5 Tax Reduction Hacks for Truckers & Owner Operators
If you're an Owner Operator or own your own truck, I want to show you exactly how you can dramatically lower your taxes and put significantly more money back into your pockets.
Most truckers over pay in taxes
I will show you five things that you should be bringing to your accountant, so that you can avoid over paying in taxes and dramatically increase your profitability.
If you don't have a good, proactive tax planning accountant, we'd be honored to earn your business and we hope that this resource will add some value and hopefully encourage you to connect with us.
We could be your Outsourced Accounting team
Really quick, we provide an outsourced accounting service where we handle all the bookkeeping, payroll, and accounting work throughout the year for our customers, while providing proactive, aggressive tax reduction planning. Along with this bookkeeping and tax planning, we will do your taxes at the end of the year and make your life much easier.
We want to keep this brief, so let's dive right into it.
1 Maximize your S-Corp
An S-Corp might save someone $2,500 - $11,000 a year in self employment taxes.
Seriously, you owe it to yourself to figure out whether an S-Corporation is right for your business, as well as how to maximize the S-Corporation for your particular situation.
CBW will help you setup and maximize your S-Corp.
Keep reading to learn more about how it works, or skip on down to see the rest of the tax reduction hacks available.
The most dramatic tax reduction usually occurs by converting to an S-Corporation instead of being taxed as a Sole Proprietorship.
Long story short, when you first get started, you are taxed as a Sole Proprietorship.
How are Sole Proprietors taxed?
In a sole proprietor ship, your net profits will be subject to self-employment taxes first and then they will flow through to your individual tax returns, where you will pay federal income tax and state income tax on:
- Gross Revenue
- Deductions
- Net Profits
SELF EMPLOYMENT TAXES
Self Employment Taxes are made up of social security taxes and medicare taxes.
- Social Security Tax = 12.4% on wages up to the SS limit ($147,000 in 2022)
- Medicare Tax = 2.8%
- SE Tax Totals: 15.3%
EXAMPLES:
$60,000 in net profits - pay $9,180 in SE taxes
$120,000 in net profits - pay $18,360 in SE taxes
It's important to note that you only pay Social Security taxes on income that is less than the Social Security limit, which is set by Congress every year and fluctuates depending on the administrations tax policy and overall changes in the Social Security benefits tables.
It's important for you to understand that the Social Security wage will determine the Social Security tax that you pay, and that is tied to the Social Security benefit you would receive later on in retirement.
In a sole proprietorship, you will be paying significant amounts of self-employment taxes.
One of the best ways to reduce your self-employment taxes is to file as an S-Corporation.
How are S-Corporations Taxed?
S-Corp owners are paid in 2 ways: salary and owners distributions.
In an S-Corp, your corporation will pay you a reasonable salary, and then you’ll take a distribution as the owner.
The salary is subject to the self-employment taxes, while the distribution is not subject to the self-employment taxes.
Because the salary is subject to self-employment taxes, most people will try to maximize their distribution and minimize the salary that they have to take.
What is the lowest amount of salary somebody can take?
The IRS has caselaw and guidance that people must take a reasonable salary. The reasonable salary has many tensions to it; essentially, you must evaluate how much you would compensate an employee to perform the job that you are doing within the business.
Maximizing your S-Corporation means being highly engaged in the process of determining what your salary is, while simultaneously managing the other important levers of tax reduction planning and business management.
You must take a salary.
People will try to take as low of a salary as possible, but that will mean IRS audits and potentially having income changed from distribution into a salary. If the IRS re-classifies your income from distribution to salary, you will end up paying penalties and interest and it will cost you a lot of time and frustration.
How much money can you save by converting from a Sole Proprietor to an S-Corporation?
Here are a couple of top level examples when it comes to self-employment tax savings between an S-Corporation and an LLC taxed as a sole proprietorship.
- BEFORE S-Corp: If you made $60,000 - pays $9,180 a year in SE taxes. If you made $120,000 - pays $18,360 a year in SE taxes.
