How You Can Be Saving Money Now
Understanding tax laws is time consuming and daunting. Laws are changing everyday and almost impossible for you to stay up to date with. We want to make sure you are taking advantage of ways you can save on taxes.
Here are five areas that you need to consider in your tax saving strategies for your law firm.
Law firm owners who want to set up a retirement plan for their business generally have three options: SIMPLE IRA, SEP IRA, and solo 401(k) plans.
Each of these retirement plans enables owners to save money for retirement. The earnings on the investments are tax-deferred until retirement, and contributions can be tax deductible.
Each plan has slightly different features, and you’ll need to choose one that meets your specific needs depending on your goals.
The thing to keep in mind with retirement contributions is once a tax year closes you can’t go back and contribute money. Each year that passes you are losing potential tax savings.
Hiring Family Members
Hiring family members can be a great tax savings strategy because you can potentially shift income into a lower tax bracket as well as allow your kids or spouse to contribute to your law firm’s retirement plan.
There are rules that must be followed for this deduction. For example, your child must be of legal working age and you must pay a reasonable wage for the work performed. They must be working in the firm. You can’t pay them for doing nothing!
If your law office has a retirement plan setup you can help your children, or other family members, start saving for retirement by having them contribute to the plan also (see the first item above). This is a great strategy for tax savings.
Health Reimbursement Arrangements
Under the right circumstances, law firms can reimburse employees for legitimate out-of-pocket medical expenses (up to the annual limits).
By implementing a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), employers can report these reimbursed medical expenses as a business deduction. If all the formalities are met, the reimbursements are not subject to income tax or payroll taxes.
Your business is eligible to setup a QSEHRA if you have less than 50 employees, you don’t offer group health insurance, and you offer the same benefits to all employees.
Choosing the type of entity you want to structure your firm as can save you lots of money in taxes. But, there is not a one size fits all.
Deciding on the type of entity comes down to revenue size, owners, and firm goals. You must look at all aspects of a firm to determine if they would be better served as a sole proprietor, S Corporation, C Corporation, or Partnership.
Meeting with a tax professional to determine the entity type will save you 1,000s, if not 100,000s.
Tax-free Reimbursement Plans
Law firms can reimburse owners and employees for out-of-pocket expenses under an accountable plan, a set of rules and processes that allow tax-free reimbursements of certain business expenses. These expenses include items that would be deductible if the business had paid them directly and they are related to the law firm operations.
To qualify you must have an accountable reimbursement plan in place. Your accountable plan should detail when employees need to provide you with substantiating documents and to return any funds paid out in advance that were not spent on legitimate business expenses.
We can advise you on how to set up expense reports and reimbursement processes that will pass IRS muster.
The best time to take advantage of these tax saving strategies is now. We’d love to meet with you and see how we can help you save on taxes and hold onto more of your hard earned money.
Aligned CPA helps solo and small law firms. We’d love a chance to talk and see if we would be a good fit for your firm. Contact us for a consultation today.
I help solo and small law firms, and other service professionals, by providing accounting, tax preparation and proactive tax planning services.
I promise you, working with a CPA can be much more exciting than crunching numbers and reviewing last year’s taxes. I look at the day-to-day of your business and help you find ways to perform better, grow bigger and generate revenue with greater ease.