Reducing Taxable Income Via a Side Business: A Guide

|

Mar 23, 2024

Trustworthy is an intelligent digital vault that protects and optimizes your family's information so that you can save time, money, and enjoy peace of mind.

reducing taxable income via a side business

Reducing Taxable Income Via a Side Business: A Guide

|

Mar 23, 2024

Trustworthy is an intelligent digital vault that protects and optimizes your family's information so that you can save time, money, and enjoy peace of mind.

Reducing Taxable Income Via a Side Business: A Guide

|

Mar 23, 2024

Trustworthy is an intelligent digital vault that protects and optimizes your family's information so that you can save time, money, and enjoy peace of mind.

reducing taxable income via a side business

Reducing Taxable Income Via a Side Business: A Guide

|

Mar 23, 2024

Trustworthy is an intelligent digital vault that protects and optimizes your family's information so that you can save time, money, and enjoy peace of mind.

reducing taxable income via a side business

The intelligent digital vault for families

Trustworthy protects and optimizes important family information so you can save time, money, and enjoy peace of mind

While you can’t avoid paying taxes, there are lawful loopholes that can reduce the amount taken from your earnings, such as having a side hustle.

This guide covers the multiple ways you can use a side hustle to reduce your taxable income. We’ll also share some viable business ideas worth considering.


Key Takeaways

  • You cannot evade taxes, but you can legally avoid their full amount by claiming self-employment tax, getting health insurance, and even reporting losses.

  • Properly tracking and organizing expenses, receipts, and other finance-related paperwork allows you to maximize all possible deductions and create a solid paper trail to substantiate your claims.

  • Event planning, consultancy, and content creation are some of the best business ideas to explore when looking to reduce taxable income with a side business.


How to Reduce Taxable Income With a Side Business

how to reduce taxable income with a side business

If you can’t beat the system, you might as well learn how to properly navigate it. Here are seven ways to reduce taxable income with a side business:

1. Claim Your Self-Employment Tax

When you’re an employee, your employer covers 50% of your Social Security and Medicare taxes. But when you’re self-employed, the IRS expects you to pay 100% of these taxes.

However, to alleviate the burden on small business owners, the government permits sole proprietors to deduct 50% of their self-employment tax.

Be sure to claim this deduction to lessen what you owe Uncle Sam in the upcoming tax year.

2. Deduct Business Expenses

The IRS recognizes expenses such as rent, internet and phone bills, office supplies, and vendor fees as essential business costs. As a result, business owners can deduct them from their income tax to promote the success of their ventures while upholding the fairness and accuracy of the U.S. tax system.

Deduct all expenses your business might incur from your taxable income, including moving or relocation costs.

Remember for an expense to be deductible, it must be ordinary and necessary for your business’s operation.

3. Get Health Insurance

Don’t have health insurance? Consider getting it, as it’s one of the most significant tax deductions the self-employed enjoy. 

Implemented in 1987, the self-employed health insurance deduction was initially only offered at a 25% deduction. However, in 2023, Congress enacted a bill allowing eligible self-employed individuals to deduct 100% of qualifying health insurance premiums.

The best part is that you can also deduct premiums for your spouse, children, and even non-dependent children under 27, reducing your tax bill even further. Qualifying health insurance plans include medical, dental, long-term care coverage, and Medicare premiums.

However, you won't qualify for this deduction if you’re covered by an employer-sponsored health plan or your spouse’s plan. Therefore, you cannot claim it if you start a side hustle but keep your main job where you’re part of your employer’s health plan. 

Additionally, this deduction cannot exceed the income you collect from your business. This means you must ensure your side hustle makes money, as you can’t claim this deduction if your business only generates losses.

4. Structure Your Side Business As an S-Corp

If you have assets you don’t want to put on the line but would love to maximize the pass-through taxation benefits typical of sole proprietorships, you should register your business as an S-corporation.

An S-corporation, commonly known as an S-corp, is a business structure offering limited liability protection and pass-through taxation.

In simpler terms, it shields your personal assets from liabilities incurred by your side business yet still allows you to report income on your personal tax returns. The result? You reduce your taxable income by paying taxes in a lower bracket.  

The only catch is that filing taxes for an S-corporation is a bit more complicated than filing for a sole proprietorship business due to compliance requirements.

5. Stay on Top of Losses

The great thing about starting a side hustle to reduce your taxable income is you don’t have to stress about the losses.

If you’re in a sole proprietorship, you can carry forward the losses you get in the startup phase to offset your taxable income in future years, leading to tax savings. If you’re already in operation but lose profits due to economic downturns, the loss is typically carried back to offset the taxable income you paid in the previous year, resulting in a tax refund.

If you structured the business as an S-corp, the loss is passed through to your tax returns, offsetting your taxable income. So, properly track any losses you make in your business year by maintaining proper transaction and cash flow records with Trustworthy, so you can claim them during tax season.

6. Hire Your Spouse or Child

If your main job is too demanding, you should entrust your side business to your spouse or child. Not only will they show greater dedication to its long-term success, but their involvement will also lead to tax advantages.

The IRS considers wages paid to a sole proprietor’s spouse or child a deductible business expense. Also, wages paid to your child will be exempt from FICA taxes until they reach 18 and FUTA taxes until they hit 21, resulting in reduced taxes on your net income.

Hiring them also allows you to shift some of the business income that would otherwise be subject to self-employment tax to their salaries, reducing your taxable income even further.

As your spouse or child’s employer, you can deduct the various costs typically shouldered by an employer, such as health insurance and retirement contributions, from your total taxable income. Plus, special tax credits are available for family-owned businesses in some jurisdictions. Employing your spouse or child means even more tax benefits if you reside in such an area.

