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Money Business Tax Savings

Business Formation and Taxation

Sole Name:

Conducting business under your own name without any form of business entity can be done on a very small scale in an industry that does not have high liability. This formation is ok for small side jobs or hobbies that generate money when it is highly unlikely the clients will sue if things go wrong. In nearly all cases this is a terrible idea.

Advantage: No setup costs, no paperwork, no tax considerations
Find the paperwork: Zero required
Disadvantage: 100% liability on all personal assets including house and savings
Tax Considerations: Schedule C

DBA:

Doing Business As is not a legal structure and provides no protection. DBAs are means of operating under another name and funnels all income and liabilities under the larger structure. If the larger is the sole name of a person then there is zero protection and all personal assets are liable, income goes under the sole individual’s name. If the larger structure is a corporation or LLC then that business structure is liable for the liabilities and revenue.

Advantage: For sole individuals a DBA looks more professional than conducting business under an individual’s name. For LLCs and corporations that operate in more than one area of business this allows for multiple business names to be utilized while all revenue and operations can be centralized under one umbrella company. 
Find the paperwork: State specific. First conduct a name search in the state the DBA will be formed. If the name is available, file for a DBA. Not a bad idea to conduct a web search to see if results for the desired name already are associated with another company.
Disadvantage: Provides zero protection itself
Tax Considerations: Income for Sole Proprietor is on Schedule C. Companies that own DBAs accept the revenue under the primary companies revenue.

Single Member (Sole Proprietor) LLC:

Takes the liability off of the individual and places it into a separate entity limiting the risk of personal loss to only the assets of the business. The social security number of the sole proprietor can be used for the single member LLC but it is recommended to acquire an EIN to fully separate the LLC from the individual.

Advantage: Compartmentalization of liability into a single business entity protecting individual assets. Taxes can be simple with only annual filing required if revenue is small.
Find the paperwork: State specific. First conduct a name search in the state the LLC will be formed. If the name is available, file for a LLC. Not a bad idea to conduct a web search to see if results for the desired name already are associated with another company. An operating agreement is optional but highly recommended for any serious business as it is a means of defending the business in court and identifies how the business is internally structured and operated.
Disadvantage: Paperwork and cost is required to set up, maintain and close an LLC. Cost varies by state but ranges between $25-$500 per step.
Tax Considerations: Depending on tax liability generated taxes are paid quarterly or annually. Taxes are reported on Schedule C on individual tax returns.

Partnership LLC:

Takes the liability off of the individual and places it into a separate entity limiting the risk of personal loss to only the assets of the business. Used when multiple individuals are looking to join together to form one business.

Advantage: Compartmentalization of liability into a single business entity protecting individual assets. Flexibility of pooling multiple owners’ resources. Depending on the number of owners this structure allows for flexibility in that a owner can change without dissolving the company.
Find the paperwork: State specific. First conduct a name search in the state the LLC will be formed to see if the name is available to be filed for the LLC. Not a bad idea to conduct a web search to see if results for the desired name already are associated with another company.
Disadvantage: Operating agreement is required. Filing costs to set up, maintain and close vary by state but range between $25-$500 annually. Separate tax filing is required for the business and monthly or quarterly taxes have to be filed with federal and state.
Tax Considerations: Year end distributions appear on the K-1. Form 1065 Due March 15th.

S-Corp:

S-Corp is a tax filing status not a corporate structure. LLC or C-Corp can elect to receive the tax treatment of an S-Corp.

Advantage: Slightly better tax advantages, better structured for future business growth, more flexibility with the establishment of retirement accounts and contributions.
Find the paperwork: Form 2553 on the IRS website. Operating agreement is required. Meeting minutes are required.
Disadvantage: Filing costs to set up, maintain and close vary by state but range between $25-$500 annually. Separate tax filing is required for the business and monthly or quarterly taxes have to be filed with federal and state. Owners have to be hired by the company and W-2’s have to be generated.
Tax Considerations: Year end K-1 tax filing for business owners to distribute company profits. The business itself files 1120S Due March 15th.

C-Corp:

Designed for large businesses.

