Is it Time to Incorporate My Side Hustle? Let’s Crunch Those Numbers!

Blue Fox Specializes in Tax Services for Consultants and Independent Contractors

Are you self-employed; earning 1099 income?
Is your personal business generating more than $30k per year?
Thinking about incorporating? [Our CEO has a video message for you!]
 
It sounds like it’s time to analyze your tax position. Let’s compare the costs of incorporating against the tax savings you’d realize as an S-corp. Let’s figure out if you’re missing any key write offs that can lower your taxable income.
 
Many of our individual tax clients have a side hustle. Some are just starting out and claim their earnings as 1099 income on a Schedule C. Nothing fancy, but these sole proprietors or single-member LLCs have saved thousands of dollars and kept their audit risk low by asking us for help at tax time. Another group of our clients have taken their side hustle to a whole new tax advantaged level by becoming S-corporations. We love using legal strategery (yes, we know that’s not a word) to proactively help people maximize their tax refunds. Here are some examples.
 
EXAMPLE 1: Let’s Save $2,000
One of our clients is an adorable family with young children. This family has been our client for 5 years, from their first year of marriage through the birth of their beautiful kiddos, we sit together every fall and spring to talk about tax-saving strategies.
 
The woman of the household is a part-time freelance marketing consultant, while her husband has both W-2 and 1099 income as a salesperson. She is earning between $28-32k annually and claiming that 1099 income on a Schedule C. Every fall, we have a free tax planning meeting and crunch some numbers for their family. Taking their entire financial and tax picture into consideration we determined a few weeks ago that they could decrease their tax liability by $2,000 if she incorporated as an S-corp. Who doesn’t want to keep $2,000 more of their hard-earned cash??
 
EXAMPLE 2: Let’s Save $8,000
A few years back, another young couple (with equally adorable kiddos, btw!) came to us for a fall tax planning meeting with surprising news: his side hustle had made nearly $60k that year and he’d also changed jobs. Both of these factors meant a significant and unexpected jump in income. We crunched the numbers and their tax bill looked to be around $6,000. We talked about their options in depth, because no one wants to owe on April 15th, right??
 
We suggested that, since his spouse did plenty of unpaid work for his side business, we actually put her on payroll. “Is that even possible?” he asked. Yes. 100%. This is a great tax-saving strategy for sole proprietors. Pay your spouse W-2 wages, and the wages and payroll taxes then become an EXPENSE to the business, lowering your Schedule C net income. There are costs associated with this strategy, like payroll processing fees and W-2 filings, but the tax savings eclipsed those expenses for this family.
 
When we saw the couple was intrigued, we doubled down. We suggested that along with payroll, since they didn’t need the cash, the ultimate tax avoidance strategy is to open a business retirement account and defer as much (or all) of the spouse’s wages into the plan up to the annual limit. This allows for federal tax deferral on the W-2 income for the spouse. They were on the fence, until we shared that this second step would take their tax bill from $6,000 to a refund of $2,000 – that’s $8,000 saved in just one conversation!
 
EXAMPLE 3: Save Nothing
“Pay the bill and make peace with what you owe – after all, you did have a good year!” No, this isn’t a joke. Yes, we do say this sometimes. Why?
 
Because A) it’s true, and B) adulting is hard. We’ll give you all your options, but at the end of the day if it’s too much to worry about with your day job, and COVID-19, and your kids running around, and your side business, we GET it. We’re here to give you good advice, that’s all. It’s up to you to take it. We won’t pressure you no matter what you decide.  
 
Do these situations ring true for you?
Are you doing pretty well at a side hustle but feel like Uncle Sam is taking too much of your cheese? Want to talk to an experienced human about your unique situation? There is no one-size-fits-all solution in the tax code. Our team at Blue Fox understands that. We work with you based on your particular challenges and opportunities. Our goal is to do everything we can to reduce your tax liability and help you keep more of the money you work so hard to earn.
 
Consultants, designers, photographers, freelancers – call us up! We especially love to serve those who work in the social impact sector. It warms our heart!
 
If you’re thinking about incorporating, let us help you analyze the numbers. Let’s see if it’s worth it.  
Schedule a free consultation: https://calendly.com/chat-with-chantal.
 
If you’re looking for a human person to talk to about tax planning, that’s us.
 
Let’s connect at (321) 233-3311 and [email protected].