7. Travel for Business

Business-related travel expenses, from transportation, accommodation, conference registration fees, and even entertainment expenses, are usually tax deductible. That means you can deduct the cost of airfare, taxi and rideshare services, lodging expenses, and even client meals or shipping expenses from your side hustle’s tax returns as long as you can prove they’re:

  • 100% business-related

  • Ordinary and necessary

  • 100 miles from home

  • Temporary 

Note that business-related travel expenses are usually subject to intense IRS scrutiny, as some taxpayers exploit them. Use Trustworthy, a secure digital document storage system to maintain the receipts and records of such expenses for seamless tax filing.


Tips to Reduce Taxes With a Side Business

tips to reduce taxes with a side business

Here are some tips to help you effectively reduce your taxes with a side business.

Set It Up at Home

If you’re strapped for cash but want to start a side business to reduce your taxable income, you should consider setting it up at home. This approach allows you to skip rent and offers potential tax benefits, as the IRS permits qualified taxpayers' home office deductions.

Sherman Standberry, a CPA and co-founder at LYFE Accounting, says:

“All homeowners and renters qualify for the home office deduction as long as you're not trying to claim the deduction as an employee. Employees are not eligible for this deduction.

You have to be a business owner or independent contractor, meaning you receive 1099 income.”

Additionally, you must exclusively and regularly use part of your property or rental as your principal place of business. While this prerequisite isn’t that stringent, claiming the home office deduction increases your chances of being audited. So, you might want to limit all personal activities from this space, especially during tax season.

Hire a Veteran or Ex-Convict

Another effective way to lower your taxable income is by hiring a veteran or an individual with a criminal record.

The Federal government, specifically through the IRS, offers Work Opportunity Tax Credits (WOTC) to encourage employers to give job seekers who constantly face barriers a chance at employment. These tax credits vary depending on the type of particular job seeker you hire and their work hours, but if strategically used, they may result in significant tax savings.

Are you concerned about potential risks to your business? You can mitigate them by enrolling in the Federal Bonding Program, a government-led insurance initiative that protects employers from damaging acts committed by employees with criminal records.

Track and Organize Your Paperwork

As you’ve likely noticed, many legitimate ways exist to navigate the tax system and save money. However, that doesn’t mean Uncle Sam just hands out deductions. 

The IRS maintains strict oversight over each deduction and may even request an audit when you least expect it. For instance, consistently reporting losses or claiming huge travel expenses and home office deductions could trigger the IRS red flag. 

To stay on the safe side, maintain detailed records of your business expenses, activity receipts, and financial transactions. These will allow you to substantiate your claims should the IRS initiate an audit.

Organized record-keeping enables you to maximize every available deduction while complying with tax laws and regulations that mandate accurate business expense tracking.

However, manually tracking and organizing every receipt can be messy, tedious, and overwhelming. Consider investing in a digital storage solution like Trustworthy.

Trustworthy is a digital storage solution for paperwork and allows you to share access so anyone, including your tax consultant or accountant, can remotely retrieve relevant business documents whenever needed.

Hire a CPA

In addition to maintaining proper records, consider hiring a certified public accountant (CPA).

Drawing on their extensive knowledge of tax laws, a CPA will handle everyday accounting tasks on your behalf and simplify tax planning and deduction claims for your business.

And since finance is their bread and butter, they’re always well-updated on tax legislation changes. As a result, they can help you discover and maximize deductions you didn’t know existed, saving you even more money on taxable income while preventing tax liabilities associated with non-compliance.

Top Side Business Ideas

top side business ideas

Short on side hustle ideas? Here are some businesses you can start for maximum tax benefits:

A Food and Beverage Business

Starting a food and beverage business is a good idea if you're already in the hospitality industry. Your experience will make it easier to run. A food and beverage business also generates many expenses you can claim on tax day. For instance, you can claim:

  • The costs of goods directly used in preparing the food and beverages for sale

  • Operational expenses such as rent or lease payments, license fees, and maintenance costs for equipment

  • Wages and benefits paid to employees

Remember to claim these deductions and maintain proper receipt and transaction records. Hire a CPA to handle the numbers and manage your Trustworthy account so you can focus on other aspects of running your food and beverage business.

Event Planning

If you’re more attuned to the events side of hospitality, start an event planning venture to start claiming tax benefits.

Event planning creates many expenses you can write off when filing taxes. For each event you plan, you can deduct decor, labor, travel expenses, food and beverage, venue rental costs, and client entertainment.

Now, imagine if you manage to organize multiple events annually! You’d generate many deductible expenses to significantly reduce your taxable income.

Consultancy

You can start a consultancy business on virtually any subject where you have industry knowledge and experience that others may find valuable.

The best part is you’ll not only get paid by your clients, but you can also claim the home office deductions and business expenses when it’s tax season.

Pick a subject you’re passionate about and skilled in, market yourself, and make money while reducing your taxable income.

Content Creation

Content creation is the lifeblood of modern business. It pays incredibly well and comes in diverse forms, including video content, podcasts, infographics, photography, and even articles and blog posts.

Beyond allowing you multiple options to select from, this activity offers many opportunities for tax savings.

Whether you go into visual content like video content, photography, or blogs, being a content creator creates business expenses like Wi-Fi, equipment, and marketing. And if you expand, you can hire employees to split income and decrease your tax bracket.

Frequently Asked Questions (FAQs)

What is the best business structure for a side hustle?

If your side hustle starts making serious money, an S corporation is the best business structure. Establishing your side business as an S Corporation lets you separate your assets from your business, protecting them from potential liabilities they may incur. Additionally, an S-Corp structure lets you leverage pass-through taxation. That means your business’s taxes are paid based on your income tax bracket, typically resulting in lower tax rates.