- AFTER S-Corp: $30,000 Salary & $30,000 Dividend SAVES $4,590 in SE taxes . $60,000 Salary & $60,000 Dividend SAVES $9,180 in SE taxes.
That’s right!
While these numbers are not perfect and you will have to factor in other tax rules and opportunities, it's not that uncommon to see people save thousands every year simply by converting to an S-Corporation.
How much should you make before switching to an S Corp.?
We usually recommend that people make net profits higher than $30,000-$60,000 before they become an S-Corporation.
The key in deciding whether or not you should become an S-Corp is usually hinged on whether or not the tax savings will outpace the cost of compliance. Not only that, but you will want to measure twice and cut once when it comes to setting up an S-Corporation, because if you convert to an S-Corp and then decide you don't want it anymore, you will initiate a five-year period where you cannot utilize the S-Corp again.
2 - Retirement Plans
You can write off up to $57,000 from the business into an investment account.
That investment account could buy gold, stock, mutual funds and even real estate.
That’s right, up to $57,000 as a straight write-off from the business and into a qualified investment account.
Small businesses have really attractive and super tax efficient retirement plans available for themselves.
3 of the easiest to setup and administer are:
- SEP IRA
- SIMPLE IRA
- Solo 401k
The solo 401k is simple and attractive ONLY if you don’t have any employees.
The SIMPLE IRA is the easiest and most cost efficient if you have some employees and want to cheaply and easily include them (you have to, actually).
The 401k has the most up side in terms of amount to save and potential, but it’s often costly to setup and upkeep.
If you don’t have employees:
We really like the solo 401k product from Vanguard or Schwab, as well as their SEP IRA.
S-Corps and Sole Props are taxed much different and their retirement plan participation is much different as well.
The Employer Contributions are what’s tax efficient.
On all retirement plans there are employee and employer contributions.
Remember when you worked for a large corporation and they matched that 401k contribution up to 4% or so?
The money that company spent to invest into your retirement account was incredibly tax efficient.
In fact, the money between an employer and employee through retirement plan contributions and matches are about the most efficient tax compensation available.
If employer contributions are so great, imagine how great it is that small businesses can participate in them, and even self employed individuals.
SIMPLE EXPLAINERS:
SEP IRA - up to 25% of net profits or 25% of S-Corp salary, not exceeding $57,000 of wages, can be contributed as an employer contribution (this is not legal tax or retirement planning advice, read the rules here).
Net Profits - $100,000 * 25% = $25,000 contribution.
$30,000 Salary of S-Corp * 25% contribution = $7,500 contribution
You’ll need to be aware of how the contribution limits, along with QBI deductions and overall financial goals come into play when determining if an S-Corp is best for you.
Retirement plan contribution limits for S-Corps are tied to the salary and not the distribution, which we are usually trying to keep low in order to save on self employment taxes.
That $25,000 and $7,500 passes through and the business doesn’t pay taxes on it, and the individual will never pay self employment taxes on it; they will only pay income tax on it when they draw it out, which is penalty free only after the age of 59.5 years.
Money you invest through this shouldn’t be touched until after the 59.5 year birthday, so that it’s penalty free.
How Much Tax Will You Save with a Retirement Plan Like This:
First, you never really pay self employment taxes, so in a way, you’re avoiding the 15.3% tax forever.
That means, you’re essentially paying $84.50 for $100 in investments (minus fees obviously).
You’re saving on the SE taxes.
Second, you will save because you’re not paying taxes during your high income years.
Deductible investment contributions allow you to take income during your highest earning years and push them out to when you’re probably going to be in a lower tax bracket.
TAXES SAVED:
100k in Net Profits in a Sole Prop = $25,000
$25,000 * 15.3% saved about $3,825 in SE taxes by avoiding it on the employer contribution.
TOTAL SAVED - $3,825 in taxes.
If you’re in a 15% effective tax rate, you probably just delayed about $3,000 in taxes until you're in a lower tax bracket.
