We’re going to give you the 5 major tax mitigation techniques for truckers.
Whether you have a small fleet, or you’re an owner-operator, these 5 strategies are the foundations of meaningful tax reduction.
We help truckers lower their taxes, establish pristine financials, and we handle all their bookkeeping, payroll, and accounting.
But we’re not like most accounting firms, we’re laser-focused on helping you do three things:
Our Core Focus for Truckers:
Most truckers overpay between $2,000 and $9,000 a year, simply because they don’t up their game and work with real tax planning experts like SL Financial Solutions.
You can’t implement meaningful tax mitigation strategies if you’re waiting till year-end to talk taxes.
You will overpay in taxes if you don’t identify and implement sound strategies early on in the year, and then work to maximize them throughout the year.
Most truckers end up overpaying in taxes because they have disengaged, overwhelmed, or even lazy tax accountants.
Respectfully, most accountants are so focused on year-end taxes, that they end up too busy to provide quality, pro-active tax planning throughout the year.
Accountants are usually not good leaders to their clients and they take the easy route out, leading to missed opportunities.
We’d be honored to provide a deep analysis of your tax return, balance sheet, and accounting to find the low-hanging fruit, but we’ll also give away some of the real and helpful strategies you should be using.
Please, book a call with us at SLFINANCIALSOLUTIONS.com and we’ll look deeply into your tax returns and books to find tax savings and efficiencies.
We won’t bore you with every single fact here, but you must know that one of the largest pieces of tax reduction planning is making sure you’ve selected the right business entity, and that usually leads us to convert to an S-Corp.
S-Corporations are excellent tools to reduce your social security and medicare tax as a trucking company.
Long story short, businesses can convert to an S-Corp, from their default sole proprietorship.
The default taxation of a business is a sole proprietorship, you need to convert to an S-Corp.
S-Corporations Could Save You thousands a year in taxes.
Truckers might save thousands each year in social security and medicare taxes, simply by converting from a Schedule C Sole Prop to an S-corporation.
Let’s take a look at how your company is taxed as the default sole proprietorship, which uses a Schedule C tax form.
This is not legal tax advice for your specific case, so please talk with us about nuanced advice for your business.
When you first start any business, you’ll start out being taxed as a sole proprietorship, or a schedule C.
You will be taxed as a sole prop unless you make a conversion to a corporation, such as an S-Corp or a C-Corp.
There are not many reasons to become a C-Corp, but we’re going to talk about truckers maximizing an S-Corp.
So, you’ll start out as a Sole Proprietorship.
a - You earn 1099 income or revenue
b - Subtract your qualified business deductions, leaving you with a “net profit”
c- You pay social security taxes and medicare taxes on your net profit (also called “self-employment taxes")
d - You then pay federal and state income taxes as it “passes through” to your personal tax returns (why S-Corps and Sole Props are called pass-through entities)
Here’s an example:
You earn 350,000 in net profits
You have 200,000 in expenses, depreciation, write-offs, mileage/fuel, repairs etc.
Leaving you $150,000 in net profit.
$150,000 net profits
- 12.4% Social Security (all income up to the limit of 147,000 in 2022)
- 2.9% Medicare Tax
- State and Federal Income Taxes
$150,000 net profits
12.4% SS tax =$18,228 in SS Taxes ($147,000 x .124)
2.9% Medicare tax = $4,350 in Med Taxes (150,000 x .029)
TOTAL SELF-EMPLOYMENT TAX AS SOLE PROP: $22,578
When you become an S-Corp, you’ll convert to an S-Corp by filing a form 2553.
You will still be an “LLC” but you’ll be taxed as an S-Corp.
Within an S-Corp, your entire net profit is no longer what’s subject to the self-employment taxes, you’ll now split your income between a salary and an owner’s distribution or dividend.
a - You earn 1099 income or revenue
b - Subtract your qualified business deductions, leaving you with a “net profit”
c- Your corporation pays you a “reasonable salary” which IS subject to self-employment taxes
d - The rest of the net will be your owner’s distribution which is NOT subject to self-employment taxes
d - You then pay federal and state income taxes as it “passes through” to your personal tax returns (why S-Corps and Sole Props are called pass-through entities)
So - your income will be split between a Reasonable Salary and an Owners Distribution.
The Salary will be subject to social security and medicare tax.
The Distribution will NOT be subject to the social security and medicare tax.
(quick reminder, self-employment taxes are the name for social security and medicare taxes).
Since your salary is NOT subject to the 15.3% Self Employment taxes, you’ll be tempted to take as low of a salary as possible.
You must take a “reasonable salary” for your role in the business.
The IRS has some substantial casework and rules around how to work through what “reasonable compensation” should be between you and your corporation, but we will help guide you to make the wisest decision based on your job and work engagement, criteria, and the role you play.