But if you start the business with a partner, a partnership LLC is an excellent business structure. It allows pass-through taxation and flexibility in allocating profits and losses between you and your partner. 

Is a side hustle the same as self-employed?

Although they’re often used interchangeably, there’s a gray area differentiating a side hustle and self-employment.

A side hustle is a secondary source of income, or a part-time hustle typically pursued beyond business hours and may not be intended as a full-time pursuit.

On the other hand, self-employed is exactly what it sounds like—an individual working for themselves. They have control over their work and manage every aspect of their business. Additionally, unlike with a side hustle, self-employed ventures typically run full-time.

What is a good side hustle for passive income?

There are several good side hustles for passive income, including real estate crowdfunding, affiliate marketing, dividend-paying stocks, and digital products like e-books and online courses. 

While you can’t avoid paying taxes, there are lawful loopholes that can reduce the amount taken from your earnings, such as having a side hustle.

This guide covers the multiple ways you can use a side hustle to reduce your taxable income. We’ll also share some viable business ideas worth considering.


Key Takeaways

  • You cannot evade taxes, but you can legally avoid their full amount by claiming self-employment tax, getting health insurance, and even reporting losses.

  • Properly tracking and organizing expenses, receipts, and other finance-related paperwork allows you to maximize all possible deductions and create a solid paper trail to substantiate your claims.

  • Event planning, consultancy, and content creation are some of the best business ideas to explore when looking to reduce taxable income with a side business.


How to Reduce Taxable Income With a Side Business

how to reduce taxable income with a side business

If you can’t beat the system, you might as well learn how to properly navigate it. Here are seven ways to reduce taxable income with a side business:

1. Claim Your Self-Employment Tax

When you’re an employee, your employer covers 50% of your Social Security and Medicare taxes. But when you’re self-employed, the IRS expects you to pay 100% of these taxes.

However, to alleviate the burden on small business owners, the government permits sole proprietors to deduct 50% of their self-employment tax.

Be sure to claim this deduction to lessen what you owe Uncle Sam in the upcoming tax year.

2. Deduct Business Expenses

The IRS recognizes expenses such as rent, internet and phone bills, office supplies, and vendor fees as essential business costs. As a result, business owners can deduct them from their income tax to promote the success of their ventures while upholding the fairness and accuracy of the U.S. tax system.

Deduct all expenses your business might incur from your taxable income, including moving or relocation costs.

Remember for an expense to be deductible, it must be ordinary and necessary for your business’s operation.

3. Get Health Insurance

Don’t have health insurance? Consider getting it, as it’s one of the most significant tax deductions the self-employed enjoy. 

Implemented in 1987, the self-employed health insurance deduction was initially only offered at a 25% deduction. However, in 2023, Congress enacted a bill allowing eligible self-employed individuals to deduct 100% of qualifying health insurance premiums.

The best part is that you can also deduct premiums for your spouse, children, and even non-dependent children under 27, reducing your tax bill even further. Qualifying health insurance plans include medical, dental, long-term care coverage, and Medicare premiums.

However, you won't qualify for this deduction if you’re covered by an employer-sponsored health plan or your spouse’s plan. Therefore, you cannot claim it if you start a side hustle but keep your main job where you’re part of your employer’s health plan. 

Additionally, this deduction cannot exceed the income you collect from your business. This means you must ensure your side hustle makes money, as you can’t claim this deduction if your business only generates losses.

4. Structure Your Side Business As an S-Corp

If you have assets you don’t want to put on the line but would love to maximize the pass-through taxation benefits typical of sole proprietorships, you should register your business as an S-corporation.

An S-corporation, commonly known as an S-corp, is a business structure offering limited liability protection and pass-through taxation.

In simpler terms, it shields your personal assets from liabilities incurred by your side business yet still allows you to report income on your personal tax returns. The result? You reduce your taxable income by paying taxes in a lower bracket.  

The only catch is that filing taxes for an S-corporation is a bit more complicated than filing for a sole proprietorship business due to compliance requirements.

5. Stay on Top of Losses

The great thing about starting a side hustle to reduce your taxable income is you don’t have to stress about the losses.

If you’re in a sole proprietorship, you can carry forward the losses you get in the startup phase to offset your taxable income in future years, leading to tax savings. If you’re already in operation but lose profits due to economic downturns, the loss is typically carried back to offset the taxable income you paid in the previous year, resulting in a tax refund.

If you structured the business as an S-corp, the loss is passed through to your tax returns, offsetting your taxable income. So, properly track any losses you make in your business year by maintaining proper transaction and cash flow records with Trustworthy, so you can claim them during tax season.

6. Hire Your Spouse or Child

If your main job is too demanding, you should entrust your side business to your spouse or child. Not only will they show greater dedication to its long-term success, but their involvement will also lead to tax advantages.

The IRS considers wages paid to a sole proprietor’s spouse or child a deductible business expense. Also, wages paid to your child will be exempt from FICA taxes until they reach 18 and FUTA taxes until they hit 21, resulting in reduced taxes on your net income.

Hiring them also allows you to shift some of the business income that would otherwise be subject to self-employment tax to their salaries, reducing your taxable income even further.

As your spouse or child’s employer, you can deduct the various costs typically shouldered by an employer, such as health insurance and retirement contributions, from your total taxable income. Plus, special tax credits are available for family-owned businesses in some jurisdictions. Employing your spouse or child means even more tax benefits if you reside in such an area.

7. Travel for Business

Business-related travel expenses, from transportation, accommodation, conference registration fees, and even entertainment expenses, are usually tax deductible. That means you can deduct the cost of airfare, taxi and rideshare services, lodging expenses, and even client meals or shipping expenses from your side hustle’s tax returns as long as you can prove they’re:

  • 100% business-related

  • Ordinary and necessary

  • 100 miles from home

  • Temporary 

Note that business-related travel expenses are usually subject to intense IRS scrutiny, as some taxpayers exploit them. Use Trustworthy, a secure digital document storage system to maintain the receipts and records of such expenses for seamless tax filing.


