Reducing Tax on Income from a Small Business

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Category: Business and Non-Profits

Written by Madeline Delanni

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My after-tax income from my small business is greatly reduced by the incomes taxes I pay each year. A friend of mine told me I could reduce the amount of taxes I owe by shifting my income elsewhere. Is that true?

Answer:

Generally, you can reduce the amount of taxes you pay by shifting the income from your business from yourself to family members who are in a lower income tax bracket. For instance, instead of paying yourself the usual salary, you could employ a family member who is in a lower tax bracket and pay him or her part of the salary you would receive for service performed for the business.

The family member must perform services for your business and the compensation you pay that family member must be reasonable. Therefore, paying your son $100,000 per year to change the cartridges in your copier and empty the trash each day would not be reasonable compensation in the eyes of the Internal Revenue Service.

Employing family members is just one method of shifting income to reduce your tax burden. Talk to your tax and financial professional about this and other methods, such as gifting assets and designating a beneficiary to receive your insurance policies and/or retirement assets instead of withdrawing the amounts during your lifetime.

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