5 Tax Reduction Hacks for Roofing Contractors
You deserve to keep as much of your money as possible. Your net profit represents large sums of revenue, hard work, and risk. We often save people $5,000 to $30,000 a YEAR in taxes by simply executing on simple, sound and intuitive tax reduction planning.
Whether you make $80K in net profit, or $800K, we specialize in helping business owners just like you work throughout the year to:
- Reduce Taxes & Never Overpay
- Stay Focused & Never Waste Time doing Bookkeeping or Accounting
- Avoid IRS Problems & Mitigate Risks
You should connect with us for a free consultation. We’re confident you’d love being one of our clients, but I want to help you regardless.
5 Tips You MUST check out as a business owner
I'll get right down to it, we'd love to be your outsourced accountant, tax reduction specialist and help keep your books up-to-date. Nobody understands how to help small businesses reduce their taxes and focus on what they do best, better than we do here at Stance Tax and Accounting.
If you want to reduce taxes, you need to be very proactive and execute on specific tax reduction strategies with a tax planner like myself.
Roofing Contractors that wait until after the year is done, will overpay.
I can't emphasize this enough, if you wait until the end of the year, you are going to pay too much in self-employment taxes, income taxes and you will miss all sorts of opportunity to build tax efficient wealth.
So here are five specific things that you can do to help reduce your taxes as a general contractor.
1 - Maximize your S-Corp
You are either taxed as a Sole Proprietorship or as an S-Corporation. There's a huge difference between just setting up an S-Corp, or setting it up and working with a proactive tax strategist to maximize it.
Long story short, in a Sole Proprietorship, all of your income is subject to self-employment taxes which includes Social Security taxes and Medicare taxes.
When you convert to an S-Corp using a 2553 form, or if you just elect to become an S corporation from the beginning, you will be able to split your income between a salary and a distribution.
While your entire income, up to the Social Security limit, is subject to self-employment taxes when you are a Sole Proprietorship; only part of your income would be subject to SE taxes in an S-Corporation.
In a Sole Proprietorship, all of your income up to the Social Security limit would be subject to the 12.4% Social Security tax and then the 2.8% Medicare tax if you are an LLC taxed as a Sole Proprietorship.
On $100,000 in net profits, you would owe $15,300 in self-employment taxes.
Sole Proprietorship = subject to 15.3% self-employment taxes
S-Corporation = not fully subject to self-employment taxes
The S-Corporation splits your income into a salary which your corporation pays you and then you take income as the owner, in the form of a distribution or a dividend.
S Corp. income equals salary and owners dividend
Salary = subject to self-employment tax
Owners dividend = not subject to self-employment tax
The salary that your corporation pays you is going to be subject to the 15.3% self-employment taxes ,while the owners distribution is not subject to self-employment taxes. The goal is to maximize the opportunity around your owners dividend, while obeying the law.
Why not take a 0% Salary?
So if your salary portion has a 15.3% tax on it, why in the world would you choose to pay yourself any salary? Well, the government understands that we are not trying to hand them our money and they set up a ruling and system, or a framework to direct people about how much of a salary they should be taking. There is caselaw and broad direction that every profession must analyze what a reasonable salary would be for their participation in the business, tenure and the role that they play.
Therefore, our goal is to take a reasonable salary so that we obey the law.
Examples of S-Corp savings
Just so you know, it's possible that somebody who had a business with $100,000 in net profits, who is formerly paying $15,300 in self-employment taxes, could cut that nearly in half.
If you paid yourself a $50,000 salary, you would save yourself around $7,000.
There's no hard and fast rule around how to maximize an S-Corporation, but you'll want to work with a tax planner that can help you be as aggressive as possible, while making wise decisions and guiding you to avoid unnecessary risks. Here at Stance Tax and Accounting, we provide oversight and a ton of help for small businesses to set up, manage, run and prepare year end reports for their S-Corporation. Save THOUSANDS, but get an expert. It sounds cliché, but you definitely are going to want to work with somebody to help you save thousands each year in taxes.
2 - Utilize Small Business Retirement Plans
You could write off up to $61,000 (SEP IRA or SOLO 401k) and put it right into a S&P 500 index fund.
Seriously, you can write off up to the cost of a new car, and put it in a retirement account.
Now, you might be cynical about investing in the market, but trust me, your future self is going to be happy you saved for retirement and that you allowed Walmart, Apple, Caterpillar and Goldman Sachs to make you money. You should participate in investing, but that’s for another conversation.
