Everyone has to pay taxes, but entrepreneurs and business owners have more tax flexibility than employees. In fact, the tax flexibility of being an entrepreneur/business owner is one of the perks of going into business.
A company’s business structure plays a large part in determining the amount of taxes the owner will pay. For example, a sole proprietor has to pay Social Security taxes and Medicare taxes on his entire income, less any deductions.
An S corporation owner/employee, on the other hand, can compensate himself through both a salary and distributions. The company pays Social Security taxes and Medicare taxes and withholds the same from the salary. The distributions are not taxed by Social Security or Medicare. This saves the S corporation owner/employee 15.3% in taxes on the non-salary income. Since an S corporation owner/employee can decide how much salary he wants to pay himself, as long as it is reasonable, he can choose how much Social Security tax and Medicare tax he pays.
A business owner or entrepreneur, whether he has a sole proprietorship, a limited liability company or an S corporation, also has tax flexibility thanks to the number of expenses he can deduct. The more deductions he takes, as long as they are business-related and legitimate, then the less profit shows on his tax return. Less profit equals less tax.
A business owner can also defer his company’s income to lower his taxes for the current year. If he delays billings until the end of the year, then he ensures that the payments will arrive in the new year, reducing his taxes for the current year. This works best if next year’s income will be less than the current year’s income.
Being a business owner or entrepreneur has many benefits. Tax flexibility is one of the most attractive.