Time to Launch Your Tax Strategy
Conduct an online search of the phrase “side hustle” and you will find websites with countless ideas on how you can make some money on the side. The ideas range from carpet cleaning to podcasting. What a lot of these sites fail to inform you, is the tax implications that come from the additional income. Here are five tips to help you stay on top of your side hustle taxes:
- Business or hobby? When reviewing your activity, the first determination made by the IRS is whether the arrangement is a business or a hobby. There are several factors the IRS uses, but the big one is: does the activity make a profit or intend to make a profit? The IRS will presume the activity is a business if a profit is made during at least three of the last five years. Once business versus hobby is determined, differing tax rules will apply. In short, expenses paid for operating a business are tax deductible. Hobby expenses are not.
- All income must be reported. Income from side hustles can come from a variety of sources. Regardless of where the money comes from or how much it is, it needs to be reported on your taxes. If you are working for a company, you will get a 1099 (if you are paid more than $600) or a W-2.
- Keep good records and save receipts. Being organized and having good records will do two things: ensure accurate tax reporting and provide backup in the event of an audit. Log each receipt of income and each expense. Save copies of receipts in an organized fashion for easy access. There are multiple programs and apps to help with this, but a simple spreadsheet may be all that you need.
- Make estimated payments. If you are running a profitable side business you will owe additional taxes. In addition to income tax, you might owe self-employment tax as well. Federal quarterly estimated tax payments are required if you will owe more than $1,000 in taxes for the year. Even if you think you will owe less than that, it’s a good idea to set a percentage of your income aside to avoid a surprise when you file.
- Get professional tax help. There are many other tax factors that can arise from side income such as business entity selection, sales tax, state taxes and more. Call to set up a time to work through your situation and determine the best course of action moving forward. Knowing you have someone to help with your tax obligations will free you to focus on your extra income generating activity.
Creating a “side hustle” can be fun, rewarding and bring in additional income to help with expenses or add funds for other activities. Just make sure you understand how the income will be taxed to avoid an unwanted surprise. We’re here to help.
Six Ideas to Help Your Business Survive AND Thrive
If you are like millions of taxpayers trying to make a living running a small business, you know it is tough out there. Here are six ideas to help your business survive and thrive.
- Understand your cash flow. One of the biggest causes of business failure is lack of positive cash flow. At the end of the day, you need enough cash to pay your vendors and your employees. If you run a seasonal business you understand this challenge. The high season sales harvest needs to be ample enough to support you during the slow non-seasonal periods.
Recommendation: Create a 12-month rolling forecast of revenue and expenses to help understand your cash needs each month.
- Know your pressure points. When looking at your business, there are a few categories that drive your business success. Do you know the top four drivers of your financial success or failure? By focusing on the key financial drivers of your business, success will be easier to accomplish.
Recommendation: Look at last year’s tax return and identify the key financial drivers of your business. Do the same thing with your day-to-day operations and staffing.
- Prioritize your inventory. If your business sells physical product, you need a good inventory management system. This system does not have to be complex, it just needs to help you keep control of your inventory. Cash turned into inventory that becomes stuck as inventory can create a cash flow problem.
Recommendation: Develop an inventory system with periodic counts (cycle counting) to help identify when you need to take action to liquidate old inventory or research any discrepancies.
- Know your customers. Who are your current customers? Are there enough of them? Where can you get more of them? How loyal are they? Are they happy? A few large customers can drive a business or create tremendous risk should they go to a competitor.
Recommendation: Know who your target audience is and then cater your business toward them and what they are looking for in your offerings.
- Learn your point of difference. Once you know who your customer is (your target audience), understand why they buy your product or service. What makes you different from others selling a similar item?
Recommendation: If you don’t know what makes your business better than others, ask your key customers. They will tell you. Then take advantage of this information to generate new customers.
- Create a great support team. Successful small business owners know they cannot do it all themselves. Do you have a good group of support professionals helping you? You will need accounting, tax, legal, insurance, and employment help along with your traditional suppliers.
Recommendation: Conduct an annual review of your resources, be prepared to review your suppliers and make improvements where necessary.
While libraries are filled with small business advisory books, sometimes focusing on a few basic ideas can help improve your business’ outlook. Please call if you wish to discuss your situation.