3 Biggest Write Offs for Contractors & Home Service Businesses

Written by
Darion Wiggs
Published on
October 18, 2022

3 Tax Write Offs for Contractors & Home Service Companies

What are the biggest write offs for contractors, construction companies and home service businesses?

We get Chicago area contractors asking us all the time "what are the biggest tax write offs?"

Most people are expecting to get a list of some really juicy tax deductions they may not have heard about, but the fact of the matter is that the major deductions that actually lower your taxes are not what you'd think of.

The best write offs for a contractor or construction business are simple: anything that actually goes into the pursuit of profits.

But there are a couple of "write offs" that most business owners don't realize and they miss out on them.

Top 3 Contractor Tax Deductions:

The top 3 contractor deductions are as follows:

1 - Maximize an S-Corp

The biggest tax deduction that business owners can get is to maximize, or get the most out of an S-Corp. S-Corps, when setup properly, might be able to cut what amount of income is subject to Social Security and Medicare taxes.

When you reduce the amount of income subject to the 15.3% self employment tax, you get lots of opportunity to save in taxes.

When you're not an S-Corp, all income, up to the social security limit is subject to the 12.4% social security tax.

You'll also owe 2.9% in medicare tax on all your net profit.

That means you'll be paying 15.3% on all income up to the social security limit of $147,000 in 2022 (it changes each year), and all income is subject to the 2.9% medicare tax after the SS limit is hit.

S-Corps may potentially cut the amount of your income that's subject to that 15.3% SE tax.

S-Corp Income Split

With an S-Corp, your corporation will pay you a "Reasonable salary", and then you'll earn an owners distribution.

That means your income is split into two pieces, the distribution and the salary.

The salary in an S-Corp is still subject to the regular 15.3% self employment taxes, but the distribution portion is not subject.

That means that whatever you take as a distribution rather than salary, will not be subject to a 15.3% tax.

You might save thousands each year in SE taxes if you convert to an S-Corp.

The biggest "write off" for most business owners, isn't really a write off, but it's converting to an S-Corporation, instead of being taxed as a Sole proprietorship.

How to Setup an S-Corp in Illinois or Chicagoland

How do you setup an S-Corp here in the State of Illinois? Well, we would have to ensure that you meet the requirements of an S-Corp, and then we'd need to ensure you obey all the rules.  But from there, we would either file and open an S-Corporation, or we would convert you with a 2553 form.

Wiggs CPA Tax & Accounting specializes in helping contractors and small businesses lower their taxes by getting the most out of their S-Corporation, while making sure they obey all the rules concerning an S-Corp.

Book an S-Corp analysis with us today and find out of you could save lots!

2 - SEP IRA or 401k Employer Contribution

The second biggest write off for most contractors is using an "employer contribution" in their small business retirement accounts.

The government wants to encourage saving for retirement, so it has provided a great deal of incentive for businesses to match, or contribute, into people's retirement accounts such as 401k, SIMPLE IRA, or SEP IRA.

Long story short, you'll need to pay attention to whether or not you have statutory employees, but if you don't, that means you'll be able to take full advantage of the employer contribution benefits of a Solo 401k or SEP IRA.

If you have employees that are not officers, owners or family members, you'll have non-discrimination rules to pay attention to, but if you don't have employees, this is much easier.

You can take up to 25% of your net profit, not to exceed an annual limit of about $58,000 each year (this changes each year), and make a direct contribution to your retirement account.

That means if you had a $80,000 salary or schedule C income, you could contribute up to around $20,000 as the employer contribution.

That employer contribution essentially avoids paying the 15.3% SE tax, while also being deductible in the year you contribute, growing tax deferred, and being seen as income only during your retirement years when your income levels are probably much lower.

IN other words, by using this employer contribution, you just wrote off $20,000 and avoided paying a little over $3,000 in SE Taxes which are never due on this contribution.

You could think of it as earning a "15.3% return" right away (obviously, this is just a way to think of it, and there are risks with all investments".

The biggest write off for most small businesses is an employer contribution into your small business retirement account.

3 - Hiring Your Minor Children

The third biggest write offs that most contractors don't know about or think about, is to hire their minor children in the business.

IF you're NOT an S-Corp, which you SHOULD probably be, there's an additional little tax savings for hiring your kids because as a non disregarded entity, you'll enjoy the family business employment tax avoidance.

But, since you're going to be an S-Corp, you should just know that if you hire your kids, and they do bonafide, real work, and you obey the rules and laws, they'll get to use the standard deduction to create a massive tax savings.

All income, up to the standard deduction, is essentially tax free.

That means the income for your kids, up to the standard deduction of $12,950, is not subject to income taxes.

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