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Posted by Karen Munoz, EA

How Entrepreneurs Can Stop Overpaying on Taxes

How Entrepreneurs Can Stop Overpaying on Taxes

As an entrepreneur, you probably quickly clicked on this article because you are curious about avoiding overpaying taxes. Regardless of the money, you make a profit; you can agree that no one wants to overpay the government. Now, this conversation is also critical because many businesses are already overpaying taxes without realizing it. 

According to over 9 in 10 business owners are overpaying their taxes, even though they are also paying for costly accounting services. Sometimes, it is not the fault of the entrepreneurs because some of them don't understand the tax laws. 

The documents explaining tax regulations as well as Federal tax laws are over 70,000 long. Additionally, not all accountants are conversant with business-related tax laws, which is to the entrepreneur's detriment. So here's how you can put a stop to overpaying taxes and save some money:


  1. Defer your taxes

Deferring your taxes is one of the most popular ways to save taxes. The deferred tax is when you get a deduction at a particular year and pay later when you get to a lower tax bracket. An excellent example of this deferred tax system is your 401(k). There is a deductible tax from every dollar you add to your 401(k), and again, the hope here is that when you eventually withdraw the money when you retire, you will arrive at a lower tax bracket.


  1. Spend on your business

The truth is, the more money you spend on your company, the higher your tax deductions, and if you spend a lot of money, you can decrease it further to zero. For instance, you can hire new staff, run an Ad campaign, or purchase new equipment. But remember that the purchase must be profitable to your business: don't just buy whatever you "Like"; buy what adds value to your business.

  1. Link personal shopping to your entrepreneurial venture

Because business expenditures are deductible, business owners do have some benefits over other taxpayers. Entrepreneurs can enjoy tax deductions while others cannot, especially with their expenses. 

So go back to your expenditure spreadsheet, observe where you spend money, and see if you can link it to your business. A good example is with your home office: you will be spending some money on your home already to file that a part of your home is maximized for business, which means your costs convert into business expenses. 

You can also connect your business to other personal expenditures such as education costs, travel expenses, and additional costs linked to your company. The more such payments you connect, the more you can save taxes.

  1. Reduce tax rate 

Another way of reducing your taxes is to lower the rate at which you are taxed. You can do this by changing the tax you pay from regular income tax into capital gains tax. The income tax is typically higher at 39.6%, while capital gains tax can be as low as 0% or 15-20% for many individuals. You will be saving money if a CPA enables you to move some of your revenue to capital gains. 

Start by restructuring your business such that there will be more capital gains from your sales than regular income. This move reduces your tax rate (on the same income), but it will be taxed at a different pace. 

There are other additional ways to reduce your taxes and to overpay. For instance, some entrepreneurs with elderly parents get their parents to live and work for them. This move is effective because such older adults are in a lower tax bracket. Your children can also work for you without owing any income tax, and the money you save through them can be saved up for their college tuition. 

Lastly, always work with a professional and excellent tax professional. The best way to avoid overpaying taxes is to have a good understanding of tax laws and how it affects your business.



Karen Munoz, EA
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