Tips to Reduce Taxes With a Side Business

tips to reduce taxes with a side business

Here are some tips to help you effectively reduce your taxes with a side business.

Set It Up at Home

If you’re strapped for cash but want to start a side business to reduce your taxable income, you should consider setting it up at home. This approach allows you to skip rent and offers potential tax benefits, as the IRS permits qualified taxpayers' home office deductions.

Sherman Standberry, a CPA and co-founder at LYFE Accounting, says:

“All homeowners and renters qualify for the home office deduction as long as you're not trying to claim the deduction as an employee. Employees are not eligible for this deduction.

You have to be a business owner or independent contractor, meaning you receive 1099 income.”

Additionally, you must exclusively and regularly use part of your property or rental as your principal place of business. While this prerequisite isn’t that stringent, claiming the home office deduction increases your chances of being audited. So, you might want to limit all personal activities from this space, especially during tax season.

Hire a Veteran or Ex-Convict

Another effective way to lower your taxable income is by hiring a veteran or an individual with a criminal record.

The Federal government, specifically through the IRS, offers Work Opportunity Tax Credits (WOTC) to encourage employers to give job seekers who constantly face barriers a chance at employment. These tax credits vary depending on the type of particular job seeker you hire and their work hours, but if strategically used, they may result in significant tax savings.

Are you concerned about potential risks to your business? You can mitigate them by enrolling in the Federal Bonding Program, a government-led insurance initiative that protects employers from damaging acts committed by employees with criminal records.

Track and Organize Your Paperwork

As you’ve likely noticed, many legitimate ways exist to navigate the tax system and save money. However, that doesn’t mean Uncle Sam just hands out deductions. 

The IRS maintains strict oversight over each deduction and may even request an audit when you least expect it. For instance, consistently reporting losses or claiming huge travel expenses and home office deductions could trigger the IRS red flag. 

To stay on the safe side, maintain detailed records of your business expenses, activity receipts, and financial transactions. These will allow you to substantiate your claims should the IRS initiate an audit.

Organized record-keeping enables you to maximize every available deduction while complying with tax laws and regulations that mandate accurate business expense tracking.

However, manually tracking and organizing every receipt can be messy, tedious, and overwhelming. Consider investing in a digital storage solution like Trustworthy.

Trustworthy is a digital storage solution for paperwork and allows you to share access so anyone, including your tax consultant or accountant, can remotely retrieve relevant business documents whenever needed.

Hire a CPA

In addition to maintaining proper records, consider hiring a certified public accountant (CPA).

Drawing on their extensive knowledge of tax laws, a CPA will handle everyday accounting tasks on your behalf and simplify tax planning and deduction claims for your business.

And since finance is their bread and butter, they’re always well-updated on tax legislation changes. As a result, they can help you discover and maximize deductions you didn’t know existed, saving you even more money on taxable income while preventing tax liabilities associated with non-compliance.

Top Side Business Ideas

top side business ideas

Short on side hustle ideas? Here are some businesses you can start for maximum tax benefits:

A Food and Beverage Business

Starting a food and beverage business is a good idea if you're already in the hospitality industry. Your experience will make it easier to run. A food and beverage business also generates many expenses you can claim on tax day. For instance, you can claim:

  • The costs of goods directly used in preparing the food and beverages for sale

  • Operational expenses such as rent or lease payments, license fees, and maintenance costs for equipment

  • Wages and benefits paid to employees

Remember to claim these deductions and maintain proper receipt and transaction records. Hire a CPA to handle the numbers and manage your Trustworthy account so you can focus on other aspects of running your food and beverage business.

Event Planning

If you’re more attuned to the events side of hospitality, start an event planning venture to start claiming tax benefits.

Event planning creates many expenses you can write off when filing taxes. For each event you plan, you can deduct decor, labor, travel expenses, food and beverage, venue rental costs, and client entertainment.

Now, imagine if you manage to organize multiple events annually! You’d generate many deductible expenses to significantly reduce your taxable income.

Consultancy

You can start a consultancy business on virtually any subject where you have industry knowledge and experience that others may find valuable.

The best part is you’ll not only get paid by your clients, but you can also claim the home office deductions and business expenses when it’s tax season.

Pick a subject you’re passionate about and skilled in, market yourself, and make money while reducing your taxable income.

Content Creation

Content creation is the lifeblood of modern business. It pays incredibly well and comes in diverse forms, including video content, podcasts, infographics, photography, and even articles and blog posts.

Beyond allowing you multiple options to select from, this activity offers many opportunities for tax savings.

Whether you go into visual content like video content, photography, or blogs, being a content creator creates business expenses like Wi-Fi, equipment, and marketing. And if you expand, you can hire employees to split income and decrease your tax bracket.

Frequently Asked Questions (FAQs)

What is the best business structure for a side hustle?

If your side hustle starts making serious money, an S corporation is the best business structure. Establishing your side business as an S Corporation lets you separate your assets from your business, protecting them from potential liabilities they may incur. Additionally, an S-Corp structure lets you leverage pass-through taxation. That means your business’s taxes are paid based on your income tax bracket, typically resulting in lower tax rates.

But if you start the business with a partner, a partnership LLC is an excellent business structure. It allows pass-through taxation and flexibility in allocating profits and losses between you and your partner. 

Is a side hustle the same as self-employed?

Although they’re often used interchangeably, there’s a gray area differentiating a side hustle and self-employment.

A side hustle is a secondary source of income, or a part-time hustle typically pursued beyond business hours and may not be intended as a full-time pursuit.

