A couple of weeks ago a friend of mine started a bit of a firestorm on Facebook when he posted a comment that if you needed money, it was better to start a side business then it was to get a second job.

 

 

I guess that’s what happens when you challenge the status quo of:

Get an education

Get a good job

Save

Retire

That old school approach isn’t working out for a lot of people as they see their real estate equity shattered, 401(k) plans decimated and current loss of job or fear of loss of job soon.

What’s the answer?

As a CPA, the main difference I see between starting a home-based business and getting a second job is that the home-based business can make you money PLUS give you a tax break too.

Here’s how it works.

As an employee, you have what we call the “Earn-Tax-Spend” syndrome.  In other words:

EARN:  You make income

TAX:  The government takes their share (and then some, in some cases)

SPEND:  You spend what’s left

If you have a business, you transform that to “Earn-Spend-Tax”.  In other words:

EARN:  You make income

SPEND:  You spend on legitimate business deductions

TAX:  The government then assess a tax on what is left

 

 

You get paid first.  The tax is assessed on what’s left.

A business owner gets paid before the IRS.

If you’ve ever thought that taxes weren’t fair,  guess what.  You’re right.  They aren’t fair.  Big business spends a lot of money lobbying for special tax breaks for businesses and business owners.

But here’s the secret that not everybody tells you.  When it comes to tax deductions:

Big Business =  Small Business = Home-based Business

You get the same tax breaks that big business gets.

Of course, it’s not quite that simple.  The tax breaks are there, but it’s up to you to find them.

Here are the five steps to paying less tax TOMORROW with your home-based business:

 

(1) Make sure you really have a business.  The IRS wants you to be able to demonstrate that your business is a real business venture.  You need to be able to prove you’re running it in a business-like manner, are putting in the time and effort required to be an eventual success, either have previous experience doing this or are learning from others who do and that there is a profit motive.

(2) Look for your hidden business deductions.  I’m not a fan of spending money simply for the tax deduction.  Instead look for expenses you currently have that can become legitimate business expenses.

A business deduction must be ‘ordinary and necessary’ to the production of income.  Common tax deductions for home based business include home office, car expenses, computer, computer equipment, meals and entertainment, pay for work your children do, cell phone, uniforms, travel and more.   In fact, ask yourself:  What do I spend money on now that could become a legitimate business deduction?

(3) Start good record-keeping habits.  A lost receipt is a missed tax deduction.  Start off with good habits to keep track of your expenses.  One trick is to you use your smart phone to take pictures of your receipts.

(4) Estimate total business deductions.  How much in deductions will you pick up each month?  $200?  $400?  $1,000?  We’ve seen clients find that much, and more, in business deductions.

(5) Change your tax withholding or estimated tax payment amount.  Calculate how much the savings will be.  A quick way to estimate this is to multiple the total annual amount of deductions times your blended tax rate.  That’s the amount of total tax savings you can estimate.  Change your exemptions (W-4) to the point where the total tax is reduced by this amount.  Your payroll administrator at work will be able to help you calculate that, based on your own circumstances.

 

That’s how a home-based business pays you back right away.

A 2nd job will mean more tax.  A home-based business will mean less tax.

A 2nd job will mean an immediate pay check.  A home-based business likely will mean you have to do some work before you get paid.

A 2nd job builds an asset for someone else.  A home-based business builds an asset for you.

In my mind, it’s an easy solution.  Don’t get a second job, start a sideline business.