Running your own business isn’t easy. Whether you’re a one-man show or have 100 employees, there is no shortage of challenges in entrepreneurship. However, as a small business owner, you are eligible for special benefits, many of which are often overlooked. These perks can make your life much easier, like unique tax write-offs, insurance benefits and a special IRA for business owners.
At Rock House Financial, we work with a lot of small business owners in Utah, and we see many of these perks get missed or misunderstood.
For starters, there are major benefits that are available to small business owners through specific retirement plans. With these plans, business owners can enjoy a boost in retirement savings and potential tax savings. Finding the right plan depends on your company size and financial goals.
Let’s take a look at 3 small business retirement plans only available to business owners as well as other benefits every entrepreneur should be aware of.
Need help with your financial planning needs? Contact Rock House Financial to see how we’ve helped other business owners just like you.
An IRA for business owners can accelerate your savings and help better prepare you for your retirement.
The Simplified Employee Pension (SEP) IRA is a retirement plan for self-employed individuals that is easy to set up. Typically, SEP IRAs are a good fit for sole proprietors, but they can still support employee contributions.
With these plans, business owners can make tax-deductible contributions to save for retirement, but at almost 10 times more than traditional IRAs and Roth IRAs.
SEP IRA Quick Facts:
- Contributions are made by employers only
- The maximum contribution is the lesser of 25 percent of annual compensation or $61,000 for tax year 2022 ($58,000 for tax year 2021)
- Contribution amounts must be the same percentage for all employee salaries
2. Simple IRA
The SIMPLE (Savings Incentive Match Plan for Employees) IRA is a retirement plan available to small business owners with 100 employees or fewer. SIMPLE IRAs also boast higher contribution limits (though lower than the SEP IRA), but these contributions can be made by the employee and employer (unlike the SEP IRA).
SIMPLE IRA Quick Facts:
- Contributions are tax-deductible, and can be made by the employer or employee
- The maximum annual contribution is $14,000 for tax year 2022 ($13,500 for 2021); with a catch-up limit of $3,000
3. Solo 401(k)
Like its name suggests, a Solo 401(k) is for businesses with only one employee – business owners function as the employee and employer.
This special arrangement gives business owners the capability to make significantly large contributions. Contributions fall under two categories, as elective deferrals from your regular paycheck and “employer” non-elective contributions.
What’s more, these contributions can be either after-tax in the form of a Roth-401(k) or pre-tax like a traditional IRA. You can choose the tax treatment of your annual contributions to fit your financial picture, unlike SEP and SIMPLE IRAs, which are only pre-tax.
Solo 401k Quick Facts:
- Annual maximum contributions can be up to $61,000, based on the following categories:
- Maximum contributions by salary deferral up to $27,000 for 2022 if age 50 or over
- Maximum employer contributions up 25 percent of compensation
- Contributions are made only to the business owner and their spouse
- Contributions can be made pre-tax or after-tax
4. Business Expenses that are Tax Deductions
Small business owners can also take advantage of certain tax benefits beyond retirement accounts. (Read our recent blog post for 3 specific tax benefits many DIYers miss.) Retirement plans are definitely useful tools for small business owners, but there are also many common business expenses that are tax-deductible that non-business owners can’t enjoy.
From home-based businesses to small offices, your working area is likely deductible. For home-based businesses, if you have a specific workspace devoted to your business only (not personal use), it’s potentially eligible for the home deduction. The size of your deduction is typically calculated by dividing your total house size (in square feet) by the size of your office.
By double-checking the IRS guidelines for business use of your home, you may be able to significantly reduce your tax expenses.
If you use your personal vehicle for business purposes, it may be eligible for a deduction. At tax time, you can use the simpler IRS standard mileage rate of 57.5 cents per mile, or tabulate your gasoline, maintenance and toll costs.
In either case, if you operate your vehicle for business reasons, keep track of your receipts and mileage, because it might be deductible.
According to the IRS, if you or your employees’ duties require you to leave your “tax home,” your travel expenses may be deductible. In fact, for everyday that’s considered business, you can deduct 100 percent of your lodging costs and car rentals.
The myriad of these travel costs can reappear as benefits during tax season. Here is a list of potential travel expenses that are tax deductible.
It’s wise to discuss your specific situation with a financial advisor who has experience helping business owners like you.
5. Tax Benefits from Health Insurance
Employees who obtain benefits from their employer can enjoy the peace of mind that comes with relatively affordable healthcare. Business owners and self-employed individuals don’t have the luxury of an employer-sponsored insurance plan. However, there’s still good news for business owners.
While employees can’t deduct their health care insurance premiums, freelancers and independent contractors with net profit for the year may qualify for the self-employed health insurance deduction. Again, it’s recommended to discuss your specific situation with a financial advisor who understands the issues and concerns that entrepreneurs have.
With this deduction, eligible self-employed individuals can deduct 100 percent of health insurance premiums for themselves, their spouses and their dependents. This deduction is treated as an adjustment to income.
In 2019, the average annual cost of health care premiums was $7,188 for single coverage and $20,576 for family coverage. This taxable income reduction can be quite significant for you during tax season.
Don’t Waste Your Perks
Considering the broad list of business risks, these perks can make a big difference in your financial well-being.
Small business owners are wise to harness the competitive edge of their product or service to run a successful business, but it’s also extremely important to utilize the financial planning benefits only available to business owners.
Consult with a fee-only fiduciary financial advisor to find the best options for your business and give yourself a financial advantage.