According to the U.S. Bureau of the Census, about 90% of American businesses are family-owned. These businesses employ about half of the workforce in the United States. Furthermore, family-owned businesses account for 64% of the nation’s gross domestic product.
If you are the owner of a family business, then you can be proud that your hard work supports your family, creates jobs, and helps drive the American economy. But when it comes to tax time, frustration may outweigh the feelings of pride and accomplishment. There are unique tax challenges that a multi-generational company must sort through.
As Certified Public Accountants who are experts in family-owned businesses, we wanted to share these seven tips.
- Hire family but treat them like employees: The tax benefits associated with wages are great for family businesses. You do not have to pay unemployment tax on your parents or spouse who work for your company. And, you might not have to pay Social Security or income tax on your children who are on your staff. But, to qualify for the tax benefits, you must pay legal wages, obey child labor laws, and ensure that your family’s work is considered necessary and normal for the business. Otherwise, the IRS may determine that their wages were not necessary to the business and may reject them as deductible business expenses.
- Hire independent contractors: Hiring independent contractors instead of employees relieves you from paying Social Security, Medicare, and unemployment taxes. Just be sure that you confirm that the workers do qualify as independent contractors.
- Keep detailed records and receipts: This is essential for maximizing tax savings. Every missing receipt is potentially a missed deduction. Make sure that your records include business start-up costs, insurance payments, office expenses, business travel expenditures, equipment and software purchases, professional membership fees, and other expenses.
- Pay bills and make purchases by year’s end: Pay outstanding bills and make any large purchases before the end of the year. This allows you to claim as much as possible on that same year’s tax return.
- Give charitable donations by year’s end: Make any donations to your favorite charities by December 31st, so you can deduct those contributions from that year’s taxes. Please note that any contributions totaling $250 or more will require a tax receipt.
- Take advantage of the Work Opportunity Tax Credit (WOTC): WOTC helps workers from certain groups who face significant barriers to employment (e.g., unemployed Veterans, food stamp participants) obtain good jobs so they can move from economic dependency to self-sufficiency. Employers who hire from a targeted WOTC group can claim a tax credit from $1,200 to $9,600, depending on the employee hired.
- Hire the right accountant: Hiring an accounting firm like Tobin & Collins that specializes in taxes for family-owned businesses is essential for making sure you get all the tax deductions you are entitled to.
If you are the owner of a small or family-run business, know that you don’t have to face tax season alone. Contact the financial experts at Tobin & Collins. For more than 50 years, Tobin & Collins has provided financial services to clients in the New Jersey and New York metropolitan area. Our exceptional team of professionals provides personal service and sound financial strategies that puts our clients on the path to future success.