Posted by Michelson Law Office

Tax breaks for side jobs: What do you need to know?

Tax breaks for side jobs: What do you need to know?

Would you like to earn some money on tops of your pay check? Then there are endless possibilities that can help you make some extra cash such as dog walking, tutoring, and freelancing. 

But your side hustle can also help you keep your money when you transform it into a side business. It is complicated when you start a business. In order to reap the tax benefits, you have to know how to transform your side hustle.  

Choose a business structure

The first thing you need to do once you are ready to turn your side hustle into an official small business is to consider your business structure. Your taxable income will be greatly affected by the way you structure your business. This means that for tax purposes, there’s value in creating a business. 

For you to decide which one is the best to pick, you should understand how each structure works first. 

As a Sole Proprietor, keep it simple

You probably started as a sole proprietor when you first started side hustling. This is a fancy tax way of saying that on your personal tax returns you were making money from the money that you claimed. You are not a legal entity as a sole proprietor. In structuring a business, this is the simplest way. 

Tax Flexibility with an LLC

Your business could evolve into an LLC or S corporation once it will grow. LLC stands for Limited Liability Company. You are creating your business entity separate from you by structuring your business this way. From business liabilities, you are protected as an LLC. That means no one can go after your personal assets if something bad will happen to your company. 

You will have a flexible tax reporting option with an LLC in addition to helping you cover your assets. Unless specifically designated, individual LLCs are automatically considered sole proprietorships. That means in your personal tax return, your income and expenses should be reported. You will have to pay personal income tax on the profits that you gain if your company is profitable. Medicare and Social Security taxes are required to be paid too. 

But you will have options when you create an LLC. An S corporation status is possible to be claimed too. If you do that, in the eyes of Uncle Sam, you are no longer a sole proprietor. You are a business owner and slash an employee.

You are entitled to a salary as an employee. This means that your business will be paying taxes on a smaller profit since the salary you are entitled is a business expense. And on the salary you claim, you only need to pay employment taxes. 

Here are other options:

Although partnership or C corporations are less common when it comes to side hustle, some small business owners may decide to create among those two. 

Partnerships involve two or more partners although it’s similar to a sole proprietorship. Rules on partnerships differ in each State. A partnership agreement will outline how sole proprietorship is shared in every case.

The owners and the business entity are taxed separately if you decide to set up your business as a C corporation. You also pay corporate income tax under this structure. 

So, what are the differences?

With LLCs, S corporations, and partnerships claiming business losses on personal taxes is possible but it is not true for C corporations. 

An LLC may be the best way to go if you are looking for a way to keep more money in your pocket after your full-time job and side business taxes. 

To get things right financially, creating the right business structure is the best help since you are trying to make money and spend money. Overlooked options, possible penalties, and other fees are some of the results of missteps. 

Tax Deductions and Benefits for Self-Employed

After creating a small business, below are the tax deductions you may be able to claim:

1. Start-up Expenses

You may be able to claim certain deductions in the first year of your business. Expenses related to the preparation to launch your business, creating your business and organizational cost are some of the deductions you can get. Picking a business structure is under the organizational costs. 

In Publication 535, the IRS gives more specifics on how much you can deduct as a start up expense. 

2. Home Office

Enter the home office deduction as one of the benefits you will gain to working from home. You can qualify for it if you use a portion of your home exclusively for business. You will have two choices to choose from once you determine your definition of a home office matches up with the definition from the IRS. To determine how much gets deducted, you can either use the simplified option or the regular method.

3. Office Supplies

Since you already know how to deduct a home office, consider office supplies next. Computers, printers, toners as well as paper qualify for this and they add up so do not forget them. 

 4. Tools

In the eyes of the government, tools and equipment are different. To do your job, tools are items that are necessary. But, here’s the catch, the tools have to amount to 2% or more of your adjusted gross income (AGI) in order to qualify for a deduction. 

5. Computer Software

POS software or accounting software or any software you use to run your business is now tax-deductible. 

Always Bring the Receipts

There is nothing more important than collecting your receipts when it comes to tax deductions for your small business. You have to make sure you can complete your return accurately regardless of which deductions you are choosing. Receipts are essential in the event of an audit. Reach out to a tax expert if you are not sure which deductions you qualify for. 

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