Tax season is just about here, and there’s no harm in getting started with your tax prep.
In fact, spending a little time getting organized today can save you hours putting your small business taxes together when you are ready to file. Not to mention help you get that refund you deserve.
While you’re gathering your receipts and other tax forms and documents, don’t forget that you can write off your side hustle business expenses to lower your taxes. Here’s how.
Do you pay small business taxes on side hustles?
If you earn money outside of your regular employment, the Internal Revenue Service (IRS) considers you a business owner.
This is most common for freelancers and contractors, but any business you run that earns a profit is eligible for self-employed tax deductions. No business is too small to report.
For example, if you help people out with computer trouble and get paid $100, you are classified as running a business. Are you an Independent tour guide or weekend art class instructor? Then you also have a side business.
And it doesn’t have to be a full-time income, either. Part-time side hustles absolutely count as well.
What exactly can you can write off?
The good news is any expense that is directly related to your business can be written off.
If you are in a band that gets paid for gigs, for example, you can write off a variety of costs. Perhaps you’re buying instruments, taking music lessons to improve your skills, or using your computer or smartphone to book gigs. You can write off pretty much most of it.
Online side hustlers can even write off computers, printers, office supplies, and conferences.
However, some business expenses can not be written off fully. Let’s say you travel for your business and write off the cost of airfare, parking, and hotels. When it comes to food and meals, though, those can only be partially written off.
A good litmus test when deciding whether you can write something off is to only write off expenses that you have solely because of your business. If you would have had the expense anyway (like spending money to feed yourself) it’s not eligible for a write-off.
Where do you add your write off on your taxes?
The IRS requires that you report and pay small business taxes on all income, even if it’s not from an employer that reports your earnings. This income is reported to the IRS on your tax return on a Schedule C.
Schedule C is an addition to your 1040 form you use to file your taxes. The form is fairly straightforward and offers boxes to input your revenue, the cost of goods sold, and other related business expenses.
At the bottom of the form, you subtract your business expenses from your income to calculate your business profit. That number carries over to your 1040 for your final tax calculation.
Because every expense lowers your profit, it also lowers your taxes. Therefore, if you’re in the 25 percent tax bracket, each business expenses lowers your taxes by about 25 percent of the cost of the purchase.
So if you make a purchase that costs $2000 for your business, your taxable income will go down by about $500. Or, whatever your top marginal tax rate is. Most middle-class earners pay 25 or 28 percent.
How can you avoid an audit?
Some business owners might think they can write off all sorts of personal expenses to lower their taxes.
However, that is far from the case. If you try to cheat on your small business taxes by writing off more than you should, you are opening yourself up to an audit, potential fines or even jail time.
Here are some common red flags the IRS looks out for when deciding who gets an audit.
Consistent business loss
The government understands that new businesses may not make money their first couple of years. Therefore, you can declare a net loss on your taxes and pay nothing on your business earnings.
On the other hand, if you have a loss multiple years in a row, the IRS considers it a hobby, not a business. So you can no longer write off related expenses.
That’s why amateur photographers and living room DJs should be careful about writing off cameras and music equipment if they’re not earning enough to cover their business expenses.
Excessive meal and entertainment deductions
If you regularly travel for your business, it’s reasonable that you would have some meal and entertainment deductions.
But if it looks like you are adding a large portion of your meals as business write offs, you could get an audit notice in the mail from the IRS.
Home office deductions
The home office deduction falls into a grey area of tax deductions. That’s because the IRS often assumes that a home office or other home workspace is available for both business and personal use.
So unless you can prove that a specific percentage of square feet are used exclusively for your business, you are best off leaving these kinds of self-employed tax deductions off of your tax return.
Business vehicle deductions
Like a home office, the IRS only allows you to deduct vehicle expenses if you can prove they are 100 percent related to your business.
So if you only own one vehicle that you use for both work and personal use, it is best to forgo this deduction.
However, if you have a second vehicle that is used primarily for business, like a truck for construction jobs or a van for a cleaning business, you can write that off without worrying that much about an audit.
At the end of the day, you should take advantage of business tax deductions as much as possible, especially if you’re self-employed that are available to you.
Just make sure you follow the law and keep good records for auditing purposes. That way you can enjoy big savings on your taxes for many years to come.