Advantage: Scalability.
Find the paperwork: Get an attorney.
Disadvantage: Costly to set up and maintain.
Tax Considerations: Complicated, get a Certified Public Accountant.

Non-Profit:

Designed for Social Services

Advantage: Donations and free stuff
Find the paperwork: IRS.GOV
Disadvantage: Restrictive on how money can be used and tighter accounting requirements. 
Tax Considerations: Seek a Certified Public Accountant
EIN: To fully separate the individual from the entity an Employer Identification Number.

Required Employment Paperwork:

You can find the forms directly on the IRS website. https://www.irs.gov/forms-instructions
Employees receive W-9 and an I-9 when they start. A W-4 and a W-2 annually.

  • W-9 is held on file with the company.
  • I-9 is held on file with the company. 
  • W-4 held with the company and filed with the corresponding state the employee is hired in. Website: https://www.acf.hhs.gov/css/employers More direct link: https://www.acf.hhs.gov/css/resource/state-new-hire-reporting-contacts-and-program-requirements
  • W-2 Physical copy is due at the end of January to the following address. Can also be filed electronically with companies like track1099.com
    • Social Security Administration
    • Direct Operations Center
    • Wilkes-Barre, PA 18769-0001

Independent contractors receive a W-9 when they start and a 1099 annually.

  • W-9 is held on file with the company.
  • 1099 Due by the end of January. Physical copy mail in location is state specific. Can also be filed electronically with companies like track1099.com

Forms are found at IRS.Gov under forms and instructions.
Each form has corresponding instructions that identify the due date.
Each state has laws governing acceptable payment terms for employees.

EFTPS:1

A physical copy of the Form 941 still has to be sent to the state specific address found on the instructions2. FICA Tax Payments are due quarterly if the tax liability is less than $2,500 and monthly if greater than $2,500. These payments can be scheduled in advance on the EFTPS. The annual FUTA3 payment of 6% of the first $7,000 paid to each employee is payable January 31st. SUTA is the states version of FICA which needs to be paid on the state website. If city taxes are applicable, they will also need to be paid on their separate system. 

Form 941 Payment on the EFTPS consists of the following:

Personal Social Security Contribution 6.2%
Personal Medicare Contribution 1.45%
Personal Federal Tax Withholding – annual rate table
Business Social Security Contribution 6.2%
Business Medicare Contribution 1.45%

Business Social Security and Medicare Contributions can be written off as an expense by the business. Businesses can not force employees to pay for the business’s share of the FICA payment.

Tax due dates: Read ALL instructions to make sure what applies. Each business structure has different tax dates and frequency changes depending on the size of the tax liability.

January 15th

  • December’s 941 payment if quarterly liability is above $2,500

January 31st

  • 1099-MISC
  • W-2
  • W-3
  • Form 940 and payment 
  • File Q4 Form 941 if quarterly liability is less than $2,500

February 15th 

  • January’s 941 payment if quarterly liability is above $2,500

March 15th

  • K-1’s
  • 1120S Business Annual Tax Return for S-Corp
  • February’s 941 payment if quarterly liability is above $2,500

April 15th

  • March’s 941 payment if quarterly liability is above $2,500

April 30th

  • File Q1 Form 941 if quarterly liability is less than $2,500

May 15th 

  • April’s 941 payment if quarterly liability is above $2,500

June 15th

  • May’s 941 payment if quarterly liability is above $2,500

July 15th

  • June’s 941 payment if quarterly liability is above $2,500

July 31st

  • File Q2 Form 941 if quarterly liability is less than $2,500

August 15th

  • July’s 941 payment if quarterly liability is above $2,500

September 15th

  • August’s 941 payment if quarterly liability is above $2,500

October 15th

  • September’s 941 payment if quarterly liability is above $2,500

October 31st

  • File Q3 Form 941 if quarterly liability is less than $2,500

November 15th

  • October’s 941 payment if quarterly liability is above $2,500

December 15th

  • November’s 941 payment if quarterly liability is above $2,500

Bookkeeping:

The easiest method of categorizing and storing a large number of financial transactions is to utilize an accounting software. Quickbooks4 or Xero5 is recommended depending on personal preference, mine is Xero for ease of use. The IRS requires all expenses to have supporting documents showing the amount paid and a description that shows the amount was for a business expense. This means statements are not adequate as they do not identify what was purchased. Receipts for every transaction are required.

