You are currently viewing Secondary scammers can ‘pay less tax by being organized’, says CPA

Secondary scammers can ‘pay less tax by being organized’, says CPA

Whether they’re pursuing their passions at night or just looking to earn a few extra bucks when they’re not on time, millions of Americans have taken a beating. While the money you earn from a side job can go a long way toward increasing your financial flexibility, it inevitably comes with extra work (and a bigger payout) come tax time.

The goal for taxpayers everywhere is to pay as little as possible while respecting the rules. If you’ve worked hard all year, mid-April isn’t the time to start scrambling to make sure you’re doing the right thing with your side income, says Jeffrey Levine, expert- certified accountant. and Chief Planning Partner at Buckingham Wealth Partners.

“It’s always important to plan ahead because you’ll pay less tax by being organized,” he says.

If you have a secondary hustle, your best bet for minimizing the stress as well as your tax burden is to choose the appropriate classification for your business from the start and continue to monitor your tax situation throughout the year, Levine says. “Getting started early can save you money in the long run.”

Here are three strategies he says would be wise to incorporate into taxpayers who hustle taxpayers.

Choose the right business structure

If you find yourself thinking ‘Is there something I’m supposed to do?’ once you’ve decided to start your own side business, you’re not alone, says Levine. “The answer is, ‘Not necessarily,'” he says. “In many cases, if you don’t have another business structure, you’re a sole proprietorship by default.”

If you’re just starting out, operating within this structure is one way to keep things as simple as possible, says Levine. “There is literally no difference between you and the company,” he says. “You file the same tax return. Your business is reported on a Schedule C.”

If you go this route, it’s important to remember that you’re making a salary that you can deduct taxes from, just like your employer would with your 9-to-5 job. An individual’s tax liability also increases,” says Levine. “This may create a need for estimated tax payments for the first time in an individual’s life, or, at the very least, the need to prepare for a much larger tax bill in April.”

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If your side business generates big profits, you might benefit from a more complicated structure, such as an S corporation. employee of his own company is subject to employment taxes, the profits of that company are paid to the individual’s personal tax return without the imposition of employment taxes,” says Lévine.

Basically, if you are a sole proprietorship, you will pay taxes on everything you earn. By paying yourself through an S corp, only the wages you pay yourself are subject to these taxes, while profits beyond your salary are treated as regular income.

In short, choosing the right business structure for you is essential. These and other factors (such as, for example, insurance and privacy issues) will determine which decision makes sense for your business, and it may be worth consulting with a tax professional before taking action.

Reduce your tax bill by contributing to retirement accounts

Ideally, your stampede brings in a lot of income beyond what you earn in your full-time job. And more money means more income taxes. One way to shelter some of that money from the IRS is to put it in a tax-advantaged retirement account.

Money contributed to plans such as traditional 401(k), IRAs, and IRAs for business owners known as SEP IRAs, reduce your taxable income for the year in which you contributed. contributions.

Having multiple gigs often means having multiple accounts to choose from, which can quickly get messy. One thing to note, Levine says, is that the contribution limits on these accounts are usually “coordinated” between plans. If you have two 401(k) plans, for example, you can contribute up to the 2022 limit of $20,500 through both accounts, rather than $20,500 each.

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The accounts you contribute to and the combination that makes sense will vary from taxpayer to taxpayer, Levine says, and your accountant may have an idea of ​​which setup works best for you. But no matter how you save, you kill two birds with one stone.

As a long-term saver, “there’s a real benefit to maximizing those retirement dollars,” which will grow at a compound rate from the time you invest until the time you withdraw the funds in retirement, he said.

“And on top of that,” he adds, “it can also help lower your tax bill if you’re working two jobs by putting more money into a retirement account through your side hustle which will reduce your income. taxable.”

Control your expenses

The best way to cut your taxes as a con artist, according to Levine: Don’t be that person who shows up to your accountant’s meeting with your receipts in a shoebox.

“Being an organized business owner will help you pay less tax,” he says. “Time and time again, the business owners I’ve worked with over the years who keep the best records tend to pay the lowest amount of tax on average.”

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In order to deduct your eligible business expenses from your taxes, it is essential to know which of your financial transactions were personal and which were for your business. “The best advice, almost all the time, is to keep your business records and personal records as distinct and separate as possible,” says Levine.

This usually means setting up bank accounts and credit cards for your hustle-related expenses, making it easy for you and any tax professional to discern what’s deductible and what isn’t.

It’s a good idea to keep constant track of anything you might need at tax time, which could include receipts for purchases you’ve made for the business or miles you’ve driven while working. on your side. Fortunately, scammers and small business owners today have technology that makes this process easier than ever, says Levine.

“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 instantly it’s saved forever,” he says. . “These are the types of things business owners should be looking to establish early on and use on a regular basis.”

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