How to Save Money on Business Taxes and Put That Money in Your Pocket Tax Free | Ep. 81 | Business Podcast
Summary
Learn how you as a business owner can save money on your business’ taxes and put that money in your pocket tax free.
You have the potential to save literally over $50,000 if you set this up for your company.
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Hello, friends. Welcome to the show. Today we are talking about how you as an entrepreneur can save money on taxes with your business. Now, before we get started with the episode, I’m going to give you a disclaimer.
I am not a financial advisor. I’m not giving financial advice. I’m not an accountant. I am not a lawyer. You should consult with your accountant lawyer advisor before embarking on anything I talk about. But what I’m going to tell you is how we structured our companies and how we are able to save a significant 50 plus $1000 a year. And put that money actually in our own pocket tax free.
Let’s not waste another second. Let’s get to it. Welcome to build the business success secrets. The only podcast that provides straight talk for entrepreneurs. Whether you’re an entrepreneur, starting with an idea or growing your business, this show is for you. We’ll teach you how to build a strong mindset, powerful body and profitable business so you can achieve success. And here’s your host, Brandon. See White today I’m going to talk about how we set up our four oh one K program in our s Corp that we own and how it gives us a ton of savings.
We decided to incorporate as a C Corp with an S designation for a bunch of different reasons. And that’s really a topic for another podcast. There’s actually a podcast that you can look up with. JJ Children, where who is a lawyer who sets these things up and goes through all the advantages and disadvantages of the different types of corporations. But we have An S Corp. And what we did is we set up a four oh one K program and we have payroll. I pay myself a salary, my wife is in the company and we have some other people in the company, and we set up payroll.
Now my wife and I own the company, but we are employees of the company, so we can benefit from the four oh one K program. And in 2020 you, for this tax year that were filing for you can put as much as $19,500 into your 401 k if you are under 50 years old and the company can write that off as an expense. So my wife and I are able to put $19,000.500 that the company pays into our four oh one K program and is an expense on the profit and loss statement, which saves the company, reduces the tax burden of profits and puts money into my wife.
And I was 401 k tax free, huge advantage. So not only are you saving money on your corporate taxes, but you’re getting that benefit directly into your savings Now gets better. If you’re over 50 you can take another $6500 in 2020 out, because the government is allowing you to accelerate your savings because you’re over 50 and you need to catch up. Basically, what they call it is a catch up plan. So now we’re able to take that money as a expense out of the company and move it into our four oh one k plan that we are employees of.
And that reduces our net profit, which reduces our tax burden, huge deal and a lot of entrepreneurs. I don’t think set it up this way because this isn’t something that people commonly talk about. This is like the nuts and the bolts of running a business, but it’s a huge advantage that people miss out on. The second thing that you can do it gets even better is you can create a profit sharing plan in your 401 K. Now, this isn’t what it sounds like. This isn’t a profit sharing. As a result, as it relates to shareholders, it is profit sharing as it relates to a four oh one K plan.
And what you can do is you can put even more money into people’s 401 case as the business owner or operator. Now there’s some limitations on that, but that adds up to even more that comes off of the company profit and loss statement. So it’s an expense to the company that you, as an employee who just so happens to own the business, gets to benefit. From now, there’s a few limitations, So let me give you well, let’s let’s not go through the limitations, Virg. Let’s talk about the two different ways that you can allocate this profit sharing.
You can give the same dollar amount to everyone, meaning you can say everybody that works in my company. Now you may be the only employee or your wife or your brother or your sister or cousin or or not even related to you, whoever that is. And you can say, Look, we’re gonna give everybody $5000 and you give everybody $5000 that can go into the four. Oh, one K plan is an expense to the company and tax free to the employee. So now you get that benefit of 19,500 plus that $5000 in this example another way that you can do it as you can do it on a pro rata basis. Meaning you can take everybody’s salary added up and then do a weighted average of people.
So maybe you pay yourself three times what other people pay, so you get three times the allocation, but you need to fall within this percentage allocation. You can’t just make this up. There are laws around how you can do this for obvious reasons, because otherwise people would stick all their money in there or change it, and the government couldn’t keep track. The I. R. S couldn’t audit this stuff, So this is a really great benefit that the government is giving us as business owners to save and to allow us to pass that on to our employees so that they can have a retirement as well. So two ways just in review, you can do the same dollar amount or a pro rata based on salary.
You definitely want to be talking to your accountant or your financial advisor. Whoever runs and helps you with your books to be able to do this, I would offer you that you don’t want to do this and do it yourself. I got 20 plus year 22. I forget how many years I’ve been doing this type of work as a business owner, and I hire someone because you don’t want to get this wrong because it would be all sort of penalties and all this stuff. So I know that we all want to save money. But there’s times when you don’t want to save money. You want to pay whatever it costs so that you can do it right now. Let’s just go over three limitations on this profit sharing one. The employer can only deduct up to 25% of the total employee camp, say you have somebody who works for you and $100,000 you can only deduct up to $25,000.
It doesn’t mean you can’t give them more, but the business will only be able to expense $25,000. In that example, it’s 25%. You cannot exceed 100% of the person’s comp. So again, with the example, if you’re paying some $100,000 you can’t give them $200,000 in a benefit. It could only be as much as $100,000 and the limit to the individual is $38,000. But think about this. You’ve got the $19,000.19,500 from the normal four oh one K plan that you’re in a max out as the business owner who is an employee of the company, and then you can get up to $38,500 and it does get better. If you’re over 50 there’s there’s an accelerated It’s like 5 $6000 like it is for the regular 41 K.
But let’s just talk about if you’re under 50 and just running this as a normal business owner with your 401 k. You get that 19. 19,500 plus the 38,500. So you effectively can put away $58,000 into a four oh, one K that can be an expense of your business and that you are getting the benefit of tax free in your 401 K. Understand that in order to get this maximum $38,000 you gotta pay yourself or the right amount of money as a salary because you can only expense up to 25% of a person’s salary. So there’s a formula there that you have to come up with, but the ability to get as much as $58,000 into a four oh one K plan tax free. That’s an expense of your business that reduces your net profit, which in turn reduces your tax consequences to your business is huge. So I encourage you all. You’re listening to this and don’t have this in place for your business to talk to your accountant, talk to your lawyer, talk to your financial advisor and have them figure out for you.
What makes the most sense for your business and how to implement some sort of 41 K plan. Now I will just mention out there because maybe we have some people who are savvy, uh, and would say to me, Brandon, it’s not only a 41 K, there’s other things that is true. The accountants will be able to advise you, but some notes that you can take down to ask your accountant that you use or whomever is financial advising you is there’s the four oh one k. There’s a 403 B. There’s, uh, 4 57 plan, and I think that this type of program applies to that.
But you’re gonna need to check on that. And then there’s a thrift savings plan, so there’s different vehicles to do this. Ask your accountant which one is best, but take advantage of this as a business owner who owns your business and can benefit from this because if you don’t have this and let’s say you were able to get that maximum $58,000 and you didn’t that flows down to the net profit, which is awesome, but you’re going to get taxed on that when you could have taken it out as an expense and put it into your 401 K tax free and grown that money and taking it out down the line when you retire.
So talk to your accountant, make something like this, happen for yourself and save some money for you and your business. Yeah, thanks for being generous with your time and joining us for this episode of Build a Business success Secrets. Before we go, let me ask you a quick question. Are you the type of person who wants to get 100% out of your time, talent and ideas? If so, you’ll love our monthly Built A Business Success Secrets newsletter. It’s a monthly playbook about the inner game of building a successful business.
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