Open a aspect enterprise? First, grasp these tax suggestions
What started as a fun home activity for Amy Abad-Sosa has grown into a source of income for small businesses.
The 29-year-old mother of two and accountant from Bogota, New Jersey, started her new project “Adventure Bins” this fall – homemade activity boxes for toddlers and preschoolers.
“We’re not throwing thousands of dollars into this, but it’s not a bad idea to have extra money,” she said.
While the pandemic has put pressure on numerous small businesses and weighed millions on household incomes, the pandemic has spurred people to find new ways to make money – be it through creating and selling activity boxes, delivering groceries, or looking for other forms of freelance work.
Internet influencers also monetize content, from makeup to manicure tutorials.
OnlyFans, a subscription service that acts as a video platform for influencers, saw new registrations grow by 75% month on month between March and April – right at the start of the pandemic.
For these new entrepreneurs, however, a surprise is just around the corner.
They need to settle the money they have earned and report it on their 2020 income tax return.
“The main problem with starting a new business or side business is not understanding the tax environment,” said Mackey McNeill, CPA and consumer finance lawyer with the American Institute of CPAs.
“You bring your box of supplies to your CPA and they say,” You owe the government $ 5,000, “she said.” That first year you are behind schedule and you are owed to the government. “
Here’s how you can avoid these tax mishaps in the first year.
Know your obligations
Regardless of whether you have just started your new side business or have been in business for years, you must state the income in your tax return for 2020.
Some online services, including Uber, OnlyFans, DoorDash, and Etsy, will issue you a Form 1099 in January listing the money you made the previous year. A copy of this form will also be sent to the IRS.
Here’s the catch: not all services will give you this information. For example, to receive a Form 1099-K, merchants on Etsy must have sales of $ 20,000 or more through Etsy and have received at least 200 payments in that year.
Even if you don’t get a 1099, you need to closely track and report income.
“For people who do things from home – making and selling crafts, for example – if you don’t go through a marketplace like Etsy or Shopify, track it yourself,” said Paula Small, a small business accountant and owner of Small Stepping stone in Manassas, Virginia.
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“Services like GrubHub and DoorDash have some reports that you can log into, but they won’t issue a Form-1099 until January,” she said. “By then you will have forgotten everything you did the year before.”
Keep a table of your income and keep track of your expenses. Consider keeping a separate commercial bank account for a better view of inbound and outbound spending.
Abad-Sosa currently uses Google Sheets – free spreadsheet software – to keep track of their income and expenses, including the cost of crafts and shipping.
“Accounting is my baby,” she said. “If you’re starting a small business, keep an excel spreadsheet about what you’re paying and what you’re buying.”
Put cash aside for taxes
Small business owners pay estimated taxes on a quarterly basis. The due dates are January 15th, April 15th, June 15th and September 15th.
This can surprise new entrepreneurs who are used to having income taxes withheld from every paycheck as employees.
Here’s another tax hour: while employees share wage tax with their employer – 12.4% for Social Security and 2.9% for Medicare – self-employed pay the entire amount themselves. It’s part of their quarterly payment to the tax officer.
Talk to a tax advisor about how much you will need for each quarterly payment to the IRS. In general, a good rule of thumb, according to Small and McNeill, is to set aside 25% to 35% of your income.
Monitor your expenses
When it comes to expense deductibility, the IRS has a number of rules that determine whether a business is a business or a hobby.
All earnings must be reported, but if you are into a hobby, you cannot deduct the cost you paid to participate.
Still, keep track of your expenses and have them ready when it’s time to file your taxes.
“Gather all of your expenses so you can get the deductions you’re entitled to and lower your net income,” said Lisa Greene-Lewis, CPA and TurboTax Specialist.
These breaks can include the home office deduction, the mileage deduction, as well as the cost of purchasing the materials and equipment needed for your business.
Hire a professional
Invest in yourself. Hire an expert to walk you through year-end tax planning and put you on a solid footing for 2021.
This tax year could prove to be a complicated one as taxpayers could weigh one Form W-2 from their regular job as well as several 1099’s due to unemployment and various sources of income.
“Good advice is a healthy return on investment,” said McNeill. “Now is the time to think about what 2020 will be like for you and whether you will be happy or sad when April comes.”