Business Tax Strategies

Taxes are large unnecessary expenses that require direct management to mitigate. Several tax strategies can be employed to lower the bulk of the marginal tax rate down to a smaller effective tax rate. These strategies include businesses, retirement accounts and offshore options.

When talking about businesses in the context of financial management there are two distinct types. Investment businesses and operational businesses. Investment businesses generate cash flow with no direct management or liability, these are ideal for independent financial wealth. Operational businesses are the type talked about here as they are for individuals that are trading hours for money and need a method of reducing the tax liabilities.

There are numerous benefits in running income through an operational business structure. The first benefit is the transfer of liability from personal self to the company. If the business were to come under a lawsuit for any reason only the assets held within the company can be held liable thus protecting all of the personal accumulated wealth. The second largest benefit of running income through an operational business is all of the tax write offs that are legally allowed. The tax burden on businesses are unique in that they make money, spend money, and then are taxed on what remains. Whereas W-2 employees make money, are taxed, then keep what money remains. It is this key difference that when utilized appropriately can create significant tax savings. There are a  vast array of tax write off opportunities available depending on the structure, method of conducting, and industry of the business. Examples of write offs: Travel utilizing Per Diem, Augusta Rule, Section 179 for automobile purchases, depreciation, Family Management Company to employe children, children’s contributions to Roth IRA form Family Management Companies earnings, internet, phone, company retreats/family vacation, contributions to retirement accounts, health savings plans, office meals.

Business Expenses

Travel

Meals

Health Care insurance premiums

Fringe Benefits:

  • Disability Insurance: Taxable, but exempt form FICA & Unemployment
  • Group Term Life: up to $50,000 for regular, non-shareholder employees
  • Qualified Transportation Costs: Taxable and subject to FICA for shareholder
  • Qualified Dependent Care: Total benefit provided to > 5% shareholders must be less than 25% or all benefits to all participants are taxable
  • Working Condition Benefits: Small gifts, occasional parties & picnics, occasional theatre or sporting events
  • De Minimus Benefits: Use of benefits from points and miles programs
  • Qualified Employee Discount Programs

Medical Reimbursement Plan:

  • IRC Section 125 – IRC Section 125 are the cafeteria plans, which allow employees to choose from a variety of pre-tax benefits, such as health insurance and flexible spending accounts. These plans provide tax advantages for both employees and employers by reducing taxable income and payroll tax liabilities.
  • IRC Section 105 Plan (HRA) – is a tax-advantaged arrangement that allows employers to reimburse employees for medical and health-related expenses—completely tax-free. They are Tax-deductible for the business, not considered income for the employee and not subject to payroll taxes.
  • HSA – Health Savings Account, is a tax-advantaged savings account specifically designed to help individuals save for qualified medical expenses. It has triple tax benefits with contributions being tax-deductible, growth is tax-free and withdraws for medical expenses are tax-free
  • QSEHRA – Tax-free reimbursement plan allowing employers, with fewer than 50 full-time employees, to reimburse employees for Health insurance premiums and qualified out-of-pocket medical expenses. Employees choose their own insurance and pay their own way. Then, the employer reimburses them—tax-free.
  • IRC Section 401(h) – allows qualified pension plans—specifically defined benefit plans—to set up a special account that pays for retiree medical expenses, tax-free. In essence, it lets employers pre-fund healthcare for retired employees and their families, much like how pension plans fund future income. This is done through a 401(h) medical account, which is a sub-account inside a defined benefit plan.

Retirement Plans

Traditional and Roth

401k IRA

Elective and non-elective contributions

Complex Plans:

  • Cash Balance Plan
  • 412(E)(3) PLan
  • Defined Benefit Plans

Per Diem6

If you own your own business and would like to write off travel expenses but would not like to keep track of the receipts utilize Per Diem. Per Diem allows company employees and business owners that travel for work domestically7 or internationally8 to write off the time spent traveling as one block payment. If the travel expenses are going to exceed the allowable block payment it is recommended to itemize and keep the receipts for the travel and not utilize Per Diem. S-Corps owners that own 10% or more of the company are not allowed to utilize the lodging aspect of Per Diem, only the Meals and Incidental Expenses so you will have to write off the lodging separately.