Long story short - you want to maximize your S-Corp by taking the lowest salary possible that also qualifies as “reasonable” if the IRS were to ever challenge your salary amounts.
$150,00 in Net Profit
Reasonable Salary - $75,000 - THIS IS SUBJECT TO 15.3% SE Taxes
Distribution - $75,000 - This is NOT SUBJECT to the 15.3% SE Taxes
$150,00 in Net Profit
Reasonable Salary - $75,000 = SE Taxes - $11,475
Distribution - $75,000 - This is NOT SUBJECT to the 15.3% SE Taxes
Sole-Prop Original Self Employment Taxes: $22,578
New S-Corp Self Employment Taxes: $11,475
SAVINGS - $11,475 a year!
You could probably use another $2,000 - $12,000 a year in saved taxes, right?
The S-Corporation is one of the most vital tools to get that tax reduction.
Now, there are some things you should know about converting your trucking company to an S-Corp.
First off, you’ll be a bit more tied to your accountants and there are more rules and requirements.
Second, you should really only become an S-Corp if it will be worth it.
Don’t become an S-Corp until after you’ve hit AT LEAST 30,000 in net profits.
Third, you should know that you will be reporting a lower income to the social security admin, so you’ll need to understand that you’ll receive a lower retirement benefit when you eventually tap into social security.
That last point transitions us nicely to the second tax reduction hack for truckers - you should invest using a small business plan.
But before we move on here, let’s talk about how impactful that S-Corp could end up being if you actually use the tax savings wisely.
Let’s just use that last example, where we found over 11,000 a year in tax savings.
Imagine if a business owner aged 35 found that savings, and they wisely took the savings and put it into a small business retirement plan.
If they persist until they’re 65 (close to full retirement age):
$1,000 a month, earning monthly compounding interest would end up growing big time.
$1,000 a month, with 8% compounding interest would end up being: $1,490,000 at age 65.
That $1,000 a month would also be, essentially, free of social security taxes so it would be create even larger tax savings…
So converting to an S-Corp can literally help make you a millionaire!
FUTURE VALUE of 8% compounded monthly:
500/month for 30 years at 8% = $745,000
1,000 a month for 30 years at 8% = $1,490,000
The savings we create using an S-Corp should finance your retirement plans and the support staff you need!
Now, let’s talk about the second major tax reduction strategy - small business retirement plans.
The government has built a tax structure that encourages businesses to provide benefits to their employees, and being self employed or a business owner, you get lots of the same benefits when your business invests in your benefits!
The tax code is filled with all sorts of sweetheart deals for these industries and small businesses and even self-employed people can tap into these tax advantages.
You might be rolling your eyes a bit right now because I’m telling you to invest in 401k’s or IRA’s, but let me break this down for you.
You can use self directed, or more traditionally hosted retirement accounts.
The key is that the plans allow the business to shift massively tax efficient dollars out of the business and into the retirement accounts of employees and owners.
Retirement plans have an employee and and employer contribution.
Remember when you were at a business with a 4% match on their 401k?
The money you contributed was the employee contribution and the 4% match the company made was called the “employer contribution”.
Both the contributions will grow tax deferred, but the employer contribution is a direct write off in the business.
The employer contributions essentially avoid the 15.3% self employment taxes!
That means the employer contributions from the business to your own account enjoys an amazing 15.3% boost in growth RIGHT AWAY, because you don’t have to pay the SE taxes on it (you don’t actually get a 15.3% growth on the account and please consult investment advisors or financial professionals).
Each of the small business retirement plans have rules and systems meant to help out different types and sizes of businesses.
You can’t discriminate with a retirement plan!
Really quick, it’s important to note that there are rules around these plans so that whatever benefits and employer matching, or profit share you make to yourself, you’d need to provide it to all similarly employed employees.
In other words, you can’t give retirement plans to you, your senior staff and not to your other W-2 employees.
So, when choosing a retirement plan, we will help our truckers and business owners identify which one helps them the most for taxes and which one supports their staffing levels and incomes at just the right level.
I won’t bore you to death, but you should know that you can genuinely write off and save MASSIVE amounts of taxes, even if you’re just a solo-truck owner earning 1099 income.
Here are some quick breakdowns of the various retirement plans for small businesses, when they’re good to be used and how much you can save.
If you’re an owner operator trucker without any other employees, then an individual 401k is a really great tool.
You can take up to 25% of your S-Corp salary, or your schedule C net income and make it as an employer contribution that’s avoiding the SE taxes.
That means if you had a $50,000 salary on your s-corp, you could contribute up to $12,500 to yourself as an employer contribution.
That contribution of $12,500 would avoid about 1,900 in SE taxes on that income.
The S-Corp actually puts some limits on the employer contributions.
Besides the employer contribution, the employee can make a contribution of up to 100% of their total salary, not to exceed the annual contribution limits of $20,500 (2022).
