There has been a significant increase in the number of home-based businesses; this is due to a number of reasons.
- Regular jobs do not provide enough financial backup to offset bills and take care of other responsibilities
- A good retirement plan would need to stand on more than just a good job. There would have to be more commitment financially if you hope to live a most comfortable retired life.
- A home-based business is convenient, flexible and serves you for rest of your life
People prefer to manage different sources of income than sticking with one source which runs a huge risk. The fragility of working for a company can be unsettling as there are risks such as company liquidation, laying-off excess workers to reduce expenses, demotions, salary restructuring, taxes, and other disturbing possibilities. A side business would provide hope for stability and a sustainable lifestyle even without the day job.
Owning a home-based business has its benefits and this extends to income although it would require proper immersion in the tax system in order to be able to abide by the national laws and tax policies.
The tax system takes two progressive alternatives
- The tax system regulated by the income of workers and earners under a registered company
- The tax system for private home-based businesses
There are some significant disparities in the management and conductions of these two systems. This is so much so that the tax for salary earners is fixed due to the consistency in salary offer but that of home-based businesses varies on a percentage deduction system.
A Home-business qualifies for certain benefits but before we outline these benefits you would have to abide by certain rules that apply to home-based business.
- a legal home-based business would have to have scheduled working hours per day
- Properly registered with legal documentation.
- Keep track records of business proceeds, expenses and proof of every sales and purchases made. This is necessary in order to have backing for audits.
The process of business taxation involves a peculiar concept of deduction by qualification. There are essential tips to managing tax deductions without breaking any tax laws. How does tax deduction work?
How tax deductions work
A salary earner who earns a certain amount of money monthly may qualify or may not qualify for a deduction; this is determined by tax laws of the country. In the United States your tax percentage is extracted from your Adjusted Gross Income (AGI). Your AGI is the final total you get after you minus your business expenditure from your business income; the rest is profit hence your tax percentage is extracted from your profit. Now how can this be advantageous to businesses and entrepreneurs? There are tips which most business owners are unaware of and this would help save more on income. This is how it works;
Scenario 1
Edith works a regular job and earns $30,000 monthly, if by standard laws she doesn’t qualify for a deduction and her tax percentage is 10%, she pays $3,000 on tax monthly with no savings.
Scenario 2
Edgar is an entrepreneur and runs a home-based business. He earns $30,000 monthly from his business on an average. If he qualifies for a deduction of $10,000 dollars he would then pay a 10% tax from his adjusted income of $20,000 which would be $2,000 and he saves $1000 dollars.
How do you qualify for a deduction?
Some of your everyday expenses qualify as business expenses when you run a home-based business. Your day to day expenses such as fueling your car, going on a trip, purchasing electronics and lots more can all feed into business expenditure, all you need to do is provide receipts, accurate and specific documentations and reasons for purchases. Purchasing a new phone which is personal can become business expenditure as a phone is necessary to run a business. These are loop holes which can be explored to qualify for tax deductions and would assist in saving your income.
It may be difficult keeping track of all the documentation needed for auditing so it is advisable to use accounting tools that would assist in documenting these processes for future audits.