Long Story Short:
You need to save for retirement no matter what, and small business retirement plans allow you to do that in a very tax efficient manner.
3 - Hiring and Paying your children
Did you know that you can save a ton in taxes by shifting income from yourself, to hiring your children to perform legitimate tasks within your small business?
There's a big difference between family owned LLC's and Sole Proprietorships, and family owned S-Corporations, when it comes to hiring your children and utilizing the family tax benefits.
Children under the age of 18, in a sole proprietorship, working in the family business, are not subject to social security or medicare taxes.
Children get to utilize the standard deduction against their lower income, which means they pay very little tax.
The little tax they do pay can fund IRA's, Roth IRA’s and other interesting investments.
Minor children working in a family owned S-Corporation ARE subject to employment taxes, and cannot get as good of a tax break.
The catch here is that the children must be your own, must be doing legitimate and organized work. They must actually perform the work and they must actually have good contracts with you and you should keep immaculate books (we will help you).
If you have minor children and you own a business, you should definitely find ways to hire them in the business and enjoy their super low tax rates.
Their income will flow to their own 1040, and they’ll have to file a tax return.
But first they get the standard deduction - $12,550 in 2021.
Then, the next income tax bracket is taxed at a super low tax rate, of only 10%, and then 15%.
For single filers, they would pay NO income tax on $12,550.
Then, only 10% on on the next $9,950.
That means they could make $22,500 a year and pay only $995 in federal income taxes.
In a disregarded entity (Sole Prop) that kid would not owe self employment taxes.
In an S-Corp, they would.
The bottom line is that hiring your kids can really pay off.
4 - Real Estate Investment Property
Buy-and-hold real estate is incredibly tax efficient.
The income that comes off of a rental property is not subject to self-employment taxes and is considered passive income by the IRS.
Not only is this income from property rental not subject to self-employment taxes, but it enjoys some of the juiciest and most effective tax deductions ever.
Depreciation:
First off, you will be able to take the total value of your property, minus the land and a couple other things, and divide it over 27.5 years for residential or 39.5 years for commercial property.
You take that depreciation amount and you are able to deduct that against your income each year.
So you will be able to depreciate the property, not pay self-employment taxes, and then you'll also be able to use the banks money in order to purchase the property.
One of the biggest advantages of real estate is that you can borrow utilizing a small portion of the overall capital required in order to obtain an income producing property.
For a small down payment, you can buy a property that would be very tax advantaged.
Your regular business could rent from an LLC that owns rental property.
One major way that you can minimize taxes is by having your business that is subject to regular income taxes lease from a LLC that owns an office building where you establish a true lease agreement.
The lease payments between your business and the LLC holding the property are deductible, and then the LLC holding the property will be able to utilize all the depreciation, cost segregation and other tax advantaged benefits before it flows through to a taxable situation.
Businesses can use real estate very simply to reduce their taxes.
If an owner operator trucker or a small business owner of some sort saves up enough capital to purchase an office building or even a duplex or some sort of buy-and-hold rental property, they can own that property in an LLC and then have their business lease it.
5 - Home Office Deduction
Ever since the pandemic, small businesses have been utilizing greater portions of their home to conduct business and there are incredible opportunities to reduce your taxes and transform your home office.
Mortgage payments are never deductible, only the interest portion is.
At its core, you would be able to take a home office deduction for whatever amount of your home is being used for full-time business.
If you’re using 500 Square feet of your house as your full time home office, and your home is 2500 square feet, then you could possibly take that share of the mortgage interest, utilities and other deductible payments and deduct them.
Essentially, you’d be able to deduct 20% of your power, water, utilities, and even services, along with your mortgage interest.
Improvements can provide extra bonus depreciation as well.
We won't get into the nitty-gritty here, but it's worth noting that improvements to the office, when used 100% for business, would be deductible or depreciable, and could be a fantastic way to help develop the property in a tax advantaged way.