On the other hand, self-employed is exactly what it sounds like—an individual working for themselves. They have control over their work and manage every aspect of their business. Additionally, unlike with a side hustle, self-employed ventures typically run full-time.

What is a good side hustle for passive income?

There are several good side hustles for passive income, including real estate crowdfunding, affiliate marketing, dividend-paying stocks, and digital products like e-books and online courses. 

The intelligent digital vault for families

Trustworthy protects and optimizes important family information so you can save time, money, and enjoy peace of mind

While you can’t avoid paying taxes, there are lawful loopholes that can reduce the amount taken from your earnings, such as having a side hustle.

This guide covers the multiple ways you can use a side hustle to reduce your taxable income. We’ll also share some viable business ideas worth considering.


Key Takeaways

  • You cannot evade taxes, but you can legally avoid their full amount by claiming self-employment tax, getting health insurance, and even reporting losses.

  • Properly tracking and organizing expenses, receipts, and other finance-related paperwork allows you to maximize all possible deductions and create a solid paper trail to substantiate your claims.

  • Event planning, consultancy, and content creation are some of the best business ideas to explore when looking to reduce taxable income with a side business.


How to Reduce Taxable Income With a Side Business

how to reduce taxable income with a side business

If you can’t beat the system, you might as well learn how to properly navigate it. Here are seven ways to reduce taxable income with a side business:

1. Claim Your Self-Employment Tax

When you’re an employee, your employer covers 50% of your Social Security and Medicare taxes. But when you’re self-employed, the IRS expects you to pay 100% of these taxes.

However, to alleviate the burden on small business owners, the government permits sole proprietors to deduct 50% of their self-employment tax.

Be sure to claim this deduction to lessen what you owe Uncle Sam in the upcoming tax year.

2. Deduct Business Expenses

The IRS recognizes expenses such as rent, internet and phone bills, office supplies, and vendor fees as essential business costs. As a result, business owners can deduct them from their income tax to promote the success of their ventures while upholding the fairness and accuracy of the U.S. tax system.

Deduct all expenses your business might incur from your taxable income, including moving or relocation costs.

Remember for an expense to be deductible, it must be ordinary and necessary for your business’s operation.

3. Get Health Insurance

Don’t have health insurance? Consider getting it, as it’s one of the most significant tax deductions the self-employed enjoy. 

Implemented in 1987, the self-employed health insurance deduction was initially only offered at a 25% deduction. However, in 2023, Congress enacted a bill allowing eligible self-employed individuals to deduct 100% of qualifying health insurance premiums.

The best part is that you can also deduct premiums for your spouse, children, and even non-dependent children under 27, reducing your tax bill even further. Qualifying health insurance plans include medical, dental, long-term care coverage, and Medicare premiums.

However, you won't qualify for this deduction if you’re covered by an employer-sponsored health plan or your spouse’s plan. Therefore, you cannot claim it if you start a side hustle but keep your main job where you’re part of your employer’s health plan. 

Additionally, this deduction cannot exceed the income you collect from your business. This means you must ensure your side hustle makes money, as you can’t claim this deduction if your business only generates losses.

4. Structure Your Side Business As an S-Corp

If you have assets you don’t want to put on the line but would love to maximize the pass-through taxation benefits typical of sole proprietorships, you should register your business as an S-corporation.

An S-corporation, commonly known as an S-corp, is a business structure offering limited liability protection and pass-through taxation.

In simpler terms, it shields your personal assets from liabilities incurred by your side business yet still allows you to report income on your personal tax returns. The result? You reduce your taxable income by paying taxes in a lower bracket.  

The only catch is that filing taxes for an S-corporation is a bit more complicated than filing for a sole proprietorship business due to compliance requirements.

5. Stay on Top of Losses

The great thing about starting a side hustle to reduce your taxable income is you don’t have to stress about the losses.

If you’re in a sole proprietorship, you can carry forward the losses you get in the startup phase to offset your taxable income in future years, leading to tax savings. If you’re already in operation but lose profits due to economic downturns, the loss is typically carried back to offset the taxable income you paid in the previous year, resulting in a tax refund.

If you structured the business as an S-corp, the loss is passed through to your tax returns, offsetting your taxable income. So, properly track any losses you make in your business year by maintaining proper transaction and cash flow records with Trustworthy, so you can claim them during tax season.

6. Hire Your Spouse or Child

If your main job is too demanding, you should entrust your side business to your spouse or child. Not only will they show greater dedication to its long-term success, but their involvement will also lead to tax advantages.

The IRS considers wages paid to a sole proprietor’s spouse or child a deductible business expense. Also, wages paid to your child will be exempt from FICA taxes until they reach 18 and FUTA taxes until they hit 21, resulting in reduced taxes on your net income.

Hiring them also allows you to shift some of the business income that would otherwise be subject to self-employment tax to their salaries, reducing your taxable income even further.

As your spouse or child’s employer, you can deduct the various costs typically shouldered by an employer, such as health insurance and retirement contributions, from your total taxable income. Plus, special tax credits are available for family-owned businesses in some jurisdictions. Employing your spouse or child means even more tax benefits if you reside in such an area.

7. Travel for Business

Business-related travel expenses, from transportation, accommodation, conference registration fees, and even entertainment expenses, are usually tax deductible. That means you can deduct the cost of airfare, taxi and rideshare services, lodging expenses, and even client meals or shipping expenses from your side hustle’s tax returns as long as you can prove they’re:

  • 100% business-related

  • Ordinary and necessary

  • 100 miles from home

  • Temporary 

Note that business-related travel expenses are usually subject to intense IRS scrutiny, as some taxpayers exploit them. Use Trustworthy, a secure digital document storage system to maintain the receipts and records of such expenses for seamless tax filing.


