As I have mentioned over the past several posts, it is so important to know the 10 financial principles that can change your life is so many wonderful ways. That’s why I have been spending time covering each of the Money Mastery Principles. Today I want to review Principle 9:
Understanding Taxation Enables You to Retain More Money. The easiest way to earn more money is to keep more of the money you already make! That means giving the IRS what it expects only when it is due and no more. Tax refunds are mythical benefits that come at a great cost to American families. Don’t be fooled by this myth and countless others. Knowing the real rules about taxation will free and empower you.
Everybody wants more money. The drive to make more money often keeps the focus off the easiest route to get more of it, which is to keep more of the money you make in the first place! But making more money in the W-2 world forces a person into a higher tax bracket, while keeping more of the money you already have does not.
How can you keep money from going to the IRS?
First, realize that there are two separate tax systems, one for W-2 employees, and the other for the self-employed or small business person. Some W-2 employees do well at their day job and then moonlight in their small business so they can make additional revenue and pick up additional deductions to save taxes big-time!
W-2 employees can only use Schedule A for itemizing deductions, but self-employed or small business owners gets to use both Schedule A and Schedule C to itemize deductions and save valuable tax dollars. If you examine Schedule C and you’ll find 19 extra lines of deductions.
When you get to use Schedule C and have an additional 19 extra areas of tax deductions over a W-2 employee, you definitely keep more of your hard-earned money. Check out Schedule C and try to picture yourself working at a small business. Here are some ideas:
- Freelance writer/editor
- Classic car restoration
- Teaching musical instruments/voice
- Auto mechanic
- Grant writer
- Public speaker
- Pet groomer/pet watcher
- Hair stylist
- Cosmetics salesperson
- Graphic designer
- Flower arranging
- Wedding event planner
- Dog breeding
Remember the goal is to make money, not just create business expenses. In all additional qualified business deductions, there must be the main attempt to create additional revenue. So don’t try to trick the system and fake a business just to get greater tax deductions. The IRS audits tons of small businesses and you don’t need these problems in your life. My point is, you will not have any problem running a small side business out of your home as long as you run your business like a legitimate business, and not a hobby. Take it seriously. Work it regularly (but doesn’t have to be lots of hours, just consistent hours so you can make a profit), and learn the tax laws for Schedule C deductions (which are few and simple).
After all is said and done, there is a high probability that when you have a small business you really will have extra money from profits and more tax deductions. Learning the tax rules will be well worth your effort. Contact me for more information at firstname.lastname@example.org.