When you have a side hustle income, it’s important to understand the tax implications of your business.
In this article, we will go over some key points about side business taxes that you need to be aware of, so you don’t find yourself in hot water with Uncle Sam.
What side business taxes are and why do you have to pay them?
Side business taxes are the taxes that you need to pay on any income that you earn from your side business.
The reason you have to pay taxes on this extra money is that the government views it as taxable income. This means that you will need to pay both federal and state taxes on this income.
There are a few different ways to file your side business taxes. The most common way is to file a Schedule C with your personal income tax return. This will allow you to report your business income and expenses on your personal tax forms.
Another option is to file a separate business tax return. This is typically only done if your side business is generating a significant amount of income.
If you choose to file a separate business tax return, you will need to obtain a business tax ID number known as an EIN (employer identification number) from the IRS. It’s the business equivalent of a social security number.
What are the tax rates for side business income?
The tax rates for side business income depend on the amount of income that you earn. Because it is a side business, you are likely qualifying as a sole proprietor which means the tax rate is the same as for your individual income taxes.
For single filers, your first $$10,276 that you earn from your side business is taxed at a rate of 10%. The next $31,500 (your total income would be up to $41,755) is taxed at a rate of 12%. The tax brackets continue to increase from there. You can see the current tax brackets here.
What are some common deductions for side businesses?
There are a number of common deductions that side businesses can take. These deductions can help to reduce your tax liability and lower your tax bill. Some of the most common deductions include:
- Home office deduction: If you have a dedicated space in your home that is used solely for your side business, you may be able to deduct a portion of your rent or mortgage payments.
- Vehicle expenses: If you use your personal vehicle for business purposes, you may be able to deduct a portion of your vehicle expenses, such as gas and maintenance.
- Business expenses: There are a number of business expenses that you can deduct, such as office supplies, marketing costs, and professional fees.
For more information on side business taxes, please visit the IRS website.
How are side business taxes calculated and what deductions can you claim?
When it comes to side business taxes, there are a few key things that you need to know.
First, you will need to calculate your taxable income. This is the total amount of income that you earned from your side business minus any deductions that you are eligible for.
Next, you will need to determine what tax bracket you fall into. The tax bracket you fall into will determine the tax rate that you will pay on your taxable income.
Finally, you will need to figure out what deductions you can claim. There are a number of deductions that side businesses can claim, such as the home office deduction and vehicle expenses.
Finally, you’ll need to make sure you also calculate your self-employment taxes. Self-employment taxes are the Social Security and Medicare taxes combined. If you work for a company they typically pay for half of this tax and the other half is taken out of your paycheck. However, for a side business, you are required to pay for both halves on your self-employment income.
What if you make a mistake on your tax return – will you get penalized?
If you make a mistake on your tax return, you may be subject to penalties and interest. However, if the mistake is an honest one, you can usually avoid penalties by correcting the mistake as soon as possible.
How can you minimize your side business taxes liability and keep more money in your pocket?
There are a few key things that you can do to minimize your side business taxes liability. First, make sure that you are taking advantage of all of the deductions that you are eligible for. This includes deductions for things like your home office and vehicle expenses.
Next, try to keep your business income low by only reporting the income that you absolutely need to. This means only reporting the income that you actually receive, rather than estimating your income.
Finally, make sure that you are filing your taxes on time. If you owe taxes and you don’t file your return on time, you may be subject to late fees and penalties.
When and how to make estimated payments for your side business taxes
If you will owe taxes on your side business income, you may need to make estimated tax payments throughout the year. Estimated tax payments are made quarterly and are due on the 15th day of April, June, September, and January.
You can make your estimated tax payments online, by mail, or with a credit or debit card. You can find more information about making estimated tax payments here.
What are estimated payments?
Estimated tax payments are payments that you make throughout the year to the IRS in order to cover your expected tax liability. You’ll make quarterly payments for your estimated taxes. The estimated tax payments are what is being referred to when you hear a business owner talking about quarterly taxes.
Paying taxes on the extra money you earn with a side business doesn’t have to be complicated or stressful. By taking advantage of deductions and filing your taxes on time, you can minimize your tax liability and keep more money in your pocket.
If you still struggle with figuring out taxes on your extra income, consider hiring a professional accounting service to help you or using tax software to walk you through filing.
Frequently Asked Questions
Do you still have some questions about side business taxes? We’ve answered the most common questions below.
At what point does a hobby become a business?
There is no definitive answer to this question. However, the IRS does have some guidelines that can help you determine whether or not your hobby is a business.
First, you should consider whether or not your hobby is generating income. If your hobby is generating income, then it’s likely that the IRS will consider it a business.
Second, you should also look at whether or not you’re spending money on advertising, marketing, inventory, equipment, and other costs associated with running a business. If you are spending these types of funds, then it’s likely going to be considered a business.
How does opening a business affect my taxes?
Opening a side business can have a significant impact on your taxes. You will likely need to obtain a business license from your state and pay any necessary state taxes and sales tax.
Additionally, you will be responsible for paying federal income taxes on your business income. You may also be required to pay estimated taxes throughout the year.
What can I write off as a small business owner?
There are a number of things that you can write off as a small business owner. This includes deductions for your home office, vehicle expenses, business equipment, and more. For a complete list of deductions that you may be eligible for, please visit the IRS website.
What is the self-employment tax?
The self-employment tax is a tax that is paid by self-employed individuals. The self-employment tax rate is 15.3%. This tax is used to fund Social Security and Medicare.