Tips to Reduce Taxes With a Side Business

tips to reduce taxes with a side business

Here are some tips to help you effectively reduce your taxes with a side business.

Set It Up at Home

If you’re strapped for cash but want to start a side business to reduce your taxable income, you should consider setting it up at home. This approach allows you to skip rent and offers potential tax benefits, as the IRS permits qualified taxpayers' home office deductions.

Sherman Standberry, a CPA and co-founder at LYFE Accounting, says:

“All homeowners and renters qualify for the home office deduction as long as you're not trying to claim the deduction as an employee. Employees are not eligible for this deduction.

You have to be a business owner or independent contractor, meaning you receive 1099 income.”

Additionally, you must exclusively and regularly use part of your property or rental as your principal place of business. While this prerequisite isn’t that stringent, claiming the home office deduction increases your chances of being audited. So, you might want to limit all personal activities from this space, especially during tax season.

Hire a Veteran or Ex-Convict

Another effective way to lower your taxable income is by hiring a veteran or an individual with a criminal record.

The Federal government, specifically through the IRS, offers Work Opportunity Tax Credits (WOTC) to encourage employers to give job seekers who constantly face barriers a chance at employment. These tax credits vary depending on the type of particular job seeker you hire and their work hours, but if strategically used, they may result in significant tax savings.

Are you concerned about potential risks to your business? You can mitigate them by enrolling in the Federal Bonding Program, a government-led insurance initiative that protects employers from damaging acts committed by employees with criminal records.

Track and Organize Your Paperwork

As you’ve likely noticed, many legitimate ways exist to navigate the tax system and save money. However, that doesn’t mean Uncle Sam just hands out deductions. 

The IRS maintains strict oversight over each deduction and may even request an audit when you least expect it. For instance, consistently reporting losses or claiming huge travel expenses and home office deductions could trigger the IRS red flag. 

To stay on the safe side, maintain detailed records of your business expenses, activity receipts, and financial transactions. These will allow you to substantiate your claims should the IRS initiate an audit.

Organized record-keeping enables you to maximize every available deduction while complying with tax laws and regulations that mandate accurate business expense tracking.

However, manually tracking and organizing every receipt can be messy, tedious, and overwhelming. Consider investing in a digital storage solution like Trustworthy.

Trustworthy is a digital storage solution for paperwork and allows you to share access so anyone, including your tax consultant or accountant, can remotely retrieve relevant business documents whenever needed.

Hire a CPA

In addition to maintaining proper records, consider hiring a certified public accountant (CPA).

Drawing on their extensive knowledge of tax laws, a CPA will handle everyday accounting tasks on your behalf and simplify tax planning and deduction claims for your business.

And since finance is their bread and butter, they’re always well-updated on tax legislation changes. As a result, they can help you discover and maximize deductions you didn’t know existed, saving you even more money on taxable income while preventing tax liabilities associated with non-compliance.

Top Side Business Ideas

top side business ideas

Short on side hustle ideas? Here are some businesses you can start for maximum tax benefits:

A Food and Beverage Business

Starting a food and beverage business is a good idea if you're already in the hospitality industry. Your experience will make it easier to run. A food and beverage business also generates many expenses you can claim on tax day. For instance, you can claim:

  • The costs of goods directly used in preparing the food and beverages for sale

  • Operational expenses such as rent or lease payments, license fees, and maintenance costs for equipment

  • Wages and benefits paid to employees

Remember to claim these deductions and maintain proper receipt and transaction records. Hire a CPA to handle the numbers and manage your Trustworthy account so you can focus on other aspects of running your food and beverage business.

Event Planning

If you’re more attuned to the events side of hospitality, start an event planning venture to start claiming tax benefits.

Event planning creates many expenses you can write off when filing taxes. For each event you plan, you can deduct decor, labor, travel expenses, food and beverage, venue rental costs, and client entertainment.

Now, imagine if you manage to organize multiple events annually! You’d generate many deductible expenses to significantly reduce your taxable income.

Consultancy

You can start a consultancy business on virtually any subject where you have industry knowledge and experience that others may find valuable.

The best part is you’ll not only get paid by your clients, but you can also claim the home office deductions and business expenses when it’s tax season.

Pick a subject you’re passionate about and skilled in, market yourself, and make money while reducing your taxable income.

Content Creation

Content creation is the lifeblood of modern business. It pays incredibly well and comes in diverse forms, including video content, podcasts, infographics, photography, and even articles and blog posts.

Beyond allowing you multiple options to select from, this activity offers many opportunities for tax savings.

Whether you go into visual content like video content, photography, or blogs, being a content creator creates business expenses like Wi-Fi, equipment, and marketing. And if you expand, you can hire employees to split income and decrease your tax bracket.

Frequently Asked Questions (FAQs)

What is the best business structure for a side hustle?

If your side hustle starts making serious money, an S corporation is the best business structure. Establishing your side business as an S Corporation lets you separate your assets from your business, protecting them from potential liabilities they may incur. Additionally, an S-Corp structure lets you leverage pass-through taxation. That means your business’s taxes are paid based on your income tax bracket, typically resulting in lower tax rates.

But if you start the business with a partner, a partnership LLC is an excellent business structure. It allows pass-through taxation and flexibility in allocating profits and losses between you and your partner. 

Is a side hustle the same as self-employed?

Although they’re often used interchangeably, there’s a gray area differentiating a side hustle and self-employment.

A side hustle is a secondary source of income, or a part-time hustle typically pursued beyond business hours and may not be intended as a full-time pursuit.

On the other hand, self-employed is exactly what it sounds like—an individual working for themselves. They have control over their work and manage every aspect of their business. Additionally, unlike with a side hustle, self-employed ventures typically run full-time.

What is a good side hustle for passive income?

