Having Side Hustle Can Help You Save Money On Your Taxes

These days you can’t have all of your eggs in one basket when it comes to sources of income. It is almost becoming the norm to have a side hustle as it allows for a fallback opportunity if your primary source of income unexpectedly disappears. It also allows for more financial freedom when you have both going on at the same time. The extra income can be earmarked for a specific economic purpose or goal and be kept separate from your primary income. The bottom line is, your side hustle should be passion-based as something you know you will enjoy as eventually, it could turn from side hustle to a full-time source of income. 

I am a mother of two young children and a CPA by professional training. My story and my reason “why” is based on a personal need, which is how many small business owners blossom.  

When I realized that my personal need to organize myself as the keeper of all things that kept my house and family running was shared with other mothers and adult children of aging parents like myself, I decided to go all-in and launch it as a digital platform that was as simple and stupid as possible. The only difference in my initial goal was I ended up creating a service that was simple but NOT stupid at all. I am now in a place where I can open up my initial side hustle, turned business, to others as they can leverage the tool that I built and coach people and help them complete their memoir using the digital organization tool that I created called “My Macro Memoir” 

I love that I can now empower other women to start a side hustle that is ready in a box for them to create anything they want out of it. As a CPA and a fractional CFO for many small businesses, the following tips should be considered when converting your side hustle into a real business:

  1. Ensure that you complete the proper documents for that state you will be doing business in and register as either a corporation, LLC (single-member), S-corporation, or non-profit. You should consult a business advisor or CPA to determine what form of business best suits your needs.
  2. Go to irs.gov and obtain an EIN. This happens instantly. However, tip #1 above must be complete before applying for your EIN.
  3. Set up a business banking account that will include only business transactions. Do not mix your personal and business expenses by any means.
  4. Choose bookkeeping software. I like the features of Quickbooks online as it is cloud-based and has several add-ons and other applications where there is compatibility. You can use Quickbooks merchant services to accept payments from customers via credit card or ACH payment. The transaction fees are very competitive to other credit card processing services available. (I have NO financial or business interest in Quickbooks)
  5. If you do not choose to go with Quickbooks, evaluate the other payment processing tools out there and the associated fees, as these can add up quickly.  
  6. Ensure that you obtain worker’s compensation insurance, business insurance, and any other insurance that your business may require if you have employees. If you have an online-based business, you may want to consider cyber insurance as well.
  7. If you will be selling physical products, you will be required in many cases to collect sales tax. Ensure that you register with the Department of Revenue in your state and understand the filing and payment schedules for sales tax.
  8. Set up a great organization system for all of your business-related documents and retain them both physically and digitally. This will protect you in many different scenarios should they arise.
  9. Hire a CPA or/and a bookkeeper to file your annual tax returns and oversee performing the monthly bookkeeping tasks that you may find that you do not enjoy. The biggest mistake I see is that people do not hire at least a bookkeeper early on and then pay to have their books cleaned up on the backend.

Some early tax savings that small business owners should consider:

  1. Any research and development costs associated with bringing your product or service to market are business expenses. Treat them as such as this is tax-deductible when they are incurred. Don’t miss out on this!
  2. Are you are a small business owner and have children like me? Consider having them do legitimate work for the business and hire them. You can pay them each up to $12,550 per tax year, tax-free (at least for 2021 as this is the standard deduction). A bonus is you do not have to pay payroll taxes for them as long as your business formation is either a Single-member LLC taxed as a disregarded entity or partnership or a sole-proprietorship. Some ideas for legitimate work for your children are to consider having your children stuff envelopes with marketing materials, modeling your product or service, or assisting with basic office tasks such as organizing or shredding papers.  
  3. Set up a retirement savings account. As a small business owner, you may receive a tax credit to assist in the cost of setting up specific retirement plans. In addition to the small business owner contributing to an IRA should consider several options. These include SIMPLE IRA, SEP IRA, 401(k), and profit-sharing plans. For any of these retirement plans, your contributions to yourself and your employees may be tax-deductible. Making this a priority is a win-win as you are forming something tax-deductible by the business, but you are saving for your retirement and encouraging your employees to do the same. 

There are many opportunities to apply the tax code and avoid taxes that are entirely legal and far from tax evasion, which is not legal. Know the difference, take advantage of the tax code that does favor small businesses, and keep your head down while you focus and keep your head up as you watch your dreams reach the stars!

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