LIFE MANAGEMENT
pay $17,500 in federal and state income tax on this 
$50,000. If, however, this $50,000 flowed to a Nevada 
C corporation, you may only pay the federal corporate 
tax rate of 15% (depending on the activity of the 
corporation), or $7,500, saving you $10,000 in taxes. 
Another application of this strategy is to spread 
income to children in lower tax brackets. Instead of 
paying your children’s expenses directly with after-tax 
dollars, hire your children and pay them for the work 
they do and have your children pay for their own 
clothes, food, school, etc. from the money they earn. 
You can deduct the wages as a business expense, 
and your children will pay taxes at their lower tax 
bracket.
Strategy #3 - Maximize Deductions
There are thousands of items that are allowed as 
business expenses. You want to make sure as many 
expenses as possible are deducted as business 
expenses. Expenses you may not be taking full 
advantage of as a business deduction are your 
medical expenses. Within a sole proprietorship or 
an S corporation, there is a limit on the medical 
expenses you can deduct. With the right provisions in 
a C corporation, you can deduct all medical insurance 
premiums and all out-of-pocket medical expenses for 
co-pays, medications, first aid items, etc.
Strategy #4 - Defer Income
One way the IRS allows you to defer income is by 
contributing to a retirement plan. A retirement plan 
that works well for a business with no employees 
(you may have another business with employees) is 
a Simplified Employee Pension Individual Retirement 
Account (SEP IRA). The IRS allows you to contribute 
18.58% of net profit (maximum of $50,000 per 
year) to your SEP IRA for retirement. If you have 
$100,000 net profit in your business, you would be 
able to contribute up to 18.587%, or $18,587, to 
your retirement account. You would get to deduct the 
contribution, saving you thousands in federal and 
state taxes. Thus, money goes into your SEP IRA tax-
free and grows tax-free. SEP IRA funds are taxed at 
ordinary income tax rates when qualified withdrawals 
are taken after 59.5 years of age. 
Strategy #5 - Proper Use of Entities
The tax rules are different for S corporations, C 
corporations and Sole Proprietorships. You want to 
use the entity or entities which require you to pay 
the least amount of tax. For example, if you operate 
your business as a sole proprietor, all profit (up to 
the taxable maximum) is subject to Social Security 
and Medicare taxes. In an S corporation, profits are 
distributed through a K-1 and are not subject to Social 
Security and Medicare taxes. Having your profits flow 
to you as K-1 income, instead of as profit from a sole 
proprietorship, could save you thousands each year 
in Social Security and Medicare taxes. 
For example, if a sole proprietorship has a profit of 
$100,000, a 15.3% tax (12.4% Social Security tax 
and 2.9% Medicare tax) would have to be paid on 
the entire $100,000, totaling $15,300 ($100,000 x 
15.3%). In comparison, if an S corporation has a profit 
of $100,000 and you pay yourself a reasonable salary 
of $40,000, the other $60,000 would flow to you 
as profit (K-1) and is not subject to Social Security 
and Medicare taxes. You only pay social security 
and Medicare tax on the $40,000 salary, for a tax of 
$6,120 ($40,000 x 15.3%). In this scenario, using an 
S corporation would save $9,180 ($15,300 - $6,120) 
in taxes each year. While it would be nice to have the 
whole $100,000 excluded from Social Security and 
Medicare tax, the IRS requires that owner-employees 
of an S corporation be paid a salary that is a 
“reasonable amount” for the work being performed. 
Conclusion
As a result of people not using all the deductions 
and laws available, billions of dollars are overpaid in 
taxes. According to the IRS commissioner, millions of 
taxpayers are overpaying their taxes each year. Begin 
using these five strategies to avoid paying more than 
you are required in taxes. 
“ Instead of paying your 
children’s expenses directly 
with after-tax dollars, hire 
your children and pay them 
for the work they do and have 
your children pay for their own 
clothes, food, school, etc. from 
the money they earn.”
www.mrca.org  —  Midwest Roofer
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