care costs, such as transportation to work, but most particularly child care. Using a cafeteria plan might allow you to shelter $5,000 in child care expenses, apart from what you shelter for health-care payouts. This type of plan is flexible in that employees decide how much money they will tax shelter for each type of benefit.
Retirement plans offer multiple benefits to business owners. The costs of establishing and administrating a plan are tax deductible, and the deposits you make into the plan are tax sheltered. If you have employees and offer company matching contributions to employee retirement deposits, the matching funds are another company deduction. Instead of getting a bigger paycheck you pay tax on, you get tax-free money deposited into your retirement account.
A number of employment benefits aren’t taxed as income. Your company could offer workers, including owners, subsidized parking or transit passes, education assistance, travel allowances, adoption support, or employee discounts at local businesses. These benefits can add up to thousands annually and aren’t considered taxable income.
If you can defer income into the next tax year, you avoid paying tax on it for an additional 12 months. So if business improves, rather than increasing your regular salary at a C corporation, you could receive a onetime bonus the following January, essentially deferring your IRS payment and allowing you to use the money for another year.
To defer a sole proprietor’s income in a high-earning year, work with clients toward the end of your tax year. Either bill them late so their payment doesn’t arrive until after year-end, or simply ask them to delay sending their payment.
Business reporter Carol Tice contributes to several national and regional business publications.