If you’re a W-2 employee, one way to reduce your tax liability is to start a part-time business.
Here’s a look at the three major reasons why starting a part-time business will benefit you, your bank account, and your community.
Reason 1: Building a business is the most reliable path to wealth
Let’s assume you are like most Americans and have hopes of becoming wealthy, if you are not already. Think big! Becoming a millionaire is a good place to start. It would alleviate the worry and stress that comes with paying day-to-day bills and ongoing expenses. Even better, wealth allows you to not just survive, but also turn your greatest dreams into reality.
According to “The Millionaire Next Door,” starting a business is your best path toward wealth. Of non-retired millionaires in the United States, more than two-thirds are headed by self-employed owners of businesses. In addition, the self-employed are four times more likely to be a millionaire than an individual who works for someone else.
So, while starting a business is not the only path to becoming a millionaire, it has been proven to be the most likely path one can follow. The evidence certainly supports the colloquialism that business is the only tried and true way to build wealth in America.
Okay … not all business startups will generate enough money to make you a millionaire, but creating a business that generates revenue you can scale is a reliable path to wealth for almost all W-2 workers.
A business works for you and generates money even when you are not working—and it’s something that you can’t achieve with just a W-2 job alone. It allows you to make money beyond the capacity of what you can just do on your own.
However, businesses often fail. Luckily, even this doesn’t have to be a worry—even if the business fails, there are still huge advantages that come with having a business, which brings us right to our second reason for starting a business.
Reason #2: Starting a part-time business will save you big on your taxes (even if it fails)
Even if your business doesn’t succeed, it’s guaranteed to save you big money on your taxes. This is especially the case if you currently have a W-2 job, as the losses from the business will offset the amount of taxes you are paying right now.
With the Tax Cuts and Job Act (TCJA) of 2018, it has become almost impossible for a W-2 worker to get any tax advantage. The standard deduction is very high, to the point where 90 percent of households use the standard deduction. In addition, with the TCJA, you can’t write off anything for your W-2 job, ever. So, if you are looking for a tax advantage, starting a business is currently the best path to follow.
When you start a business, your personal expenses become business expenses—and lead to big tax savings. The simplest example of this is your cell phone. If you use your phone for business, part of that cell phone and monthly plan becomes a business deduction, leading to large savings on your taxes. Other significant expenses include business miles on your car or depreciation of your vehicle, if you use it for business. With some knowledge and planning, you can also use your business to turn a vacation into a business trip, and then deduct a lot of the trip's cost.
There are companies that specialize in setting people up with a business or helping them recognize that the “side hustle” they have qualifies as a business by the IRS’ definition. The basic idea behind the IRS definition of a business is an activity that you consistently work on and are attempting to make a profit off of. There is certainly a bit more to it than that, but if you have an activity that fits this description, there is a very good chance that it will fit the IRS’ definition of a business and lead to big tax savings.
There are a couple myths to avoid.
First, your activity does not need to be profitable, or even have revenue, to be considered a business. Again, as long as you are working on it and attempting to make a profit, it could likely be a business. Second, you do not need an LLC or any other type of business entity to be considered a business.
Even if you have never filed anything with anyone, your activity could still be a business that leads to tax savings. In fact, the first time you need to let any government agency know about your business is when you are filing your taxes and taking your deductions.
