When you run a one‑person company, every dollar you earn becomes your tax bill. Fortunately, the tax code offers many chances to lower that burden if you plan ahead and keep up with deadlines. Here is a practical guide to proven methods that can help you keep more of your hard‑earned money.
- Select the Appropriate Business Structure
Your entity determines how you’re taxed. Sole proprietorships are simple but expose personal assets to liability. If you’re comfortable with extra paperwork, consider forming an LLC or an S‑Corporation.
- LLC: Provides liability protection and flexible profit‑sharing. Income passes through to your personal return, avoiding double taxation.
- S‑Corp: Lets you pay yourself a reasonable salary (subject to payroll taxes) and take the remainder as dividends, possibly cutting self‑employment tax.
- Increase Deductions Quickly
The sooner you detect deductible expenses, the more you can cut taxable income. Common deductions for solo entrepreneurs include:
- Home office deductions (a share of rent, utilities, insurance, and internet).
- Vehicle mileage or real vehicle expenses if you use a car for business.
- Professional services: legal, accounting, consulting fees.
- Health insurance premiums paid directly by the firm.
- Retirement contributions such as IRA, Solo 401(k), SEP‑IRA.
Preserve meticulous records—digital receipts, mileage logs, and a dedicated expense spreadsheet—so you can justify every deduction if the IRS asks.
- Take Advantage of the Qualified Business Income Deduction
Under Section 199A, many small businesses can claim up to a 20% deduction on qualified business income. The deduction phases out for higher‑income taxpayers, but it can still trim a large portion of your liability if your earnings fall within the threshold.
- Defer Income, Accelerate Expenses
Tax timing is an underused strategy. If you predict a lower tax bracket next year—perhaps because of a dip in business activity—consider deferring invoicing until January. In contrast, acquire necessary equipment or pay for software subscriptions in December to claim the full deduction this year.
- Apply Depreciation and Section 179
Big purchases such as computers, office furniture, or a new machine can be written off over several years through depreciation. Section 179 allows you to deduct the full cost of qualifying equipment in the year it’s placed in service, up to an annually changing limit. This can generate a substantial immediate tax benefit.
- Address Payroll Taxes
If you operate as an S‑Corp, you must pay yourself a "reasonable salary." The IRS scrutinizes this closely; too low a salary can trigger penalties. After you establish a defensible salary, the remaining profits are taxed only once, at the corporate level, and then at your personal rate on dividends, which are exempt from self‑employment tax.
- Keep Retirement Contributions High
Solo retirement plans, like a SEP‑IRA or Solo 401(k), let you contribute up to 25% of your net earnings—often surpassing the limits of a traditional IRA. Contributions are tax‑deferred, and you can also claim a tax deduction for
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- Use Health Savings Accounts (HSAs)
If you have a high‑deductible health plan, an HSA offers triple tax advantages: contributions are tax‑deductible, growth is tax‑free, and withdrawals for qualified medical expenses are tax‑free. The contribution limits are generous and can be a powerful way to lower taxable income.
- Stay Current on State and Local Rules
Many states provide small‑business tax credits, research and development incentives, or low‑income tax rates for sole proprietors. Consult your state’s department of revenue website or a local tax professional to make sure you’re not missing a credit.
- Arrange for Estimated Taxes
Solo companies often pay taxes quarterly through estimated tax payments. Failing to pay enough can trigger penalties. Apply the IRS’s "Safe Harbor" rule: pay at least 90% of the current year’s tax or 100% of the previous year’s tax (110% if your income exceeded $150,000).
- Explore a Tax‑Efficient Business Expense Strategy
Some expenses are more tax‑efficient when considered capital expenditures instead of current expenses. For example, buying a computer can be capitalized and depreciated, while buying office supplies remains a current expense. Recognizing these nuances can affect when and how you record costs.
- Watch Emerging Tax Laws
Tax laws evolve. For example, recent proposals to change the deduction for business interest or adjust the thresholds for the Qualified Business Income deduction could affect your strategy. Stay informed via reputable news sites, IRS updates, or by maintaining a relationship with a tax advisor.
- Collaborate with a Qualified Tax Professional
While DIY software can take care of basic filings, a seasoned CPA or tax attorney can uncover deductions you might miss, advise on legal structures, and help you navigate complex areas such as payroll and retirement plans. The cost of professional advice is often counterbalanced by the tax savings they secure.
- Document Your Reasoning
If an audit occurs, having a clear, logical rationale for your deductions, business structure, and income deferrals simplifies the process. Maintain a "tax strategy" file that explains your decisions, supported by receipts, contracts, and correspondence.
- Reassess Annually
Tax planning isn’t a single‑time task. Each year, review your income, expenses, and business goals. Modify your structure, contributions, and deduction strategy accordingly to keep your tax liability as low as possible.
By combining these approaches—structuring your company wisely, maximizing deductions, timing income and expenses, and staying current with tax law—you can dramatically decrease the tax burden on a one‑person company. The key is disciplined record‑keeping, proactive planning and periodic consultation with a tax professional. The money you save can be reinvested in your business, used for personal enjoyment, or saved for future objectives.