There are several good side hustles for passive income, including real estate crowdfunding, affiliate marketing, dividend-paying stocks, and digital products like e-books and online courses. 

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While you can’t avoid paying taxes, there are lawful loopholes that can reduce the amount taken from your earnings, such as having a side hustle.

This guide covers the multiple ways you can use a side hustle to reduce your taxable income. We’ll also share some viable business ideas worth considering.


Key Takeaways

  • You cannot evade taxes, but you can legally avoid their full amount by claiming self-employment tax, getting health insurance, and even reporting losses.

  • Properly tracking and organizing expenses, receipts, and other finance-related paperwork allows you to maximize all possible deductions and create a solid paper trail to substantiate your claims.

  • Event planning, consultancy, and content creation are some of the best business ideas to explore when looking to reduce taxable income with a side business.


How to Reduce Taxable Income With a Side Business

how to reduce taxable income with a side business

If you can’t beat the system, you might as well learn how to properly navigate it. Here are seven ways to reduce taxable income with a side business:

1. Claim Your Self-Employment Tax

When you’re an employee, your employer covers 50% of your Social Security and Medicare taxes. But when you’re self-employed, the IRS expects you to pay 100% of these taxes.

However, to alleviate the burden on small business owners, the government permits sole proprietors to deduct 50% of their self-employment tax.

Be sure to claim this deduction to lessen what you owe Uncle Sam in the upcoming tax year.

2. Deduct Business Expenses

The IRS recognizes expenses such as rent, internet and phone bills, office supplies, and vendor fees as essential business costs. As a result, business owners can deduct them from their income tax to promote the success of their ventures while upholding the fairness and accuracy of the U.S. tax system.

Deduct all expenses your business might incur from your taxable income, including moving or relocation costs.

Remember for an expense to be deductible, it must be ordinary and necessary for your business’s operation.

3. Get Health Insurance

Don’t have health insurance? Consider getting it, as it’s one of the most significant tax deductions the self-employed enjoy. 

Implemented in 1987, the self-employed health insurance deduction was initially only offered at a 25% deduction. However, in 2023, Congress enacted a bill allowing eligible self-employed individuals to deduct 100% of qualifying health insurance premiums.

The best part is that you can also deduct premiums for your spouse, children, and even non-dependent children under 27, reducing your tax bill even further. Qualifying health insurance plans include medical, dental, long-term care coverage, and Medicare premiums.

However, you won't qualify for this deduction if you’re covered by an employer-sponsored health plan or your spouse’s plan. Therefore, you cannot claim it if you start a side hustle but keep your main job where you’re part of your employer’s health plan. 

Additionally, this deduction cannot exceed the income you collect from your business. This means you must ensure your side hustle makes money, as you can’t claim this deduction if your business only generates losses.

4. Structure Your Side Business As an S-Corp

If you have assets you don’t want to put on the line but would love to maximize the pass-through taxation benefits typical of sole proprietorships, you should register your business as an S-corporation.

An S-corporation, commonly known as an S-corp, is a business structure offering limited liability protection and pass-through taxation.

In simpler terms, it shields your personal assets from liabilities incurred by your side business yet still allows you to report income on your personal tax returns. The result? You reduce your taxable income by paying taxes in a lower bracket.  

The only catch is that filing taxes for an S-corporation is a bit more complicated than filing for a sole proprietorship business due to compliance requirements.

5. Stay on Top of Losses

The great thing about starting a side hustle to reduce your taxable income is you don’t have to stress about the losses.

If you’re in a sole proprietorship, you can carry forward the losses you get in the startup phase to offset your taxable income in future years, leading to tax savings. If you’re already in operation but lose profits due to economic downturns, the loss is typically carried back to offset the taxable income you paid in the previous year, resulting in a tax refund.

If you structured the business as an S-corp, the loss is passed through to your tax returns, offsetting your taxable income. So, properly track any losses you make in your business year by maintaining proper transaction and cash flow records with Trustworthy, so you can claim them during tax season.

6. Hire Your Spouse or Child

If your main job is too demanding, you should entrust your side business to your spouse or child. Not only will they show greater dedication to its long-term success, but their involvement will also lead to tax advantages.

The IRS considers wages paid to a sole proprietor’s spouse or child a deductible business expense. Also, wages paid to your child will be exempt from FICA taxes until they reach 18 and FUTA taxes until they hit 21, resulting in reduced taxes on your net income.

Hiring them also allows you to shift some of the business income that would otherwise be subject to self-employment tax to their salaries, reducing your taxable income even further.

As your spouse or child’s employer, you can deduct the various costs typically shouldered by an employer, such as health insurance and retirement contributions, from your total taxable income. Plus, special tax credits are available for family-owned businesses in some jurisdictions. Employing your spouse or child means even more tax benefits if you reside in such an area.

7. Travel for Business

Business-related travel expenses, from transportation, accommodation, conference registration fees, and even entertainment expenses, are usually tax deductible. That means you can deduct the cost of airfare, taxi and rideshare services, lodging expenses, and even client meals or shipping expenses from your side hustle’s tax returns as long as you can prove they’re:

  • 100% business-related

  • Ordinary and necessary

  • 100 miles from home

  • Temporary 

Note that business-related travel expenses are usually subject to intense IRS scrutiny, as some taxpayers exploit them. Use Trustworthy, a secure digital document storage system to maintain the receipts and records of such expenses for seamless tax filing.


Tips to Reduce Taxes With a Side Business

tips to reduce taxes with a side business

Here are some tips to help you effectively reduce your taxes with a side business.

Set It Up at Home

If you’re strapped for cash but want to start a side business to reduce your taxable income, you should consider setting it up at home. This approach allows you to skip rent and offers potential tax benefits, as the IRS permits qualified taxpayers' home office deductions.

