Start a side business for those sweet tax advantages.

 

Let's face it – the tax code is set up to favor entrepreneurs.  There's no reason you can't take advantage of that.

 

Ever wonder why the rich get richer?  There are many reasons, one of which is the way the tax code is set up to encourage certain behaviors, such as owning a business.

Let's say you earn $100 as an employee.  Before you get access to your money, taxes come out.  To keep it simple, we'll say you pay about 20% in taxes.  So, earn $100 as an employee, pay $20 in taxes, get $80 in spendable (or saveable!) money.

Now let's imagine you earned that same $100 as an entrepreneur, either in a full time business or in your side hustle.  Step 1, earn $100.  Step 2, spend money.  We'll say you spent the same $80 that you spent as an employee, and that your spending was on things the tax man say it's ok to spend on as business expenses, such as an internet connection and a cell phone.  You are left with the $20, which flows through to your personal return as profit.  It's now personal income.  You still pay 20% in taxes, but you are paying 20% of the money that is left.  So that's 20% of $20, or $4.  That leaves you $16 you can spend personally.

$16 in personal spending plus $80 in business spending gives you $96 you can spend when you earn as an entrepreneur.

Now I was an English major and barely made it through that one required math class in college, but even I know spending $96 is way more fun than spending $80.

Yes, I am oversimplifying this.  Different brackets of your personal income are taxes at different rates.  Some businesses (like C corporations) do pay tax themselves rather than passing profits through to the personal return.  And you can't buy just anything with pre-tax money – the expenses have to be the sort of expenses the IRS says are legit. But I'm trying to make a point here.  And that point is that if all your income is coming in from a paycheck from an employer, you are paying the maximum in taxes on that income, and missing out on some sweet tax advantages.

Do you have a hobby where you are already spending a good amount of what would count as business expenses if that hobby were a business?  Could you shift some of your personal expenses (such as that internet connection and cell phone bill) over to that business? Have you helped people out with this skill, had them offer to pay you for your time, and declined the payment, thinking it is just a hobby?  Would you consider charging people for what you do and making it a business?  If so, you should look into turning that hobby into a business.

Now, some of you may think you can do this without any intention of getting clients.  I'm not recommending that.  The IRS has some rules about the distinctions between a hobby and a business you should definitely research.  But if you are looking for a side hustle and already have the skills and knowledge, why not test the market and see if there's demand for what you are offering?

Often clients think their side hustle has to be in what they do for their full-time job or in something they hate (so it feels like work).  But you can take a skill you've already developed, an interest you already have, even if it is something so fun you've been doing it for free, and if people will pay you more for it than what it costs you to do it, BOOM, you have a profitable business.

Obligatory disclosure – I'm not a CPA, and you aren't my client, so talk to your team of advisors before you take action.