If you’re not allowing yourself to think about the looming tax season, which will be there waiting for you, whether you want it to or not, after dumping untold thousands in Christmas and New Year’s Travel expenses this year.
Nobody likes to think ahead, but smart business owners most certainly do. Particularly if you’re operating your business as an S Corporation to avoid double taxation, among other benefits.
Here are the 3 ways the IRS allows you to file your S Corp taxes as a couple:
- Partnerships: A business jointly owned and operated by a married couple is generally treated as a partnership.
- Joint filing: Some couples opt to file as a “qualified joint venture” to ensure that both spouses receive credit for Social Security and Medicare coverage.
- Sole proprietor partnerships: In some states, husband-wife partnerships can be treated as a sole proprietorship, ditching their Form 1065 and Schedules K-1 in favor of a simpler filing process.
Note that the following 5 benefits/loopholes won’t apply to everyone’s situation. Consult your business accountant (and if you don’t have one, why not?) before employing any of the tactics described below.
1. Social Security benefits
Hey, don’t most of us have dreams of grandeur? To be a Richard Branson or Daymond John and not have to worry about struggling through those retirement years? The reality is — well — that you have to live in reality while your business continues to grow and succeed. Meaning, both you and your spouse need to work on building as much social security benefits as possible.
Since these benefits are based on your earnings throughout your career, this is of particular benefit to single-income families. Such as where the husband or wife stays home with the kids (or is working as an artist of some kind, etc.) Since one spouse isn’t accruing these benefits by not working, it only makes sense to add them on and give them an official income for the Feds to see.
If you’re a savvy business owner who minds their accounting, you know that this actually increases your tax liability, since you’ll have to pay more social security taxes to the IRS. This particular tax tip isn’t about saving money this year, it’s about having more money down the line, when you really need it.
Plan to be wealthy, even rich beyond measure. But also plan for things to not work out the way you plan!
2. Contributions to your retirement account
As an independent contractor, you can contribute up to $53,000 to your 401k every year! This might seem like more than enough, but who doesn’t want to add even MORE tax deductible savings into their portfolio? Adding your spouse to your business can mean for big-time extra savings. Savings this year and savings when it comes time to pack up your favorite khakis and golf shirts and move down to Myrtle Beach for all-day golf and 6pm bedtimes!
By placing your spouse on the payroll, they would be able to contribute up to $18,000 into a 401k, along with their “employer’s” contributions which can amount to 25% of gross income. Let’s say you’ve maxed out your $53k contribution. By adding your spouse to the payroll, your household could contribute an additional $23,000, for a total of $76,000!
Let’s look at an example so you can get a better picture of the increased contributions you could be making to your 401k account:
- Say you paid your spouse $20,000, they could contribute $18,000 as an employee contribution to their 401k. Add in the 25% employer matching contribution: 25% x $20,000 = $5,000 and you get a grand total of $23,000 of tax deductible contributions!
There’s no guarantees that your 401k is going to make passive thousands of dollars by the time you retire, but you could just as easily throw that money away on the stock market yourself and watch your retirement dreams fly away too. See 7 Rules for a Successful 401k
3. Deducting childcare expenses
It’s pretty hard to claim childcare expenses when you’re a single-income couple. However, what the IRS doesn’t know certainly won’t lead to an audit anytime soon. At the same time, be very careful employing this deduction tactic, as there are cases where the IRS have denied or later contested these deductions.
When this happens, you’re not saving, but rather losing. Losing the deductions themselves and possibly incurring penalties too. As with all advice, consult with a business accountant before assuming your situation warrants the flawless execution of childcare deductions.
4. Writing off travel expenses
Fun, sun, culture. Sipping margaritas on the beach with your husband while “writing it off” as a business expense. What heavenly travels await the two of you after taking your spouse on as an employee or partner?
Not so fast slugger! The IRS is a lot smarter than you are, and have unlimited resources to prove or disprove your clever tax-dodging attempts.
As with childcare costs, travel expense write-offs will be scrutinized heavily by Uncle Sam and his minions at the Internal Revenue Agency. Your spouse actually has to have a purpose on the trip. You can’t say that your wife is a certified dietitian serving meals to clients when there’s no record of proof for such a claim. Just as your husband, with no formal education in medicine can be your “Medical Consultant”.
The IRS will dig into your expenses and you’d better have paperwork to support your spouse’s role in the company, and any “sudden” changes that occur such as any suspicious lateral movements or promotions they get expressly to meet the requirements of a given trip.
From Nick Rizzi, CEO of Brooklyn, N.Y.-based Smart Tax:
If you travel together in a business capacity, you can write off all of your spouse’s travel expenses, says Rizzi—but the spouse needs to have a legitimate business role in the trips. When my wife attends trade shows with me, she can’t write off her meals and airfare unless she works at the shows as well.
5. Avoiding double taxation
Double taxation is one of the main distinct disadvantages of forming an S Corp. This disadvantage can be mitigated fairly easily by hiring your spouse onto the payroll.
The chief drawback of a C corporation is the so-called “double taxation” potential. “Profits are first taxed to the corporation,” Weltman says. “Then, when they are distributed to shareholders in the form of dividends, they are taxed again; the corporation cannot deduct dividend distributions.” However, the threat of a double tax can sometimes be mitigated for following certain strategies.
One such strategy is to withdraw those funds in the form of a salary paid out to your spouse, where it will be subject to tax only once.