Need advice on tax planning for my side hustle (~$21k USD). Both founders are in the 30% bracket.
Hey everyone,
Looking for some thoughts on a tax planning strategy for my side hustle.
Context: My sibling and I both have full-time jobs and are already maxed out in the 30% tax bracket. On the side, I do software consulting for foreign clients through a freelance platform. We've set up a formal registered business entity for this, but taking a founder's salary from it doesn't make sense since it just adds to our personal 30% slabs. (I primarily manages the account)
The numbers for FY 25-26:
- Total billed: ~$21.5k USD
- Realized in Indian bank: ~$14k USD (around ₹12.6L)
- Still sitting in the foreign platform wallet: ~$7.5k USD (Sitting in Toptal wallet)
Here is what we are thinking of doing to bring the tax liability down to around lower range say 50-70K or may be less legally:
1. Cash Basis Accounting (Income Deferral): We are planning to opt for the cash basis of accounting for the business. Since the $7.5k is still sitting in the foreign virtual wallet and hasn't hit our Indian bank account yet, we are hoping to defer recognizing this income until the next financial year. (We will still declare the foreign wallet balance in Schedule FA of our ITR to stay compliant and avoid any Black Money Act penalties). (By selecting this in our ITR-5)
2. Rent to Parents: We use our parents' house as our registered office space, so we plan to formally pay them around ₹4 Lakhs a year as rent. They can claim the 30% standard deduction on this, and since they have no other income and are in the 0% tax bracket, it's tax-free for them.
3. Salary to Parents: We also want to hire our parents for back-office admin and bookkeeping, paying them a combined salary of around ₹4.5 Lakhs. Again, this falls within their basic exemption limits, so no tax for them.
4. Business Expenses: We have about ₹82k in genuine software subscriptions (like AI tools) and online upskilling courses. We are also planning to have about ₹1 Lakh in cash withdrawals that we plan to back up with internal petty cash vouchers for local travel and office supplies.
5. Tax-Free Withdrawals: By claiming the rent, salaries, and expenses, the net taxable profit of the business drops to around ₹2.2L. The business will pay its flat corporate tax on this (which comes to around ₹70k). After the business tax is paid, we plan to withdraw the remaining post-tax profits to our personal accounts, which should be exempt from tax in our hands.
This plan theoretically shifts a lot of income to our parents tax-free, defers the wallet balance, and keeps our personal tax returns completely clean.
What do you guys think? Is this plan solid, or are there any suggestions or better ways to optimize this further? I actually not keen to pay the taxes much and want some legit suggestions