Owning your own business comes with a number of benefits (and challenges). Some of the obvious benefits include a flexible schedule and being your own boss. However, there are unique financial benefits of owning your own business that can make being a business owner even more appealing.
1. Legally Pass Expenses through the Business
One of the most significant benefits of owning your own business is the ability to legally pass some of your expenses through the business. That means that certain expenses can be deducted as business expenses, reducing your taxable income and potentially lowering your tax bill.
For example, if you own your own business and you need a new laptop, you can deduct the cost of the laptop from your business income, lowering your taxable income for the year. Or if you work from home, you can deduce a portion of your rent, utilities, and other expenses related to your home office as business expenses.
As a general rule, your company can write off any ordinary and necessary incurred expense, which you can't do if you're just working for someone else. You can pass expenses like child care, vehicles, health expenses, travel expenses, and more through your business as long as there is a business purpose associated with the expense.
Some people might be thinking that this is too good to be true. But being self-employed means that you incur financial risks and costs that employees don't have to worry about. To help make up for this, the IRS is quite generous when it comes to tax deductions to help soften the blow of the added costs.
However, you can't run every personal expense through the business. Consult with a tax professional while building your business to ensure that you are following all applicable tax laws and regulations.
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2. Aggressive Retirement Contributions
Business owners can aggressively contribute to retirement plans, which ranks highly among the financial rewards of running a business. You can invest in several different options:
- 401(k): Type or retirement plan that allows employees to contribute a portion of their wages to save for retirement
- Simplified Employee Pension (SEP) Plan: Retirement plan designed to allow employers to contribute to traditional IRAs
- Solo 401(k): A type of 401(k) designed for a business owner with no employees other than a spouse
Many small business owners think they don't have enough employees to provide a 401(k) plan, but any size company — even an owner-operator business — can have a 401(k) plan.
As a business owner, you also can contribute far more to your retirement plan than you can as an employee. For example, say you own your own photography business and are the only employee. You can set up a Solo 401(k) and contribute as much as $61,000 per year or $67,500 if you're over the age of 50 (as of 2022), which is much higher than the traditional limits on 401(k) plans available to employees.
With an SEP plan, you can contribute up to 20% of your net income up to $330,000 for the 2023 tax year. You can also contribute up to 25% of your employees' total compensation or a maximum of $61,000 for the 2022 tax year or $66,000 for the 2023 tax year (whichever is less).
These aggressive contributions can help you build up your retirement savings faster than you would be able to as an employee.
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3. Take Money from the Business
As a business owner, you can also take money from your company as a distribution, dividend, or draw instead of a salary. This is entirely legal as long as you abide by generally accepted accounting principles. And it can provide you with a significant increase over what you would make as an employee who only receives a salary.
You can use this money to help cover personal expenses or to reinvest in the business and help it grow. However, it's important to note that taking too much money out of your business can be harmful. It reduces cash available for future growth and could put your business at risk if a large unexpected expense comes up. So, discuss your plans with a financial advisor to maximize your financial benefits and minimize the risk to the business.
Ultimately, these financial benefits were put in place to help encourage more entrepreneurs to own their own businesses.
Ready to Own Your Own Business?
Beyond the financial benefits, Our team at Caring Senior Service is familiar with the ins and outs of owner benefits and can help you look at the big picture of small business ownership. Get in touch with our team today.