Tax Planning

Want to minimize taxes and avoid penalties? One of the ways is to issue yourself a significant paycheck in December, and call it a "bonus." This method aims to cover all remaining federal and state tax liability for the year with the funds from one paycheck. But how do you figure out the precise amount due? We would need to do a tax projection at the individual level and create a mock tax return for the upcoming tax filing that would give a projected tax liability. This tax projection project includes reviewing all sources of income—such as wages, dividends, rental income and other income streams—and considering specific tax deductions for the year. Once we figure out your individual tax liability, we can process a payroll for this amount. Instead of receiving this paycheck as a direct deposit, the funds will be sent directly to federal and state tax agencies.

1. Avoid Underpayment Penalties: Both the IRS and state tax agencies impose penalties for underestimating your tax payments and they calculate those penalties based on the time the estimated taxes were paid. But when you make payments through your paycheck, the agencies do not have the exact time stamp of your payment and consider your payments timely. Such tax planning strategy reduces estimated tax payment penalty.

2. Keep the IRS Happy: A bonus amount increases your total wages on your W-2. This means your "reasonable compensation" as an S Corp owner will be higher and you will pay more self employment taxes on your income. And this will make the IRS happy. A substantial year-end paycheck helps demonstrate that you are meeting reasonable compensation requirements, potentially reducing the likelihood of an audit.

3. Manage Cash Wisely: Issuing a large paycheck at the end of the year allows you to retain more funds in the business throughout the year. This can be beneficial for managing operating expenses, investing in business growth during the year.           

1. Accountable Plans for Reimbursements: Implementing an accountable plan allows you to reimburse yourself for business expenses such as mileage, home office costs, or meals without these reimbursements being treated as taxable income. This strategy allows you to withdraw cash from your business and still classify it as an expense rather than a distribution. This can be particularly advantageous in avoiding reasonable compensation audits.

2. Retirement Contributions: Maximizing contributions to retirement plans, such as a SEP IRA or Solo 401(k), can significantly reduce your taxable income. These contributions are deductible, helping you build long-term wealth while also lowering your current tax bill. SEP IRA contributions depend on the amount of your W-2, and SEP IRA accounts are usually very small with S Corps, but a very good fit for Sole Proprietors. Another option is a Solo 401(k), which allows business owners to stash away a larger amount of money. Do you want to stash even more money? Lets talk about defined benefit plans!

3. Income Splitting: For business owners with family members involved in the business, income splitting can be a powerful tool. By shifting income to family members in lower tax brackets, you can effectively reduce the overall tax burden on your family unit.

4.  Pass-Through Entity Tax (PTET) Deduction:  In many states high-net-worth business owners can benefit from the Pass-Through Entity Tax (PTET) deduction. This allows you to deduct your personal California taxes on your federal return. To implement this strategy effectively, you must consult with your CPA and also to make payments twice a year—in June and at the end of December.

5. Acceleration of Expenses: This is a classic strategy employed by many of us. Made too much money? Buy a piece of equipment before December 31st, prepay your rent, increase your charitable contributions, or harvest your capital losses. Or, if possible, wait to bill your clients until the next year.​​​