Because I am a big advocate of “side gigging”, I often include it as a recommendation when I am asked by others for financial advice. So as a natural follow up, I am asked why one should pursue a side business in spite of a successful career?
I have a ton of reasons why you should pursue a side business while working in a successful career. Here are a few:
A side business can satisfy your needs and wants beyond what is allowed by your fixed income at work. Maybe you want to get a new bike? Or that cruise in the coming winter months? With a side business, you can put aside your profits toward you indulgences without having to compromise your monthly budget.
With a side business of your own, you are not relying on a bonus or a raise from your company. You are going to get that bike and cruise vacation whether or not your boss likes it!
Whether you desire extra money for your needs and wants, or to boost up that rainy day fund, running your own side gig will ensure you have some additional funds coming into the household other than your steady paycheck.
If you are working within a budget each month (which everyone should be), the extra money can be your “play” money. You can use this at your disposal without having to rely on salary increases and bonuses.
Is your job fulfilling? Do you feel like an important part of this world? Do you feel like you are making meaningful contributions and not just filling in space? These are very valid questions and unfortunately there are too many out there who answer “YES” to these questions. It is a fact that most people do not enjoy their jobs.
A side business allows you to pursue a passion and find satisfaction in doing so. Because you can choose what to do, you can do what you like doing best. You don’t have to seek satisfaction in Classified Ads. You can create your own satisfaction and contribute in your own way, all while sitting at home.
Have an idea but not sure it would work? Ever suggested the latest breakthrough innovations at work only to get shut down? You can prove your point by pursuing your side gig.
My friend John’s father (also an immigrant) is an engineer. He had recommended a new method of doing some things at the company he worked at. The company shut him down. So what did he do? John’s father hit the drawing board each evening after work in his basement. Was he sure it would work? No, but he tried anyway. What’s there to loose but some time and sweat?
The result? An enhanced part of a machinery which worked a lot more effective and efficient. Was John’s father itching to start a side business to become a millionaire? No! He was itching to prove his point. It just so happened that John’s father branched out with this new part and three years later drove his old employer out of business.
Was debating whether this is the main reason I always preach having a side business. Decided to make it the second most important instead. Building wealth and preserving it are two very different things.
Because we all pay homage to our favorite uncle SAM, we end up taking home just a portion of what we earn. It is often said that we work January through March just to pay taxes. If you are making more than six figures a year from your job, you are likely working through April just to pay your tax bill.
Owning a side business, no matter how big or small, has tremendous tax advantages. I plan on covering taxes in depth over time. But suffice it to know for now that owning a business can significantly lower your effective tax rate.
NO SIDE BUSINESS:
John works and makes $120,000 from his job (W2)
Standard Deduction: $5,400
Personal Exemption: $3,650
Taxable Income: $110,950
Federal tax (21%): $24,775
State tax (3%): $3,328
City tax (2%): $2,219
Total tax paid: $30,322
Effective Tax Rate: 27%
Yes – you are donating 27 cents of every dollar to your favorite uncle SAM
John works and makes $120,000 from his job (W2)
Income from Small Business: $15,000
Side Business Deductions: $25,000
Standard Deduction: $5,400
Personal Exemption: $3,650
Taxable Income: $100,950
Federal tax (21%): $21,199
State tax (3%): $3,028
City tax (2%): $2,019
Total tax paid: $26,246
Effective Tax Rate: 26%
There is a favorable difference of 1% in my example (or $1,200 on a $120,000 income). I have used the numbers above for simplicity purposes. Truth is, the 1% difference is far understated and can be much larger. When I was working for the man, my effective tax rate was 12% lower than what it would have been had I not owned had side businesses. On a $120,000 annual income, 12% translates into $14,400 extra cash in my pocket. What can you do with that kind of extra cash?
Your effective tax rate is reduced despite a higher gross income (120,000 + 15,000 from your small business). Sure you may say that the side business expenses were $25,000. However, a bulk of that $25k are expenses you are paying regardless whether you have a side business or not. As a business owner, you are entitled to classify the following as business expenses: part of your rent or mortgage, property taxes, utility bills, maids to clean the house, gasoline, mileage or car payment, cell phone, internet, the list goes on . . .
These are just a few things off top of my head. There are a lot more when you study it. Another thing to note, the numbers above are based on a single individual. The benefits are bigger for a married couple because of the change in tax rates, the standard deduction and personal exemption amounts. America likes to reward those who get married 🙂
First of all, you are in for a rude awakening when you realize how little of what you make is what you keep.
Second, when you start learning about the tax advantages of running a side business, you will realize how big of a mistake you had made all these years by not starting it up. Careful tax planning is critical to preserving wealth and building it over time. You may just have hit the biggest jackpot of your life by reading this blog post. And yes, I speak of nothing but legal and IRS allowed ways to minimize your tax burden.
The most important reason for me preaching side gigging is the same reason you get insurance. You just don’t know what the future has to hold. A profitable side business serves as a safety net in the unfortunate event that you may need it. In the world that we live in today, you just never know. What’s the worst that can happen? Absolutely nothing but the loss of few evenings, nights and weekends. But the upside? A well oiled money making printing press. Your only problem will be deciding what to do with the money.
