When it comes to taxes, there's no shortage of myths and misunderstandings. From wild social media tax schemes to practical strategies, knowing what works—and what's legal—can mean the difference between keeping more of your hard-earned money and running into trouble with the IRS.
In this guide, we’ll break down three key tax strategies that business owners, entrepreneurs, and investors should be aware of. These are not loopholes or questionable tactics but legitimate ways to reduce your tax burden legally while keeping more money in your pocket.
1. The S-Corp Election: Is It Really a No-Brainer?
One of the most common tax strategies for business owners is electing S-corporation (S-corp) status. Many accountants will automatically suggest it, but is it always the best choice?
Why Business Owners Choose S-Corp Status:
- If you’re a sole proprietor or LLC owner, all your profits are subject to self-employment tax (15.3% for Social Security and Medicare).
- With an S-corp, you can split your income between salary (subject to self-employment tax) and distributions (not subject to self-employment tax).
- This can result in significant tax savings, often reducing your self-employment tax burden by thousands of dollars per year.
The Common Pitfall
Many business owners set their salary too low, hoping to minimize their tax burden. However, the IRS requires that S-corp owners take a “reasonable salary” before paying out distributions. If the IRS deems your salary unreasonably low, you could face penalties, back taxes, and interest.
How to Avoid Issues:
- Use an independent salary verification tool or a third-party analysis to determine what is considered “reasonable” for your industry and role.
- Make sure your salary aligns with Bureau of Labor Statistics data for your responsibilities.
- Consult a tax professional before making the switch to an S-corp.
Take Action
- Review your S-corp election with a tax professional.
- Ensure your salary meets IRS guidelines to avoid penalties.
- Evaluate if the tax savings outweigh administrative costs.
2. The Augusta Rule: A Smart Way to Save on Taxes
The Augusta Rule (named after the Masters golf tournament in Augusta, Georgia) allows homeowners to rent out their property for up to 14 days per year tax-free.
How It Works:
- If you host business meetings, team retreats, or workshops at your home, you can charge your business a reasonable rental fee.
- Your business gets a legitimate tax deduction, and you personally don’t have to report the rental income on your tax return (if it’s 14 days or fewer).
Example Calculation
Let’s say similar event spaces in your area rent for $500 per day. If you use your home for 14 days a year:
- 14 days × $500 = $7,000 in tax-free income
- If you’re in a 40% tax bracket, that’s nearly $2,800 saved in taxes.
The Key to Doing It Right
- The rental price must be reasonable (you can’t charge your business $10,000 per day unless you live in a mansion that rents at that rate).
- Keep documentation—a rental agreement, proof of business use, and comparable rental rates.
- Don’t exceed 14 days—or the IRS will consider it taxable income.
Take Action
- Determine if you can hold business events at home.
- Research comparable rental rates in your area.
- Maintain proper documentation for IRS compliance.
3. Hiring Your Kids: A Legitimate Tax-Saving Strategy
If you have children, hiring them in your business can be a win-win strategy. Not only can you teach them valuable skills, but you can also shift income from your high tax bracket to their tax-free bracket.
Why It Works
- Children under 18 working for their parent’s sole proprietorship or LLC don’t pay Social Security or Medicare taxes.
- The first $15,000 of their earnings (in 2025) is tax-free at the federal level.
- Their income can be used for legitimate expenses, like college savings, contributing to an Infinite Banking Concept (IBC) system, or personal expenses—helping them build financial security while keeping money within the family.
Common Mistakes to Avoid
- The job must be legitimate—they can’t just “exist” and collect a paycheck.
- The pay must be reasonable for their role and age.
- Keep documentation, including time sheets and job descriptions.
- If your business is an S-corp, you may need a separate family management company to avoid payroll tax issues.
Examples of Jobs Kids Can Do
- Social media content creation
- Office tasks like filing or data entry
- Cleaning or maintenance
- Modeling for marketing materials
- Customer service tasks
Take Action
- Create a job description for your child’s role.
- Pay them a reasonable wage and document their work.
- Use their income for tax-advantaged savings, such as funding an Infinite Banking Concept (IBC) policy, investing in their first business, or setting aside money for future education expenses.
The Fear of IRS Audits: How to Protect Yourself
Many business owners worry about being audited, but the reality is:
- Most IRS inquiries are simple adjustments based on mismatched information, not full audits.
- If you have documentation, you have little to fear.
How to Protect Yourself
- Follow the “ordinary, necessary, and reasonable” test for deductions.
- Keep records of all business expenses, including receipts, agreements, and logs.
- Use accounting software like QuickBooks or apps like MileIQ to track business miles.
- Hire a qualified tax professional to ensure compliance.
Take Control of Your Taxes
Many entrepreneurs and business owners unknowingly overpay in taxes simply because they aren’t aware of legal strategies that can save them thousands of dollars every year.
By implementing smart tax strategies—like electing S-corp status correctly, leveraging the Augusta Rule, and hiring your kids legally—you can reduce your tax burden while staying 100% compliant with the IRS.
Want to go deeper?
- Connect with a tax professional to optimize your tax plan.
- Take our free 32-second financial freedom quiz to see where you stand.
