As we approach the end of the year, members often ask about what steps to take in order to maximize the tax benefit of your business for the year. Here are some options for you to secure some quick wins for your business finances.
1. Optimize your health insurance deduction
If you pay for health insurance through your business account, you may be eligible for the self-employed health insurance deduction.
To qualify and receive the maximum benefit allowed, your health insurance premiums must be recorded correctly in your payroll.
Action Item: Before year-end, verify that your recorded health insurance premiums are accurate in your payroll system.
2. Contribute to your retirement
Contributing to a retirement account is a powerful way to lower your taxable income. The two most common options for our members are a SEP IRA or a Solo 401(k).
Employer Contributions: Regardless of which plan you choose, your business can fund a portion of the account. This limit is generally based on your W-2 wages (for S Corps) or business net income (for Sole Proprietors).
Employee Deferrals (Solo 401k): If you are looking to maximize tax deductions now (paying tax later in retirement), a Solo 401(k) is often a great option.
Crucial Deadline: While employer contributions often have a flexible deadline, employee salary deferral contributions must run through payroll by December 31st.
3. Income shift using strategic invoicing
If you are concerned about having too much taxable income in the current year, you might consider delaying your invoicing.
How it works: Because we record income when the cash hits your bank account (cash basis accounting), sending an invoice later in December may result in payment arriving in January.
The Benefit: This pushes that income—and the associated tax liability—into the next tax year. This doesn't eliminate the tax, but it can help smooth out your income or defer taxes if you expect a lower income bracket next year.
4. Capture expenses and process reimbursements
One of the simplest ways to reduce your taxable income is to ensure all your business expenses are accounted for before the year closes.
Make Necessary Purchases Now: If your business needs equipment, software, or supplies (like a new laptop or subscription renewals), purchasing them before December 31st ensures they count toward this year's deductions.
Pay Yourself Back: Did you pay for business expenses with personal funds earlier in the year? Make sure to process those reimbursements now. Transferring the exact amount from your business bank account to your personal account before year-end creates a clear paper trail, ensuring your business books reflect the expense and you get the deduction.
5. Ensure benefits are recorded in payroll
To claim certain deductions, the payments must be officially recorded in your payroll system before the year ends.
Health Insurance: Confirm that your health insurance premiums are correctly recorded in your payroll. This is a requirement to qualify for the self-employed health insurance deduction.
Retirement Contributions: If you are making an employee salary deferral contribution (such as to a Solo 401(k)), this must run through your payroll and be processed by December 31st to be valid for this tax year.
Need help?
If you're unsure about your retirement plan setup or have questions about your payroll, we're here to help. Send us a message from your dashboard to get in touch with your Collective team.
Disclaimer: This information is for educational purposes only and does not constitute legal or tax advice. Tax laws vary by state and individual circumstances. Please consult your tax professional for advice specific to your situation.