Small Business Tax Deductions - "F" Is For FICA, FUTA & FIDO

If you own a small business and are looking for deductions, don't miss out on these. The first two you've may heard about but probably don't understand (until now). The third one may seem far-fetched (pardon the pun) but is legitimate if the circumstances described below fit your situation.

1. FICA This acronym stands for Federal Insurance Contributions Act, which is legal-eze for the employer's share of social security and Medicare tax. In 2011 all employees must pay 4.2% of their first $106,800 in compensation (wages, salary, bonuses, etc) to the federal government for social security tax. This 4.2% is deducted from the employee's gross wage, so while the gross wage is an employer expense, the social security deduction is not. Note: normally, the employee social security tax is 6.2%, and it will return to that rate for 2012.

Medicare works somewhat differently in that the tax rate is only 1.45%, but there is no limit to the amount of compensation subject to the tax.

But the employer is obligated to match both the employee's social security and Medicare withholding amounts, and this is a deduction for the employer because it doesn't come out of the employee's paycheck. Instead, it comes right out of the employer's pocket.

So don't miss this expense. It is common for small business owners to deduct the wages but forget to deduct the accompanying payroll taxes.

2. FUTA This stands for the Federal Unemployment Tax Act. It represents the federal unemployment tax that all employers must pay out of their own pocket. The bad news (for the employer) is that unlike FICA, employees contribute nothing to this tax. The good news is that for most employers, FUTA ends up being a much smaller expense than FICA. It usually amounts to 0.8% of the first $7,000 in wages or salary paid to each employee each year, or a maximum of $56/year. For part-time employees who earn less than $7,000, you end up paying even less. But don't overlook this one. When it comes to taxes, every little deduction helps. And even a "small" business can have 50 or more employees, and if each of them has at least $7,000 in annual wages, you're looking at a deduction of $2,800. For an employer with 100 employees, your federal unemployment tax could exceed $5,000. Also note that effective July 1, 2011, the rate has been reduced to 0.6%.

3. FIDO Fido is the name of a dog. What's that got to do with small business tax deductions? Well, isn't it possible that you have a dog that lives on the premises of your business? And could it not also be possible that this dog is not your pet, but rather a watchdog for the business? If that's the case, then the cost of feeding and maintaining the dog is a bona fide, and therefore deductible, business expense.

These are three (or maybe only two) small business tax deductions that will reduce your taxes. Be sure to report them on your business income tax return this year.

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