You started making money on the side. Maybe it’s a few clients or jobs a month, maybe it’s turning into a full business. Either way, money is coming in and it is a matter-of-time that Uncle Sam comes knocking. You go online and you are hit with LLC’s and S Corps. Now the questions you are wondering is:
Do I need an LLC or an S Corp?
Which one going to save me money on taxes?
I get it. I can look up one tax question and leave with six more. But in order to build wealth, learning how to manage your tax liabilities is essential.
That’s why I sat down with my CPA, Laura Zarrate, founder of Athena CPAs and Advisors, along with my cohost Lindsay. We talked through the questions that come up when a side hustle starts getting serious. Here are the takeaways, without making you decode tax jargon for the rest of your day.
Key Takeaways
- Don’t wait for an LLC to start tracking your income and expenses
- An S corporation is a federal tax election an eligible business can make.
- An S corporation owner who works in the business must receive reasonable wages, which are subject to payroll taxes.
- Run the numbers before making the election
- Talk to a CPA to help you understand which option is the best tax strategy for you.
Do you need an LLC to deduct business expenses?
No. If you’re self-employed, you may be able to deduct qualifying business expenses even if you haven’t formed an LLC. A single-member LLC is generally reported on its owner’s personal tax return for federal income tax purposes unless it elects a different tax treatment. Forming an LLC does not unlock a secret menu of deductions.
So why consider one? The legal and practical reasons depend on your business. Laura suggested looking at your activity, whether income is recurring, and the risks involved. An LLC can also prompt you to set up clearer systems, though you can keep separate business records as a sole proprietor too.
The takeaway: Don’t wait for an LLC to start tracking your income and expenses. And don’t assume that reaching a certain monthly income automatically means it’s time to form one.
If you put your own money into the business, is that income?
This was one of my questions because, like a lot of business owners, I’ve used personal money to get things going.
For a typical single-member LLC taxed as a sole proprietorship, transferring your own money into the business is an owner contribution. It isn’t a sale or payment from a client. Labeling that transfer correctly in your books helps you see what the business earned versus what you put into it.
Laura’s practical advice was to open a separate business bank account and keep business spending there. If you need money for groceries or the spa, transfer it to your personal account first. Your future self will thank you when tax season rolls around.
What is an S Corp, and why is everybody on TikTok talking about it?
An S corporation is a federal tax election an eligible business can make. It isn’t a business structure you find on your state’s LLC registration page. An eligible LLC can elect S corporation tax treatment.
The potential savings usually come from how Social Security and Medicare taxes apply. An S corporation owner who works in the business must receive reasonable wages, which are subject to payroll taxes. Remaining business profit generally isn’t self-employment income. That’s the part behind the “S Corp saves taxes” videos—but you can’t simply call all your pay a distribution and skip payroll.
There’s work and cost involved, too: payroll, filings, and an additional business tax return. Laura’s point was to run the numbers before making the election. If the business is new, has a loss, or isn’t earning enough to outweigh those costs, the move may not make sense yet. The income figure she mentioned in our conversation was a starting point for discussion, not a universal S Corp threshold.
And one more myth we cleared up: you don’t need an S Corp just to explore self-employed retirement plans. The right plan and contribution amount depend on your earnings, business structure, and whether you have employees.
The least exciting habit might save you the biggest headache
Bookkeeping. I know. Nobody started a business because they were excited to categorize transactions.
But Laura sees business owners reach tax season without knowing how much they made—or whether some of the money in their account came from sales, a loan, or their own contributions. At that point, there’s less time to make informed decisions.
Her advice was simple: use a spreadsheet or bookkeeping software, update it consistently, and look at your numbers every month. Keep receipts and notes while you still remember what an expense was for. I have personally done the “I know that receipt is somewhere in my email” search, and I do not recommend making that your accounting system.
Can your home office or car count as a business expense?
Potentially, but the details matter.
If your home workspace meets the rules—generally, regular and exclusive business use—you may qualify for a home office deduction. Under the regular method, expenses directly related to that office may be deductible, while eligible costs for the whole home are allocated between business and personal use. That’s why Laura told me to keep receipts for things like home repairs, not just my desk and internet bill. A receipt alone doesn’t make the full cost deductible, though; eligibility and how an improvement is treated still matter.
The car question came up because I’m shopping for one. Buying or leasing a car doesn’t turn every trip into a business expense. If you use it for both business and personal driving, keep a mileage record and separate the two. The deduction method, vehicle type, and depreciation rules affect what you may claim. Please talk to your tax professional before buying a car because a video promised you could “write off the whole thing.”
What should you do next?
If your side hustle is growing, you don’t have to master the tax code overnight. Start with a few habits that give you and your tax professional useful information:
- Track what comes in, what goes out, and what you personally contribute.
- Keep business and personal spending easy to tell apart.
- Review your numbers during the year, not for the first time at tax season.
- Ask a qualified tax professional to compare your options before making a major election or purchase for tax reasons.
You’re building something that matters to you. Knowing your numbers helps you make decisions for the business you actually have—not the one a stranger on TikTok assumes you have.
Listen to the full episode for my conversation with Laura and Lindsay, including the questions we asked about LLCs, S Corps, home offices, and cars.
You can find Laura at:
Instagram at @athenacpas.
This post is educational and isn’t individualized tax or legal advice. Tax treatment depends on your facts, location, and the rules for the year involved.
