As technology increases, it has become easier than ever to find creative ways to earn money outside traditional full-time employment. While being a part-time entrepreneur is only intended to supplement your income, it can significantly impact your taxes. The IRS requires that you report any income above $400 earned from hobbies or other activities. Although the process is far from complex, it can be a bit confusing figuring out how to report this additional income.
The first step is to figure out if your earnings fall under the classification of “other income” or if they are actually considered profit from a business. Business income must be reported on a Schedule C, whereas other forms of income can be reported directly in Form 1040. Other forms of income that typically stem from hobbies, such as contest winnings, royalties, and non-monetary prizes would also need to be reported to the IRS. One little known fact about reporting income is that bartering is also considered a form of income by the IRS. In this case, while money has not changed hands, a monetary value is usually assigned to the goods or services being bartered that facilitate the exchange. This value is usually taxable and must be fair market value for similar goods and services.
The main impact of a part-time business that is generating income is that payroll taxes like Social Security and Medicaid must be paid. When wages are earned through employment, the employer pays half of these taxes and the taxpayer pays the other half. However, when operating a business the taxpayer has the entire burden of these taxes.
Another common impact on taxes is unfortunately one which is typically unexpected. Additional income means the likelihood of moving up in the tax bracket, which would mean a higher percentage demanded by the IRS.
If your part-time, income-earning activities fall under the category of a real business and you have not actually taken the steps to structure it as an LLC or other business entity, then for taxation purposes it is considered a Sole Proprietor business. As a business it may qualify for many deductions, such as business mileage, business expenses like printing and office supplies, and in some cases even home office deductions. It makes sense to consult with a tax expert in order to maximize deductions and lower taxable income.
Lower Tax Liability
Consulting with a tax expert or CPA may also help you find ways to minimize tax liability through dedicating a portion of side earnings into a form of savings. While the money may not seem much as it trickles in, investing it into an interest bearing savings account will quickly add up. There are many options available such as contributing to your employer’s Health Savings Account (HSA), a solo 401(k), or an IRA. Explore the various options available and determine which is best suited to your needs. There are multiple benefits to this approach. A healthy savings account contributes to peace of mind and will aid in future retirement. In many cases it may also help lower taxable income.
Every day there are new opportunities to generate additional income. Whether you pick up some Uber passengers as you run errands around town, rent out your apartment through AirBnB while on vacation, or sell arts and crafts through Etsy, monies earned must be reported to the IRS. Make sure to know how these side hustles are impacting your taxes and you won’t be surprised come tax time.
Not sure how being a part-time entrepreneur is affecting your financial bottom line? Contact us today for a free consultation.
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