Have a Side Gig? Here’s a Few Ways You Can Save a Few Extra Bucks
Starting and running a business is no easy job. A small business owner has to be a jack-of-all-trades. One who is knowledgeable about their industry, their customers, personal and business accounting, advertising, employees, applicable laws and regulations, taxes and investments (just to name a few). Plus, owning your own business can add complications to your household finances and taxes as well.
A lot of people in this situation don’t realize how valuable finding and connecting with a financial advisor can be.
First, most independent RIA (Registered Investment Advisors) are independently owned small businesses. In order to start Hylland Capital Management LLC, I needed to incorporate a business, get appropriate business licenses, file taxes, learn to keep up the books of the business, and much more. Financial Planning business aside, you may find them to be a valuable resource when it comes to starting and running a small business.
Second, at a period when your free time is stretched thin, why not bring in an expert to worry about certain things like the company’s retirement plan and your personal finances – Leaving you the time and energy to do what you do best, running your business!
Owning your own business is incredibly rewarding, and has a lot of financial perks too! Below are a few that we would look into for clients with a part time side gig or who are full time self-employed:
1) Home Office Deduction
If you run your business out of your home, there is one huge tax break you can take advantage of, the home office deduction. IF your business qualifies you can deduct expenses such as mortgage interest, real estate taxes, insurance, rent, repairs and maintenance, utilities, casualty losses and depreciation of your home.
The IRS rules read:
“To qualify to deduct expenses for business use of your home, you must use part of your home:
· Exclusively and regularly as your principal place of business,
· Exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business,
· In the case of a separate structure which is not attached to your home, in connection with your trade or business,
· On a regular basis for certain storage use,
· For rental use,
· As a daycare facility,”
For most, you can deduct a portion of these expenses based on the proportion of your home office space to your whole house. For example, if your home office that meets all the qualifications above is 200 square feet, and your house is 2,000 square feet, you may be able to deduct 10% (200 divided by 2000) of the direct and indirect expenses of your home.
So, a typical household with expenses of;
· Mortgage - $1,000 per month. Or $12,000 per year,
· Taxes of $2,000 per year,
· Electric bill of $150 per month, or $1,800 per year, and
· Insurance of $1,000 per year,
Can get a tax deduction of $1,680 per year! Plus depreciation of your home.
For more on this topic, see IRS Form 8829: https://www.irs.gov/pub/irs-pdf/f8829.pdf
And IRS Publication 587: https://www.irs.gov/publications/p587/ar02.html
2) Mileage Deduction
More than likely if you have a business you are having to drive somewhere to keep it running. A drive to visit clients? Weekly trips to the post office? Parking fees and road tolls? Annual property taxes? Depreciation of your car’s value? Interest on your car loan? It is all potentially tax deductible.
When deducting your car based expenses you generally have 2 options. You can choose a “standard mileage rate”, where you simply take all the miles you drove for business and multiply it by the IRS’s mileage rate, which stands at $0.54 per mile for 2016.
Did you drive 8,000 miles last year for your business? That’s $4,320!
Or if you choose not to do the standard mileage rate, you can do the more complicated “Actual Car Expenses” deduction. By doing this you give up the luxury of simply taking a small deduction for each mile and instead must itemize each and every expense you had during the year. Applicable expenses include:
· Lease Payments
· Parking Fees
· Registration fees
Here, you must calculate a ratio of business use to personal use for your vehicle (Similar to the proportion calculation for home office deduction above). If you drove 12,000 miles last year, 8,000 of which were business related, then you can deduct 75% ( 8,000 divided by 12,000) of your expenses.
For more on the topic, see IRS notice IR-2015-137 “2016 Standard Mileage Rates for Business, Medical and Moving Announced” https://www.irs.gov/uac/newsroom/2016-standard-mileage-rates-for-business-medical-and-moving-announced
And IRS Publication 463: https://www.irs.gov/pub/irs-pdf/p463.pdf
3) Extra Retirement Savings
Here's the big one -
Having your own business qualifies you to take advantage of additional tax deductible and tax deferred retirement accounts. Most commonly a business owner will have 2 plans to choose from, a “Solo” 401(k) or an SEP (Simplified Employee Pension). Both technically allow you to contribute up to $53,000 per year. That means up to $53,000 less you have to pay in self-employed income taxes each year!
For someone operating a business as a side gig – this means you can potentially stash away tens of thousands of dollars before your business will create extra taxes you have to pay.
Which is right for you – an SEP or a Solo 401(k)? Here’s the difference:
SEP's contribution limit is the lesser of; 25% of the employees compensation or, $53,000.
Solo 401(k)s contribution limit is the lesser of; 25% of the employees compensation PLUS the employee contribution of up to $18,000 or, $53,000.
For this reason, any person whose business has income under $212,000 will most likely find it easier to save more with a solo 401(k).
As an example, consider prior to considering any deduction for SEP contributions, your net earnings from self-employment for this year is $100,000. Assuming you do not contribute to another retirement plan for your business, your annual SEP contribution will be limited to $25,000 (25% of $100,000).
Now consider this scenario with a solo 401(k). Prior to considering any contributions you make, your net earnings from self-employment are $100,000. Your solo 401(k) contribution limit is 25% of your net earnings, contributed by the employer, plus $18,000 of your own contributions, for a total of $43,000.
For a lot of cases, business owners will find that solo 401(k)s offer the ability to save more than other self-employment retirement accounts.
Setting up a Small Business Retirement Account
Most large brokerages today such as Vanguard, Fidelity and TD Ameritrade offer both Solo 401(k)s and SEP for very little if any administrative costs.
Contact Us and Hylland Capital Management can set up AND manage your small business retirement plan.
Better still, if you open up a solo 401(k) for your business, but still work outside of your own business as well, you can still participate in your other employer’s retirement plan in addition to your newly created solo 401(k)! The only limit is the $18,000 in employee contributions. You may not contribute more than a total of $18,000 to any number of 401(k) plans, but your employers can each contribute up to their limit.
Think a few extra thousand dollars in a tax sheltered retirement account won’t amount to much? Head over to our compound interest calculator and see the difference.
For all the added stress running a home business creates, it’s nice to know you will be rewarded with a couple perks too.
Have questions about how you can best maximize the benefits of your home business? Give us a shout and set up a no fee, no obligation introductory meeting.