How business owners with employees can legally pay less in taxes
Business owners with employees lower their taxes in three main ways: reducing the wages that payroll taxes apply to, using deductions and credits the tax code already offers, and choosing the right business structure. Pre-tax benefit plans are often overlooked because they can lower payroll taxes for the employer and the employee at the same time.
Start with the taxes you actually pay
An employer with W-2 staff pays more than income tax. There is the employer share of Social Security and Medicare (7.65% of most wages), federal and state unemployment tax, and in many states other payroll-based costs. Most tax advice focuses on income tax. Payroll tax is where many owners have room they have never looked at.
1. Offer benefits through a Section 125 plan
When employees pay for qualified benefits with pre-tax salary reductions under a written cafeteria plan, those amounts are generally not subject to FICA. The employer saves its 7.65% share on them, and employees lower their own taxes too. See how the Section 125 math works.
2. Add a preventive care and medical reimbursement program
Some programs pair a Section 125 plan with a self-insured medical reimbursement plan and preventive care services. They are designed to add benefits for employees while lowering payroll costs. Design matters, so check the plan carefully and involve your CPA.
3. Sponsor a retirement plan
Employer contributions to a qualified plan such as a 401(k), SEP or SIMPLE IRA are generally deductible, and small employers may qualify for credits that offset the cost of starting a plan.
4. Reimburse expenses under an accountable plan
Reimbursing employees for legitimate business expenses under a properly documented accountable plan keeps those amounts out of wages, so neither side pays payroll tax on them.
5. Time equipment purchases
Section 179 expensing and bonus depreciation can let a business deduct much of the cost of qualifying equipment in the year it is placed in service, instead of over several years. Limits change, so confirm the current rules before you buy.
6. Claim the credits you qualify for
Credits reduce tax dollar for dollar. Depending on your business, look at the research credit, the small employer health insurance credit, retirement plan startup credits and state hiring or training incentives.
7. Review your business structure
How the business is taxed, as a sole proprietorship, partnership, S corporation or C corporation, changes how much of the owner's income is subject to self-employment or payroll tax. Owners of pass-through businesses may also qualify for the qualified business income deduction.
8. Use tax-advantaged health accounts
Health savings accounts, flexible spending accounts and health reimbursement arrangements let employers and employees pay for care with pre-tax dollars when they are set up correctly.
What to avoid
Be careful with anything sold as guaranteed, risk free or "IRS approved". The IRS does not pre-approve tax strategies. Ask for the legal basis in writing and have your CPA review it. Paying less tax legally means using rules that exist, with the paperwork to back them up.
Where to begin
Ask your CPA which of these you already use. Most employers find one or two they have never set up. If the payroll side is the gap, we can show you what a pre-tax benefits program would look like for your team, in writing, at no cost.
Common questions
What is the easiest way for an employer to lower payroll taxes?
Offering qualified benefits through a written Section 125 plan is one of the most common. Pre-tax employee contributions are generally not subject to FICA, which lowers the employer share too.
Do tax credits or deductions save more?
A credit reduces your tax bill dollar for dollar. A deduction reduces the income your tax is calculated on. Both matter, and which is worth more depends on your situation.
Should I change my business structure to save on taxes?
Sometimes. Entity choice affects payroll and self-employment tax, but it also affects paperwork, payroll requirements and state taxes. Review it with your CPA before changing anything.
See if your company is a fit
Book a free 15-minute call with a founder. You get written numbers and the plan documents before you decide anything.
Book a free callThis article is general information, not tax, legal, accounting, insurance or benefits advice. Everlasting Benefits Group is an independent sales representative for third-party plan administrators and may be paid by them when an employer adopts a plan. We are not a plan administrator, insurer, law firm or accounting firm. Tax rules change and results vary by state, payroll and plan design. Talk with your own CPA or attorney before adopting any plan.