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If your side hustle is growing to a point where you are bringing in significant extra income, consider converting it into an official small business.
Business taxes can be confusing to navigate, but there is no need to worry. There are extra benefits that you can take advantage of during tax season in order to keep more of the money you make.
Note: This is not meant to be tax advice. If you have questions about taxes, please contact a tax professional.
5 Tax-Saving Tips for Small Businesses
These tax-saving tips for small businesses will help you learn how to set up the most beneficial tax structure for your business, highlight deductions you might not know are available to you, and help you reap the benefits so you can invest the extra cash back into the longevity of your business.
#1: Determine a business structure that works best for you
The way you choose to structure your new small business will impact what percentage of your income is taxable, adding value to creating a viable business from your side hustle. Two common business statuses for entrepreneurs are sole proprietor and limited liability company, or LLC.
As a sole proprietor, you aren’t considered a legal entity, so it is the most simple way to set up your business when you are just getting started. Although it takes a lot of the complications out of filing taxes, the amount of taxable income you claim is more rigid.
Limited Liability Company
As an LLC, you and your assets are protected from liabilities that could affect your business. You are considered a separate legal entity from your business, meaning that you have more flexibility when it comes to tax reporting. If you choose to structure your business as an LLC, you have the option to claim an S Corporation status.
By choosing the S Corporation status, you are also considered an employee in the eyes of the IRS, not just a business owner. This means that you can claim a salary for yourself, and you will only have to pay employment taxes on the salary you determine is appropriate.
Since employee salaries are considered a business expense, you are reducing the profits you claim on your tax files, bringing down the overall amount of income tax you would pay for your business.
#2: Make it a family affair
If you are married, consider “hiring” your spouse as an employee of your small business. Your spouse can help you out with business tasks as simple as bookkeeping or supply management and claim net income as well.
Since your spouse would also be entitled to a salary (with employment taxes), you can easily increase the number of business expenses, further reducing the taxes you would pay on your business’ net profits.
Keeping your finances in alignment with your spouse is a balancing act. It requires you to stay on top of filing your taxes and paying your bills on time.
Ensure that both of you are covered when it’s time to file your taxes. Your spouse could also be eligible for Social Security or retirement benefits. However, involving your spouse in your business can become confusing financially, so consider hiring a tax expert to help you with your filing status.
#3: Track your expenses to maximize deductions
As an entrepreneur, there are several tax deductions you can take advantage of, eventually lowering the amount of income tax you owe annually.
Auto expenses, for example, can be beneficial to you and your business if carefully planned and calculated. If you drive a significant amount for meetings, errands, and other business purposes, there are two avenues you can take to deduct those costs from your business taxes. You can use the IRS standard mileage rate as a guiding metric, or you can claim deductions based on the actual costs of your car maintenance such as gas, repairs, and insurance.
Calculate what percentage of your time spent in the car is dedicated to your small business, and decide which of the aforementioned tactics makes the most sense financially for your filing purposes. Some other common expenses that can be included in your business’ tax deductions are:
- Travel/vehicle expenses
- Home office
- Computer software
Keep a record of your receipts in order to allocate small expenses back to your business motives.
What to Know When Your Family Vehicle Is Your Business Vehicle
Oftentimes, when starting a small business, you may not have the capital to purchase a separate office or equipment in order to run your company. If you are running your business from home, then you probably use your personal vehicle to handle errands and do other things for your business as well. Here are some things you will need to know if you are going to use your personal vehicle for your business.
1. Register Your Vehicle to Your Business
In order to make sure that your business is fully protected, you should register your vehicle to your business in order to fully maximize your liability protection. You will need to show proof of the business as well as your ownership with documents such as articles of incorporation and the vehicle title. While you can receive a tax deduction when using your vehicle for your business, you will need to show proof of how it is used for your business and how often. You can save your gas receipts and keep track of your mileage, and you can also wrap your vehicle or have other visible forms of advertising on it, which has the potential to deliver benefits when it comes to tax time.
2. Find One That Works
While pretty much any vehicle can double as a company car, in order to use it for your family as well, you will have to consider the size. Any of the common midsize SUV models could be a good option for your family, though gas could be a concern. There is also the option of choosing a hybrid vehicle that allows you the choice of using gas or a charging system. If you are in the market for a new car, choosing a hybrid vehicle can be a great investment as it can save you a lot of money in the long run.
3. Consider Your Brand
Branding is something that is not limited to the type of packaging you choose or the logo that you use (all of which can be tax deductions). Everything about your business, including your company vehicle, will reinforce your brand, therefore it should be thought out carefully. If you are going to purchase a new vehicle that will double as business and personal use, consider how that vehicle will represent your brand.
Utilizing your personal vehicle for business can save you lots of money in the beginning stages of your company. If you are using a vehicle that you already have, you can have it custom-wrapped in order to make it truly represent your brand.
#4: Plan for retirement now
Allocating extra money towards your retirement account can reduce your taxable income as a small business owner. If you are under 50, you can contribute “up to $5,500 to a traditional or Roth IRA; those over 50 can put up to $6,500 toward their retirement savings.”
In a traditional retirement account, your savings will not be taxed until you withdraw the money when you retire, so you might as well save money now while you can take advantage of the extra income from your side hustle.
#5: Prepare for potential losses
It is important to keep in the back of your mind how losses can impact your tax filing status. Consider building a support network and staying connected with others who own small businesses.
Believe it or not, building a community for confronting financial obstacles will provide some advice when you’re asked tough questions. Attempt to find your best niche and stick with it to avoid any discrepancies. Trying to expand in many different directions may lead to more ambiguity than opportunity.
It is totally fine to claim losses on your business’ tax files, as long as they do not become a common annual occurrence. In order to claim business-related expenses on your tax returns, you must be able to show significant profits and growth. If you do not document these discrepancies properly, you could find yourself in a net operating loss, or NOL. Simply put, an NOL means that the deductions you claim for your business are higher than your reported income.
Don’t Let Taxes Keep You From Starting a Small Business
The confusing language and processes behind business taxes should not intimidate you from taking the leap from side hustler to a successful small business owner.
If anything, you have the complete power to mold your start up’s tax structure to best benefit yourself and your lifestyle. Once you feel confident filing your business’ tax forms, you can invest the money you save back into yourself and your business, growing it to new heights.