In the spirit of tax day, I will be reviewing my #1 tax savings strategy today – incorporating yo’ self!
There is not a separate tax code for rich people as opposed to poor people. There are two tax codes: one for the individual and another for corporations.
If you have any sort of side hustle, it’s about time you incorporate yourself.
Individual Tax Rate – Standard/Itemized Deductions
Most people take the standard deduction when it comes to yearly tax returns. Worse yet, people just mail in their W-2 and other tax documents to their accountant, allowing a relatively complete stranger to file one of the most important documents of the year on their behalf.
Most tax accountants will apply only the “standard deduction” to your tax return, returning you a very limited sum of money or, in the worst case scenario, even ending up with you paying the Government money!
If you don’t take the standard deduction, your remaining option is to itemize your deductions. Individuals’ tax returns only consist of a few items – most of which do not apply to a huge portion of the population. A few of the basic deductions that can be itemized are the following:
- Child tax credit
- Tax deduction on interest payments on a mortgage
- Tax deduction on tuition paid on college tuition
- Income Tax Return
- Medical Expenses
- Random cases – like being mugged
Most people would be better off taking the standard deduction because itemizing these few items would not be more than the standard deduction – table below:
If you have a side hustle, filing your taxes as an individual is one of the most foolish things you can do. At best you will end up getting just a meager sum of money from your tax return.
Now let’s get into how the smart side hustler does her/his tax returns.
Corporate Tax Rate – Itemized Deductions
Before I convince you as to why you need to incorporate yourself as an LLC (s-corp, c-corp, individual, and/or partnership) – let me show you what you can deduct as a part of your tax return when you are a corporation instead of an individual.
For the purposes of this example, I will use the example of being an Airbnb host who opened a LLC for their Airbnb business. The main caveat is that every expense can be written off as a tax deduction – so let’s get started.
- A portion of your rent based on sq. footage of the guest’s space
- A portion of your rent based on sq. footage used as ‘office space’
- Any furniture you bought for your Airbnb
- Any bedding you bought for your guests
- A portion of your internet bill for your guest
- A portion of your cell phone bill in order to run your business
- The cost of your cell phone if it is for business
- The cost of your laptop/tablet if it is for business
- A portion of your electric bill in order to provide your guests with electricity
- A portion of your gas bill in order to provide your guests with cooking gas
- Any repairs you made to your property due to guest damages
- Any mileage on your car that you used to transport guests and/or furniture
- Any airplane flights you took that are related to your business for conferences
- Any hotel fees you paid if you traveled for business
- Any food costs during your business travel
- Any transportation fees (Uber/taxis/rental cars) you used during business travel
- The fee for any courses you took in order to become an Airbnb host
- Any amenities you provide for your guests – shampoo, conditioner, body wash, laundry costs, hand soap, free breakfast, paper towels, tissue paper, and/or toilet paper
All of these deductions can be had along with the standard tax deductions at the individual level.
Of course, you need to declare any income you may or may not have accrued as a part of your business and pay taxes on it. You will have to pay %20 on any income gained through your side hustle, but you will also get %20-30 returned as a part of any expenses spent on your business. Hypothetically, what happens if you were Airbnb-ing out your couch for $20/night and only received a few guests over the course of the year?
I’ll tell you – you would get a huge tax return.
Okay, now before you judge me for telling you to Airbnb out your couch and write off your cell phone bill, this is completely legal by the current tax laws in the U.S. You can complain about how corrupt this mentality is, or you can realize that this is exactly how the %1 are getting so far ahead in life.
Just look at how the major corporations of the world are abusing taxes in the latest video from Last Week Tonight’s host, John Oliver:
Now, I am not saying two wrongs make a right. However, not incorporating your side hustle or not having a side hustle to incorporate in the first place is a good way to lose out on a lot of money.
Why You NEED An EIN For Your Blog/Vlog/Instagram/YouTube Channel/Airbnb/Side Hustle
The first thing you need to do is find a side hustle that works for you (if you have one, great). The second thing you need to do is to incorporate your side hustle by applying for a Federal EIN. You don’t need a lawyer or anything fancy, you just need $35 to apply for the application.
It will take you 15 minutes to save thousands of dollars on your tax returns next year. So many of us have social media dreams, content creation goals, or simple hobbies that can be incorporated.
Just make sure you are not lying on your tax returns as all deductions need to have proof in a receipt or in some way that you can prove that the deduction was for your business. I am not telling you to lie on your tax returns, only to get what is yours. Make sure all receipts are kept for at least 7 years in case of the terrifying ‘audit’.
The government takes %30-%35 of your paycheck every two weeks.Every time you negotiate for a $1 per hour raise, you are really only negotiating for $0.70 cents. That is the greatest theft in human history and it is only fair that we understand tax laws and take advantage of what deductions are available in the system – legally.
If you don’t know how to itemize your taxes, then work with a trusted tax accountant. I go without the tax accountant as they will never fully care about my money as much as I do.
I use Turbo Tax for my tax returns and it has not failed me yet – it is simple and self-explanatory. Turbo Tax lets you see live updates, save draft versions, go back for revisions, and makes sure you file your taxes properly.
As always, if you found this article helpful, insightful, or the least bit entertaining, then like, comment, subscribe, follow, and SHARE!
Thanks for reading.
P.S. The above is not investment advice and is meant for general education purposes only as I am not aware of your specific situations and/or risk tolerance.