Which reason is right for you? Only you can tell. All I know is that there are way too many people who are only one layoff away from devastation
As far as the people that seek advice, when I ask them why not to start it up on the side, I get responses such as “it takes time”, “too much hassle”, “it’s a risk”, etc. Well you know driving is a risk – in fact a much bigger one. Basically excuses to avoid getting off from the couch.
Your side business does not have to be stressful, especially when you are doing well in your career. There is no urgency to get stuff completed on hard deadlines (though deadlines will work in your favor for accountability purposes). It does not have to be risky at all. I am sure you have $300 to spare given that you have a day job right? By the way, life is a risk too, so do you stop living it?
And as far as spending time is concerned, well so does watching TV on the couch, or killing 3 hours in the evening lolly-gagging and grabbing a latte you don’t even need with a friend but feel cool to get it anyway from Starbucks with. Look, time will pass by anyway. You decide what you want to do with it.
Why our why not should one pursue a side business even when successfully employed?
A side business doesn’t always have to remain a side business. Read my thoughts on the evolution of a side business to a full time business venture.Previous: Your Job is Changing & It is NOT in Your Favor
A powerful and motivational article. Also, think about Michael Jordan, Bill Clinton, and Jennifer Lopez, all people with pretty successful day jobs, right? Still, they all branched out into side gigs as authors or actors or entrepreneurs. Truly successful people, once they latch on to something good, will work all the angles and take advantage of all the possibilities.
you got it Tyler – these are some very smart individuals that used the money they earned from their careers to further diversify and grow their own empires. In the same way, each one of us should think of our net worth / portfolios as our own empires and therefore use the tools / strategies legally available to us to best use.
I have a question, though. Doesn’t your business have to be profitable? In your example, you made $15k in your side business, but had $25k in expenses. This suggests that you lost $10k in your side business. Doesn’t this send off a red flag to the IRS and cause them to possibly audit you?
I understand that the $25k are mostly expenses that you would have already undertaken without the small business (car mileage, internet, part of the mortgage, etc.), but you are reporting a net loss to the IRS from the small business.
Also, the IRS deems any activity that has failed to produce a profit for the last two out of the previous five years as being a hobby–which would limit your ability to claim losses in the future. So I think you may want to present a more likely example.
So you are saying if I were to buy a Subway franchise and staff it with Management to run it during the day while I work my job, it will be deemed a hobby the first 2 years?
To address your question, if your business is profitable, there are no losses to deduct. Your taxable income will in fact increase. Red flag or otherwise is a personal decision. It is a fact that most businesses take time to establish, break even and eventually become profitable, if they ever do (most businesses fail).
Finally, the IRS can audit you at any time for any reason, including random sampling. That certainly hasn’t stopped entrepreneurs in the past has it? The example I have presented is hypothetical and for ease of understanding the concept. If you have a better one or one that is more “likely”, I am sure we would love to hear about it?
Sunil, have highlighted this post in my latest wrap.
I never decided to start a side business to diversify my income interestingly enough. It’s therefore funny that the online income has grown to a level that i could not have imagined.
As a result, I will start being a little more “professional” about things and incorporate and see how things go. That said, I’m still not running my site an Yakezie for money. If and when I retire in 7-8 years, it would be a nice thing to do for a living and keep my mind busy. But, hopefully in 7-8 years, it’s my investments and savings w/ my day job that support my journey in retirement.
Good deal Sam – and there is certainly no one size fits all in this game. What you are doing sounds perfectly fine, and it seems to be working for you.
Just to clarify, when you mention earning money, I am assuming you refer to FS and not Yakezie correct? I haven’t seen monetization applied to the Yakezie. How are you monetizing the FS website? I’ve looked at it, and feel I am blatantly missing something.
7-8 years will be here before we know it. All the best as that approaches. I still have a long road to go, but it’s nice knowing that I can take a step back today from my “profession” and be just fine.
I’m proud you cannot see the ads on Financial Samurai! That’s really great to hear. As for Yakezie.com, once your 6 months is over, you will find out. It’s pretty simple. But before then, get to know as many Members and Challengers as you can.
I am a single father and have a 70k per year job. I have to alternate claiming my daughter with her mother for yearly deductions. I can honestly say that I have too many ideas for a side gig, but I definately need the help when it comes to tax time. I am trying to (as is everyone) conserve as much money as possible from my day job. I feel as if I am in a rut and need some help with a jump start. Can anyone provide me with ideas as to what may be a good side gig to recover some of the money that Mr. SAM(he’s no uncle of mine) is taking from me when tax time comes around? Any help is greatly appreciated.
broad question Grant, but good news is there are too many options. have you read my free report? seek within first and see if you can find something you are so passionate about that you can turn into an offering/business. then let’s see if it’s a viable concept.
Hi, Grant. I run a product brokerage & internet marketing company part-time while I work an eight hour job. I am building my business now & look forward to the day when I am financially free & able to give up working for someone else. Please let me know if you would like to learn more about it.