Side Hustle Income: Does a C-Corp Make Sense?

By Kevin L. Kennedy, Esq.

Let’s say you have a day job working for someone else, but you’re also trying to start a side business.  You hope that one day you can leave your ‘day job’ and work for yourself full-time.  Maybe this sounds familiar to you. Your first tax/legal question should be whether you need a business entity for your side hustle.  For more on that, read here (https://kkoslawyers.com/do-i-need-a-business-entity-for-my-side-hustle/).

Do I Need a Business Entity for My Side Hustle?

Your second tax/legal question should be how should I tax my side hustle business? S-Corp?  Sole Prop? Partnership? What about a C-Corp? Does it make sense to have a C-Corp for my side hustle income following the Tax Cuts and Jobs Act era?

Generally, a C-Corp does not make sense for small businesses because the C-Corp pays corporate income tax on your small business income and then you as the business owner pay income tax again on that same income.

However, there are a couple of limited circumstances when a C-Corp can make sense; one relating to an HRA for a non-married business owner, and the other involving a self-directed IRA ‘blocker corporation’.  Otherwise, a C-Corp typically does not make sense for the full-time entrepreneur/small business owner.  However, you are not a full-time entrepreneur, this is your side hustle.  Therefore, keep reading, and as a starting point, ask yourself the following two questions:

  1. Do I need my side hustle income to pay my bills?
  2. Am I in a high-income tax bracket?

Now, let me go further into detail about these questions.

#1 Do you need your side hustle income to pay your bills?

The reason double taxation occurs is that typically, the full-time entrepreneur needs their business income to live on (i.e. to pay for their everyday household living expenses).  But think about your side hustle.  You’re not in the same situation as the full-time entrepreneur.  The question becomes, do you need the income from your side hustle to pay for your household living expenses?  If the answer is yes, then the general rule applies – a C-Corp is not a good idea.  But if you don’t, (i.e. your side hustle income is completely discretionary income because you can live off of your day job income), you’ll want to consider the next question.

#2 Are you in a high-income tax bracket?

Assume, for example, your personal income tax rate is 32% (federal only) and your side hustle net income for the year will be $45,000. Therefore, you will pay income tax on that $45,000 at your personal tax rate of 32%. However, as a result of the Tax Cuts and Jobs Act, corporate income tax rates are 21%.

Therefore, IF you didn’t receive any of the income from your side hustle and you retained it inside the business, and IF your side hustle were to be taxed as a c-corporation, that $45,000 would likely be taxed at 21% instead of 32%. Obviously 21% is better than 32%. So for your current year taxes, it could be a ‘win’ to tax your side hustle as a C-Corp.  Sometimes with taxes, all you really care about is your current tax year.

Delaying the Inevitable

As they say, eventually the tax man cometh. Eventually you will withdraw these funds out of the C-Corp, and there are rules about that (i.e. retained earnings, personal holding company tax, accumulated earnings tax, etc.).  These rules need to be carefully considered before you even think about having your side hustle taxed as a C-Corp.

ALSO, let’s assume you WILL eventually be in a lower personal tax bracket when you pull these funds out at retirement, after you quit that high income salary job of yours.   Of course, 20% (your hypothetical personal income tax rate upon retirement) is less than the 32% personal income tax bracket you’re in currently, but don’t forget that you already paid a corporate income tax of 21% on your side hustle income. I’m not a math whiz, but 32% (paying personal income tax rate now at a higher personal rate) is still less than 41% (21% corporate rate now + 20% personal income tax rate later).

What is the takeaway? 

Talk to your CPA and/or Tax Attorney about the best way to tax YOUR side hustle.  Don’t assume that it doesn’t matter and you can ignore the issue since it’s just a ‘side hustle’.  There are a myriad of exceptions and rules that apply to certain industries, etc. – much more than what I can cover in a brief blog article. Talk with your tax/business attorney and/or CPA to discuss what makes the most sense for your situation.  Feel free to call our office.  We would be glad to assist.

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