Sherman Standberry, a CPA and co-founder at LYFE Accounting, says:

“All homeowners and renters qualify for the home office deduction as long as you're not trying to claim the deduction as an employee. Employees are not eligible for this deduction.

You have to be a business owner or independent contractor, meaning you receive 1099 income.”

Additionally, you must exclusively and regularly use part of your property or rental as your principal place of business. While this prerequisite isn’t that stringent, claiming the home office deduction increases your chances of being audited. So, you might want to limit all personal activities from this space, especially during tax season.

Hire a Veteran or Ex-Convict

Another effective way to lower your taxable income is by hiring a veteran or an individual with a criminal record.

The Federal government, specifically through the IRS, offers Work Opportunity Tax Credits (WOTC) to encourage employers to give job seekers who constantly face barriers a chance at employment. These tax credits vary depending on the type of particular job seeker you hire and their work hours, but if strategically used, they may result in significant tax savings.

Are you concerned about potential risks to your business? You can mitigate them by enrolling in the Federal Bonding Program, a government-led insurance initiative that protects employers from damaging acts committed by employees with criminal records.

Track and Organize Your Paperwork

As you’ve likely noticed, many legitimate ways exist to navigate the tax system and save money. However, that doesn’t mean Uncle Sam just hands out deductions. 

The IRS maintains strict oversight over each deduction and may even request an audit when you least expect it. For instance, consistently reporting losses or claiming huge travel expenses and home office deductions could trigger the IRS red flag. 

To stay on the safe side, maintain detailed records of your business expenses, activity receipts, and financial transactions. These will allow you to substantiate your claims should the IRS initiate an audit.

Organized record-keeping enables you to maximize every available deduction while complying with tax laws and regulations that mandate accurate business expense tracking.

However, manually tracking and organizing every receipt can be messy, tedious, and overwhelming. Consider investing in a digital storage solution like Trustworthy.

Trustworthy is a digital storage solution for paperwork and allows you to share access so anyone, including your tax consultant or accountant, can remotely retrieve relevant business documents whenever needed.

Hire a CPA

In addition to maintaining proper records, consider hiring a certified public accountant (CPA).

Drawing on their extensive knowledge of tax laws, a CPA will handle everyday accounting tasks on your behalf and simplify tax planning and deduction claims for your business.

And since finance is their bread and butter, they’re always well-updated on tax legislation changes. As a result, they can help you discover and maximize deductions you didn’t know existed, saving you even more money on taxable income while preventing tax liabilities associated with non-compliance.

Top Side Business Ideas

top side business ideas

Short on side hustle ideas? Here are some businesses you can start for maximum tax benefits:

A Food and Beverage Business

Starting a food and beverage business is a good idea if you're already in the hospitality industry. Your experience will make it easier to run. A food and beverage business also generates many expenses you can claim on tax day. For instance, you can claim:

  • The costs of goods directly used in preparing the food and beverages for sale

  • Operational expenses such as rent or lease payments, license fees, and maintenance costs for equipment

  • Wages and benefits paid to employees

Remember to claim these deductions and maintain proper receipt and transaction records. Hire a CPA to handle the numbers and manage your Trustworthy account so you can focus on other aspects of running your food and beverage business.

Event Planning

If you’re more attuned to the events side of hospitality, start an event planning venture to start claiming tax benefits.

Event planning creates many expenses you can write off when filing taxes. For each event you plan, you can deduct decor, labor, travel expenses, food and beverage, venue rental costs, and client entertainment.

Now, imagine if you manage to organize multiple events annually! You’d generate many deductible expenses to significantly reduce your taxable income.

Consultancy

You can start a consultancy business on virtually any subject where you have industry knowledge and experience that others may find valuable.

The best part is you’ll not only get paid by your clients, but you can also claim the home office deductions and business expenses when it’s tax season.

Pick a subject you’re passionate about and skilled in, market yourself, and make money while reducing your taxable income.

Content Creation

Content creation is the lifeblood of modern business. It pays incredibly well and comes in diverse forms, including video content, podcasts, infographics, photography, and even articles and blog posts.

Beyond allowing you multiple options to select from, this activity offers many opportunities for tax savings.

Whether you go into visual content like video content, photography, or blogs, being a content creator creates business expenses like Wi-Fi, equipment, and marketing. And if you expand, you can hire employees to split income and decrease your tax bracket.

Frequently Asked Questions (FAQs)

What is the best business structure for a side hustle?

If your side hustle starts making serious money, an S corporation is the best business structure. Establishing your side business as an S Corporation lets you separate your assets from your business, protecting them from potential liabilities they may incur. Additionally, an S-Corp structure lets you leverage pass-through taxation. That means your business’s taxes are paid based on your income tax bracket, typically resulting in lower tax rates.

But if you start the business with a partner, a partnership LLC is an excellent business structure. It allows pass-through taxation and flexibility in allocating profits and losses between you and your partner. 

Is a side hustle the same as self-employed?

Although they’re often used interchangeably, there’s a gray area differentiating a side hustle and self-employment.

A side hustle is a secondary source of income, or a part-time hustle typically pursued beyond business hours and may not be intended as a full-time pursuit.

On the other hand, self-employed is exactly what it sounds like—an individual working for themselves. They have control over their work and manage every aspect of their business. Additionally, unlike with a side hustle, self-employed ventures typically run full-time.

What is a good side hustle for passive income?

There are several good side hustles for passive income, including real estate crowdfunding, affiliate marketing, dividend-paying stocks, and digital products like e-books and online courses. 

Try Trustworthy today.

Try Trustworthy today.

Try the Family Operating System® for yourself. You (and your family) will love it.

Try the Family Operating System® for yourself. You (and your family) will love it.

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