Finally, one of the best ways to reduce your taxable income is to reinvest earned money back into your business, specifically your employees. This will reduce your tax burden while simultaneously giving your team better chances of success.
Generally speaking, the salaries, wages, bonuses and other compensation you pay your employees in a given year are tax deductible so long as they fit the following criteria:
The compensation is both ordinary and necessary.
They are a reasonable amount.
They paid for services that were actually provided.
They were paid for or incurred in the current year.
Investing in your business by hiring skilled employees can lower your tax burden, but employee retirement contributions are also tax deductible for employers. According to the IRS, employers may deduct 401(k) contributions as long as they don’t exceed the limitations described in section 404 of the Internal Revenue Code.
Offering your employees matching, profit-sharing or safe harbor contributions is a great way to boost their morale, attract the top talent and grow your business as research shows happy employees are more productive workers.
Key takeaway: Reduce your taxable income by understanding deductions and credits, make tax-friendly investments, and invest in your employees.