How Having a W-2 Job and a Small Business Can Benefit Your Tax Return

Many people assume that having both a traditional W-2 job and a small business complicates taxes, but it can actually provide valuable tax benefits. Whether you’re starting a side hustle or running a full-time business alongside your employment, leveraging both income streams can help you maximize deductions and minimize your tax liability. Here’s how:

1. Deducting Business Expenses

One of the biggest tax advantages of owning a small business is the ability to deduct ordinary and necessary expenses. These can include:

Home office expenses (if exclusively used for business)

Business-related phone and internet costs

Office supplies and equipment

Travel and meals for business purposes

Vehicle expenses (mileage or actual costs)

By claiming these deductions, you reduce your taxable business income, which in turn lowers your total taxable income.

2. Offsetting Self-Employment Taxes

Self-employed individuals typically pay 15.3% in self-employment taxes (Social Security and Medicare). However, when you have a W-2 job, your employer already withholds these taxes from your paycheck. This means your business income may result in a lower additional self-employment tax liability. Plus, you can deduct 50% of your self-employment tax from your adjusted gross income (AGI), helping to further reduce your tax bill.

3. Maximizing Retirement Contributions

Having both a W-2 job and a business allows you to supercharge your retirement savings:

Contribute to an employer-sponsored 401(k) with potential company matching

Open a Solo 401(k) or SEP IRA for your business, allowing you to contribute even more

In 2024, the maximum Solo 401(k) contribution is $69,000 (including employer and employee portions), providing a significant tax advantage.

4. Home Office & Vehicle Use Deductions

If you run your business from home, you can deduct a portion of expenses such as:

Rent or mortgage interest

Utilities

Property taxes and insurance

If you use your vehicle for business, you can deduct mileage or actual expenses like gas, maintenance, and insurance, helping to lower your taxable income.

5. Offsetting W-2 Taxes with Business Losses

If your business incurs a loss, it can offset your W-2 income, reducing your overall taxable income. However, be cautious—if your business consistently reports losses, the IRS may classify it as a hobby, making it ineligible for deductions.

6. Taking Advantage of the QBI Deduction

If your business is structured as a sole proprietorship, LLC, or S-corp, you may qualify for the Qualified Business Income (QBI) Deduction, which allows for a deduction of up to 20% of your net business income. This helps further reduce your taxable income and overall tax liability.

7. Deducting Health Insurance Premiums

If your W-2 job doesn’t provide health insurance, you may be able to deduct self-employed health insurance premiums for yourself, your spouse, and dependents, lowering your taxable income.

8. Smart Tax Planning & Estimated Taxes

Since self-employment income isn’t taxed upfront like W-2 wages, planning is essential:

Adjust your W-2 withholdings to balance your tax payments

Make quarterly estimated tax payments to avoid penalties

Work with a tax professional to ensure you’re taking full advantage of deductions and tax-saving strategies

9. Don't Leave Money on the Table!

If you have business income but don’t report it properly, you could be losing valuable tax savings opportunities. Here’s why:

Missing Out on Deductions – Failing to claim legitimate business expenses (like home office, internet, travel, and supplies) means paying more in taxes than necessary.

Losing the QBI Deduction – Many small business owners qualify for the 20% Qualified Business Income Deduction, which lowers taxable income. If business income isn’t reported, you miss out on this valuable tax break.

Retirement Contribution Opportunities – Business owners can contribute more to retirement accounts, reducing their taxable income while securing their future.

Potential Refunds & Lower Taxes – Properly reporting business income allows you to leverage deductions, reduce taxable income, and pay less in taxes overall.

Avoiding IRS Penalties – If you receive 1099 forms for self-employment income, the IRS expects you to report it. Failing to do so could lead to penalties, interest, and audits.

Example Tax Savings Scenario (Simplified)

Without a Business:

You make $100,000 from your job.

After the standard tax deduction, you’re taxed on about $85,000.

You could owe around $14,000 in taxes (estimate).

With a Small Business:

You still make $100,000 from your job.

Your business makes $20,000, but you have $10,000 in expenses (things like supplies, internet, travel, etc.).

After deducting expenses, your taxable business income is $10,000.

Instead of being taxed only on your W-2 income, now you are taxed on both sources: $85,000 from W-2 + $10,000 from business = $95,000 taxable income.

However, with additional deductions such as the QBI deduction, you reduce the taxable business portion further, lowering your tax bill compared to just having a W-2 job.

Final Thoughts

Combining a W-2 job with a small business offers unique tax advantages, from deductions to retirement savings and strategic tax planning. If you want to optimize your tax situation, consider working with a tax professional who can guide you through the best strategies tailored to your specific income and goals.

Need help navigating taxes for your W-2 job and small business? Contact us today for expert tax planning and bookkeeping services!