Looking to Lower Last Year's Tax Liability?

If you are a small business owner and have not filed last year's tax return, you can still do some last minute planning to lower your tax liability before the filing deadline. A couple of strategies to lower your tax liability are contributions to tax-advantaged savings and retirement accounts, such as a SEP IRA, solo 401(k) or HSA. The benefit of these accounts are that contributions are tax deductible and can reduce your taxable for the prior year up to the tax filing deadline (April 15th for Schedule C filers).

Anyone who is self-employed, freelances, or owns a small business may be eligible to open a Simplified Employee Pension (SEP) IRA or a solo 401(k). For the 2024 tax year, you can contribute up to 25% of your total compensation or a maximum of $69,000, whichever is less. For a self-employed individual, contributions are generally limited to 20% of your net earnings from self-employment. A solo 401(k) may be more advantageous for some as it allows both employee and employer contributions, so you could contribute the maximum without having to have the full $345,000 in net profit for the year that would be required to contribute the same amount to a SEP IRA.

If you are enrolled in a high-deductible health plan, you may be eligible to participate in a health savings account (HSA). In general, in 2024, an individual can contribute up to $4,150 and families can contribute up to $8,300 (additional catch-up contributions may be made if you are over 55 years old). An HSA can provide a triple tax benefit: (1) contributions are tax deductible; (2) growth is tax-deferred, and (3) withdrawals for qualified medical expenses are tax-free.