You can’t contribute more than your salary as an S-Corp, into a 401k employee contribution, but you can do up to the salary amount (whatever is less).
The employee contribution can either be a deductible contribution, or it could be a ROTH contribution.
That means in this example (the $12,500) you could put the whole amount into a 401k as well and have it grow tax deferred and then tax free in retirement if it’s Roth.
Long story short, this is a massive boost to savings, investing and tax write offs. In fact, the employer contributions must be the lesser of 25% of net income or $61,000.
That’s right, depending on how your net income and salary looks, you could make a straight up $61,000 contribution from your business to your investment account.
That brings us to the next major tax write offs for truckers - hiring your minor children!
There are some secret tax benefits to hiring your minor children.
Here are some quick qualifiers:
Don’t cheat with this, or the IRS will catch you.
A: Shift income from your high tax bracket to the kids lower, or even standard deduction bracket
B: Disregarded entity family businesses enjoy no employment taxes to children
Let us explain:
First off, your tax bracket is higher than your kids.
Kids get to take the standard deduction, which means that their first 12,000 or so in income is income tax free.
If you’re an S-Corp, the income your kids earn WILL be subject to employment taxes.
If you’re NOT an S-Corp and you’re a family owned disregarded entity, the income your children earn in your family business will NOT be subject to employment taxes.
Depending on how you participate in the business, you could make some changes to get lots out of this.
The bottom line is, inviting your kids to legitimately participate in the business is a fantastic way to earn money and save taxes - you just need to be legitimate about it.
Obviously truckers have massive opportunities when it comes to equipment write offs, depreciation and bonus depreciation.
We won’t get too complex into this because you probably know this already, but when you work with a tax professional it's important to time your purchases and get the most out of your equipment investments.
Remember, it’s critical to stay on top of your net profits and your equipment needs.
The key to lowering your taxes with this strategy is to build up cash accounts that have capital to make investments when appropriate. We help you develop accounts and cash flow to upgrade and invest in your business at just the right time, while we are monitoring your tax liabilities all the time.
Your home office can be a GOLD mine in write offs.
You’ll want to carefully monitor what portion of your home is being used for business, whether it’s storing your equipment, truck or your home office.
In proportion to how much is used for business, your home office deduction can include all sorts of things like:
There’s much more that goes into this, but let’s just note that you can get some big write offs.
Buy and hold real estate has massive tax advantages.
We always recommend that over time, you find ways to save up enough for an invents in a rental property, or commercial property as an investment property.
The money you use as a down payment for rental real estate is NOT deductible, but the income that is generated from a rental property or commercial office you buy has incredible tax efficiency.
It might sound insane to talk about buying rental property, but buying an office, shop, or other commercial buildings can be really great investments.
Another tax advantaged and wealth building idea for truckers is to utilize small multi family homes to get started in real estate investing.
One thing that truckers can do is owner occupy a duplex, triplex, or fourplex home.
They would live in one of the units and then rent out the other units, allowing the renters to cover the costs of the mortgage and utilities and they can live, essentially, rent free.
Well, you can use traditional down payments and mortgage products to purchase a multi family home.
In other words, you can use 0%, 5%, 10% down payments to buy an income producing asset!
That’s incredible if you really think about it.
The key to using a regular mortgage is that you’d have to live in it at least a year as your primary residence.
We know lots of truckers using owner occupied duplexes and triplexes as the perfect way to start building massive wealth while they’re in high production mode in their business.
You can buy a duplex or triplex as your primary residence, and then while your tenants are paying your rent, you can depreciate the property, use cost segregations to fast forward tax deductions even faster and your spouse can be the manager of the property or even become a real estate professional.
If you don’t live in the duplex or triplex, then you’ll just need to bring more like 20% to the table as a down payment and your mortgage will probably have a higher interest rate than typical.
Buying a multi family property in order to lower your expenses and allow your tenants to pay your rent is a fantastic way to build wealth, and super tax advantaged wealth at that!
If you’re looking to lower taxes and build wealth, then you owe it to yourself to look into real estate eventually. Remember, diversification is really important when it comes to wealth building, and there’s a couple levels of wise diversification you should consider:
Besides this, you’ll want to have tax diversification.
Long story short, you'll want to build tax efficient and diversified wealth over time and your tax advisor should be encouraging you to be wise with money and build tax efficient wealth.
These 5 things will help you lower taxes and build tax efficient wealth.
If you're ready to get your trucking business headed in the best direction and you want to establish pristine financials, never worry about bookkeeping, and get your taxes done right, then give us a call and schedule a no-cost tax analysis today!
We're a full-service, outsourced accounting firm that helps small businesses achieve truly better outcomes. We roll all of our services together into an "outsourced accounting service", so we can provide a one-stop-shop solution for small business owners. Here are some of the services that are included in our outsourced accounting service.