Augusta Rule9

Homeowners can rent out space in their home for 14 days a year without reporting the income to the IRS. You can rent out a room or whole house for a business meeting, deduct the cost of the rental fee from the business as an expense and then not have to claim the rental fees on personal tax.

Section 17910

This allows businesses to write off the full purchase price of qualifying vehicles in the year they are placed in service, provided the vehicle is used more than 50% for business and weights more than 6,000 pounds.

Depreciation

Large assets like an automobiles that do not qualify under Section 179 can utilize depreciation.

Family Management Company

A Family Management Company is essentially a Payroll Company that is strictly utilized to hire minor children of the parents who own the business to avoid taxes.

  • Family Management Company is a entity structure that will have to file a tax return
  • Company structures that work
    • Sole-Proprietorship, Schedule-C (Recommended)
    • Single Member LLC
    • Partnership, only parents of the child are owners
  • Company structures that DO NOT work
    • All S-Corp Elections types
    • C-Corp
    • Partnership that have a Non-Parent of the child that has an ownership
  • Taxes that are avoided for employees under 18 years old
    • FICA
      • Social Security
      • Medicare
  • Taxes that are avoided for employees under 21 years old
    • FUTA
      • Unemployment taxes
  • Taxes that are NOT Avoided
    • State Tax
      • Avoid by living in Zero Income Tax State
    • Federal Withholding
      • Avoided with Standard Deduction $14,600 (2024)
  • Age Limitations
    • At any age, youth may work in businesses owned by their parents
  • Roth Contribution Limit $7,000 (2024)
  • Child still needs to receive a W-2 and file taxes
    • Child does not need to file taxes if child makes under the standard deduction of $14,600

Business Account for Losing Money11

You can have a business account as a Sole Proprietorship, LLC, S-Corp
Business loses money every year, businesses that lose money for more than 3 out of 5 years are considered hobbies and get flagged by the IRS for audit review.
Loses are used to reduce your W-2 or non business related income
Any business or side business activity will qualify.

OffShore

Key acronyms:

  • IRS – Internal Revenue Service; Tax collection agency for the United States
  • Tax Evasion – Illegal action in which a person or entity deliberately avoids paying a true tax liability. Willfully failing to pay taxes is a federal offense under the IRS tax code, penalized by criminal charges and substantial financial penalties.
  • Tax Strategy – Legal action of reducing tax liability by following the IRS code
  • Money Laundering – The process of taking the proceeds of criminal activity and making them appear legal
    • Placement; integrating the “dirty money” into the financial system
    • Layering; concealing the source of the “dirty money” through a series of transactions and bookkeeping tricks
    • Integration; now-laundered money can be withdrawn from the legitimate account as clean money
  • FinCEN – Financial Crimes Enforcement Network; collects and analyzes information about financial transactions in order to combat domestic and international financial crimes.
  • CTR – Currency Transaction Report; All financial transactions conducted with hard currency in the amount of $10,000.01 and above are reported to FinCEN
  • MCTR – Currency Transaction Report; any hard currency transaction being placed into a prepaid financial instrument such as a cashiers check.
  • SAR – Suspicious Activity Report; When hard currency is being transacted that does not logically match up with the line of business, when money structuring is suspected to be taking place to avoid a CTR report.
  • OECD – Organization of Economic Co-Operation and Economic Development; exchanges tax and financial information with many of the world’s governments, used to spy on your banking
  • CRS – Common Reporting Standards; information standard for the automatic exchange of tax and financial information on a global level, Its purpose is to combat tax evasion, developed by OECD
  • FATCA – Foreign Account Tax Compliance Act; requires all international banks that participate to report any American that opens accounts at their institution
  • SEC – Security and Exchange Commission; oversees the securities markets for the purpose of protecting American investors
  • FCPA –  Foreign Corrupt Practices Act; Transparency in accounting on a global level by the SEC, and to combat bribery of foreign officials
  • OFAC – Office of Foreign Assets Control; financial intelligence and enforcement agency that administers and enforces economic and trade sanctions in support of U.S. national security and foreign policy objectives
  • FBAR – Report of Foreign Bank and Financial Accounts; All Americans must report all accounts held in foreign jurisdictions with amounts above $10,000 if they have authority over those accounts. 
  • Expat – expatriate; Individual that lives and work outside of their home country
  • FEIE – Foreign Earned Income Exclusion; Expats are allowed the first $105,900 (2019) of income to avoid tax
  • Expat CPA – Certified Public Accountant that has a better understanding of offshore tax treatments for Americans
  • Double Irish Dutch Sandwich – Shifting money around Europe though shell companies and parking it in the Bahamas to avoid all taxes 

