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Some people think that because their side-business isn’t their main form of employment at the moment, they do not have to worry about the tax side of the equation. Sadly, this is not the case, and if you are running a business even if it is only to earn you a little extra on the side you do need to take it into account when filing your return.
To ensure that you stay on the right side of the law and your side-hustle is free to flourish, here are some of the main things you need to know about the tax side of the equation:
Income is Income
As I said above, just because you are making money from a side-hustle, doesn’t mean that you don’t have to pay tax on it. Whether you make your money from email marketing, selling stuff from your website or walking neighborhood dogs, that money needs to be included as part of your income.
Hobbies and Businesses are Reported Differently
In the United States, hobbies and businesses are reported differently with line 21 being used to report hobby income and Schedule C being used to file business income. That means it’s important that you work out whether your side-hustle should be considered a hobby or business. If your side-hustle is more of a hobby, you will not be able to claim deductions in excess of your income. Whereas it is possible to do so with a business.
So, how do you work it out? Ideally, you should ask a tax official to help you with this, but it’s pretty safe to say that if you are making money incidentally perhaps by selling something you’ve created occasionally to recoup your costs it’s a hobby, whereas if you’re making a regular income, and you’ve set up your operation for continuous production, it is likely to be a business.
There are Lots of Deductions You Can Make
If you want to keep more of the money you make from your side-hustle, you will need to learn more about deductions. Deductions are expenses you incur in the course of your business, for which you do not have to pay tax on. In order to claim these deductions, you will need to track them, whether that be by using an app like Trip Log, which tracks mileage, or by keeping the receipts from your supplier. If you do not have proof of deductions, you cannot claim them and you will pay more tax as a result.
Deductions Can be Partial
If, for example, you use your phone for both business and personal calls it is possible to make a partial deduction for some of the cost of running that phone. This is called pro-rating and you can do it on lots of things including your home utilities and mortgage payments if you run your business from home.
Never File Late
Running a side-hustle can be very time-consuming but don’t let that get in the way of filing your taxes because if you do, you could incur significant penalties that could wipe out a lot of your profit.
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