Employer Contributions are COMPLETELY tax deductible.
When you have an actual business retirement plan, you can get way more benefits than what you get as a normal person doing ROTH or Traditional IRA’s, or even as an employee who has access to a 401k.
Why are Small Business Retirement Plans So Awesome? Employer contributions.
You know when you worked for a corporation and they did an “employee match”, where they would take up to 4-5% of your contribution and MATCH it? That employer match is super tax efficient. That employer match or employer contribution essentially avoids self employment taxes, which is the 15.3% tax you’d pay on it if you took it as a salary in an S-Corp, or if you were taxed as a sole proprietorship.
There are rules though.
Types of Small Business Tax Plans:
- SIMPLE IRA
- SOLO 401k
Defined Benefits Plan (a pension)
With the SEP IRA, and a profit share plan on a 401k, you are able to put up to 25% of your Sole Prop total income, or 25% of your s-corp salary, as a contribution.
SEP & 401k Employer Contribution - up to $25,000
THEN - with a 401k, you can also do an employee contribution, and either contribute tax deductible or ROTH, up to the limits.
That $25,000 contribution avoided the 15.3% self employment tax. That means you essentially earned 15.3% right away. That also means you’re able to grow it tax deferred until you reach 59 years old.
You might not like locking your money up like that, but trust me, your future self will.
3 - Hire your kids
You may want to consider hiring your kids in your business. There are some MAJOR benefits for small businesses when they hire their minor children, and have them do real, authentic work in the business.
You must setup a real employment situation in the business, but then the wages they earn can be REALLY REALLY tax efficient.
The S-Corp doesn’t have as much tax benefit for this as a Sole Proprietorship or “disregarded entity”, and there are rules you’ll want to consult your tax advisor on. In a family owned business, minor children performing real work are NOT subject to Social Security and Medicare Tax.
That’s right - you would avoid the 15.3% SE tax.
Not only that, but they will then do their own tax return, and:
- Standard deduction for 2022 is 12,550 for single filers
- The 10% tax bracket goes up to 12,275
- 12% bracket is wages 10,275 to 41,775
LONG STORY SHORT:
- The first $12,550 earned by a minor child is TAX FREE
- The next $10,275 is only taxed at 10%
- The next $30,000 or so is only taxed at 12%
If you are at an effective tax rate of say, 30%, you’d save $3,765 if they only earned $12,550. You’d save another $2,055 if they earned up to the next $10,275 (if they made around $22,000).
The bottom line - this can add up if you do it right.
Now, you’ll need to pay for tax returns, payroll and all the other bureaucracy, but you can pile up the tax savings if you want to.
4 - Real Estate Investments
Over time, you should own rental property. Wealth diversification is really important.
- Business income
- Investment invoice
- Real estate income
Your business, real estate and investments all enjoy various levels of tax treatment. The most important thing to consider is that real estate investing, into buy and hold rentals or commercial property, can be the most tax beneficial thing you ever choose to do.
Buy & Hold Real Estate:
The income from rental real estate is considered a “passive” income by the IRS (not like earning passive income from a pyramid scheme) and it’s NOT subject to the self employment taxes.
Rental income is not subject to 15.3% Self employment taxes.
Not only that, but the property enjoys some really huge advantages.
- Depreciation: You can take a major portion of the property, and write it off against the income.
- Cost segregation & bonus depreciation: You can also write off certain improvements and portions of the property faster.
- Banks Money & Leverage: You only need a small portion, usually 20-25% of the purchase price, to buy a property.
- Appreciation and Cash Flow: For the most part, real estate tends to appreciate and is a really good asset to hold.
S-Corp Rent from an LLC holding a property
You can even have a rental agreement between two companies. Your LLC could own the office building. Your S-Corp can pay a fully tax deductible lease payment to the property. That is an easy way to shift income.
It’s not for everyone, but there’s no reason not to check out real estate as an investment.
5 - Home Office, Fringe Benefits, Vehicles & Travel
Without hitting on this too much, your home office, your vehicle and your travel can TRULY become a gold mine of tax deductions. There are ways to use Section 179 along with bonus depreciation to write off your trucks, heavy equipment and other items that your business needs.
There are quite a few conditions, but we'd love helping you choose the right equipment and write off, along with planning your business around travel so that you love what you do. IF you want to travel, we can help nudge your business in the direction of utilizing the tax loopholes available to write off travel, hotels and other expenses.
Long story short, we can help you find lots of write offs and pro-actively built a tax efficient business!