Going offshore is ideal for individuals that are not physically required to remain in the United States to earn their money. This includes remote based employment, remote base businesses, business that can be managed remotely, or income that can be generated globally.

Offshore options include moving the business, the individual or both out of the United States. This can be on a temporary or permanent basis that will reduce or eliminate taxes altogether.

Offshoring the business but not the individual; Prior to the Tax Cuts and Jobs Act in 2017 individuals would establish a business in a foreign country and retain all of the profit within the company so they would only get taxed on the distributions. However, The Tax Cuts and Jobs Act that was passed in 2017 taxes US owners of a foreign companies, which are majority controlled by US persons, on their retained earnings. This effectively closed the loophole unless there is a foreign entity that controls 50% of the offshore business making the business not majority controlled by US persons. Offshoring a business to a country that the United States doesn’t have a Totalization Agreement12 with does allow the individual to avoid paying Social Security and Medicare taxes13 on their salary.

Offshoring the individual but not the business; Working as an Expat allows for the Foreign Earned Income Exclusion (FEIE)14. This Exclusion allows the individual to not pay federal taxes on the first $105,900 (2019) but still pay the Social Security and Medicare taxes. This requires the individual to not be in the United States for a minimum of 330 days out of the year15. There a numerous other deductions and exclusion allowed for expats the largest are for housing16 and fringe benefits17. 

Offshoring both; Offshoring both the company and individual will not add any additional benefit on its own unless the individual renounces their American citizenship18. All taxes can be avoided if the business and individual follow the Flag Theory19, developed by Harry D Shultz, and reside in the correct jurisdictions. Individuals that follow the Flag Theory set up their businesses in a country that doesn’t tax businesses on foreign earned income and have citizenship in another country that doesn’t tax foreign earned personal income.

  1. https://www.eftps.gov/eftps/index.jsp ↩︎
  2. https://www.irs.gov/forms-pubs/about-form-941 ↩︎
  3. https://www.irs.gov/forms-pubs/about-form-940 ↩︎
  4. https://quickbooks.intuit.com/ ↩︎
  5. https://www.xero.com/us/ ↩︎
  6. https://www.gsa.gov/travel/plan-a-trip/per-diem-rates/faqs#1 ↩︎
  7. https://www.gsa.gov/travel/plan-book/per-diem-rates ↩︎
  8. https://allowances.state.gov/web920/per_diem.asp? ↩︎
  9. https://www.irs.gov/taxtopics/tc415 ↩︎
  10. https://www.irs.gov/publications/p946 ↩︎
  11. https://www.irs.gov/publications/p536 ↩︎
  12.  https://www.irs.gov/individuals/international-taxpayers/social-security-tax-consequences-of-working-abroad ↩︎
  13.  https://www.irs.gov/individuals/international-taxpayers/social-security-tax-consequences-of-working-abroad ↩︎
  14.  https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion ↩︎
  15.  https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-requirements ↩︎
  16.  https://www.irs.gov/publications/p54#en_US_2018_publink100047520 ↩︎
  17.  https://www.irs.gov/publications/p15b ↩︎
  18.  It is ideal to already have a second citizenship prior to renouncing the United States citizenship. ↩︎
  19.  https://en.wikipedia.org/wiki/Perpetual_traveler#Flag_theory ↩︎