Jeffrey Levine: Being organized starts with having a plan.
Having bank accounts that are segregated, having expenses that
are tracked appropriately having the right business structure,
all of these things starting ahead can save you money in the
long term. A common question is, 'Hey, I started doing this
business. Now, what do I have to do? Is there something I'm
supposed to do?' and the answer is not necessarily. In many
cases, if you have no other business structure, you are by
default, a sole proprietorship. In many instances, side hustles
are set up as sole proprietorships or LLCs, where
there is no salary from which to make withholdings. And so as
profits increase from that business, so too does an
individual's tax liability. In my experience, other
entrepreneurs who have more established businesses will
often opt for S-corporations. The primary tax advantage for
the S-corporation comes on the profit above and beyond the
amount that an individual pays themselves a salary. Because for
let's say, a sole proprietorship, you continue to
pay self employment taxes, no matter how high your income is,
or what your profit is. Whereas on the S-corporation side, only
the wages paid are subject to those employment taxes. So even
though two individuals may make exactly the same amount of
income, the other elements of their business, how risky or not
it is, how much asset protection is valuable to them or not, can
all matter in the determination of the right entity selection.
Imagine, for instance, you're a sole proprietor and you want to
make payroll and you have to put out a W-2 to your employees,
well, do you want your own name? Do you want your own social
security number on that, that information that's going to your
employees? Maybe not, maybe you decide to create a separate tax
ID number or even a separate entity structure to keep a
little bit of a distance between yourself and your employees.
If you've got a side hustle that's often on top of your your
regular hustle, so your income is higher than it might
otherwise be. And by putting money into some of these income
producing plans, you can lower your overall tax bill. And
depending upon how much profit you have, or other elements of
your business, the type of plan you establish, can have a
dramatic impact on the amount that you can fund. And by
putting money into a retirement account, it actually reduces
your business income that is eligible for that deduction. If
you're looking for the most amount of money. Well, a really
successful side hustle might mean setting up a 401(k), it
could even mean setting up a personal pension plan for
yourself. On the other hand, if you're looking for ease of
operation, a SEP IRA is often the simplest type of corporate
plan that can be established and funded. And of course, on top of
all of these plans, your 401(k) let's say for your regular job
plus maybe your SEP IRA for your side hustle, you can still
contribute to an IRA or a Roth IRA on top of those dollars.
Now, it's possible your IRA deduction could be limited. But
that doesn't stop you from making the contribution to that
account in the first place. For instance, if you only quote
unquote, have $50,000 of profit from your side hustle, well you
may want to use a 401(k) that could allow you to fund more
dollars than let's say a SEP IRA. On the other hand, if
you've already contributed all of your salary deferrals to an
existing 401(k) plan for a day job, if you will, then you
probably want to keep your outside plan as simple as
possible.
The best advice nearly all the time is to keep your business
records and your personal records as distinct and separate
as possible. Today, we have apps that can help track your miles
for business or non business purposes. There are apps where
you can take a picture of your receipt and instantaneously it's
recorded forever. These are the types of things that business
owner should look to establish early on and to use regularly.
Along with having separate credit cards and bank accounts
for their business. Ordinary and necessary can vary by business.
So it's important to understand the types of expenses that
others in your particular field would have that the IRS would
deem to be ordinary and necessary. Ultimately, it's a
lot easier for tax professionals to eliminate something that they
see in front of them than it is to try and ask you to track down
information that is not there when they need it.