Starting a Side Business to Make Extra Cash? Master these tax tips first.

Starting a Side Business to Make Extra Cash? Master these tax tips first.

Regardless of whether you just started your new side business or you’ve been operating for years, you’ll need to report the income on your 2020 tax return.

Some online services, including Uber, OnlyFans, DoorDash and Etsy, will issue you a Form 1099 in January, detailing the money you’ve earned in the prior year. A copy of this form goes to the IRS as well.

Here’s the catch: Not all services will give you this information. For instance, in order to receive a Form 1099-K, merchants on Etsy must have made at least $20,000 in sales via Etsy and they must have received at least 200 payments that year.

Even if you don’t get a 1099, you’re on the hook for accurately tracking and reporting income.

Here’s how to head off those first-year tax mishaps.

Set aside cash for taxes

Small business owners pay quarterly estimated taxes. The due dates are Jan. 15, April 15, June 15 and Sept. 15.

This can come as a surprise to new entrepreneurs who are accustomed to having income taxes withheld from each paycheck as employees.

Here’s another tax lesson: While employees share the burden of payroll taxes with their employer – 12.4% for Social Security and 2.9% for Medicare – self-employed people pay the entire amount themselves. It’s part of their quarterly payment to the taxman.

Watch your expenses

When it comes to deductibility of expenses, the IRS has a set of rules that determine whether a venture is a business or a hobby.

All income must be reported, but if you’re engaging in a hobby, you can’t deduct the expenses you paid to participate.

Nevertheless, track your costs and have them ready when it’s time to file your taxes.

Those breaks can include the home-office deduction, the mileage deduction, as well as expenses incurred when you bought materials and equipment necessary for your business.

Hire a professional

Invest in yourself. Hire an expert to walk you through year-end tax planning and get you on solid footing for 2021.

This tax year might prove to be a complicated one, given that taxpayers could be juggling a Form W-2 from their regular job, as well as multiple 1099s from unemployment and different sources of side-gig income.

Year-End Tax Tips for 2019

Year-End Tax Tips for 2019

Here are 10 things to consider as you weigh potential tax moves between now and the end of this year.

Set some time aside to plan

Effective planning requires that you have a good understanding of your current tax situation, as well as a reasonable estimate of how your circumstances might change next year.  There’s a real opportunity for tax savings if you’ll be paying taxes at a lower rate in one year than in the other.  However, the window for most tax-saving moves closes on December 31st, so don’t wait till the last minute.

Defer income to next year

Consider opportunities to defer income to 2020, particularly if you think you may be in a lower tax bracket then.  For example, you may be able to defer a year-end bonus or delay the collection of business debts, rents, and payments for services.  Doing so may enable you to postpone payment of tax on the income until next year.

Accelerate deductions

You might also look for opportunities to accelerate deductions into the current tax year.  If you itemize deductions, making payments for deductible expenses such as medical expenses, qualifying interest, and state taxes before the end of the year (instead of paying them in early 2020) could make a difference on your 2019 return.

Factor in the AMT

If you’re subject to the alternative minimum tax (AMT), traditional year-end maneuvers such as deferring income and accelerating deductions can have a negative effect.  Essentially a separate federal income tax system with its own rates and rules, the AMT, effectively disallows a number of itemized deductions.  For example, if you’re subject to the AMT in 2019, prepaying 2020 state and local taxes probably won’t help your 2019 tax situation and could hurt your 2020 bottom line.  Taking time to determine whether you may be subject to the AMT before you make any year-end moves could help you avoid a costly mistake.

Bump up withholding to cover a tax shortfall

If it looks as though you’re going to owe federal income tax for the year, especially if you think you may be subject to an estimated tax penalty, consider asking your employer (on Form W-4) to increase your withholding for the remainder of the year to cover the shortfall.  The biggest advantage in doing so is that withholding is considered as having been paid evenly throughout the year instead of when the dollars are actually taken from your paycheck.  This strategy can also be used to make up for low or missing quarterly estimated tax payments.  With all the recent tax changes, it may be especially important to review your withholding in 2019.

Maximize retirement savings

Deductible contributions to a traditional IRA and pre-tax contributions to an employer-sponsored retirement plan such as a 401(k) can reduce your 2019 taxable income.  If you haven’t already contributed up to the maximum amount allowed, consider doing so by year-end.

Take any required distributions

Once your reach age 70 ½, you generally must start taking required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans (an exception may apply if you’re still working for the employer sponsoring the plan).  Take any distributions by the date required – the end of the year for most individuals.  The penalty for failing to do so is substantial: 50% of any amount that you failed to distribute as required.

Weigh year-end investment moves

You shouldn’t let tax considerations drive your investment decisions.  However, it’s worth considering the tax implications of any year-end investment moves that you make.  For example, if you have realized net capital gains from selling securities at a profit, you might avoid being taxed on some or all of those gains by selling losing positions.  Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 if your filing status is married filing separately) or carried forward to reduce your taxes in future years.

Beware the net investment income tax

Don’t’ forget to account for the 3.8% net investment income tax.  This additional tax may apply to some or all of your net investment income if your modified adjusted gross income (AGI) exceeds $200,000 ($250,000 if married filing jointly, $125,000 if married filing separately, $200,000 if head of household).

Get help if you need it

There’s a lot to think about when it comes to tax planning.  That’s why it often makes sense to talk to a tax professional who is able to evaluate your situation and help you determine if any year-end moves make sense for you.

Need more help?  Please contact or make an appointment with us here, we are here to help. 

4 Key Ways to Save Money for Your Business

4 Key Ways to Save Money for Your Business

Managing company finances can feel like a huge task. That’s why it’s sometimes a good idea to get back to the fundamentals. For example, the more your company saves, the more your company makes.

Simple, right?

But cutting costs isn’t always that easy. Every company has to navigate different types of expenses.

Where can you save money, and where should you leave things as they are?

You’re ready to save money for your business.  Read on and discover 4 surefire ways to cut company costs and improve your bottom line.

1. Cut Unnecessary Types of Expenses

What kind of incentives are you dishing out for your employees? If things are getting tight, it may be time to re-examine that luxury coffee machine in the kitchen. Nobody likes their perks being taken away, but it’s better than having to downsize the company and let people go.

And it’s not just about incentives. Cut your power bill by hooking all electronics to power strips. At the end of the day, you can turn these off to avoid losing money to standby power.

Anytime you make a payment, ask yourself if the service is necessary. And if it is, ask yourself how you can find ways to cut costs.

Over time, these small changes can lead to big savings.

2. Negotiate Better Rates

Every business works with a variety of vendors, whether they’re selling office supplies or product materials. You should know that your rates are never set in stone. One of the best ways to cut company expenses is to head to the negotiation table.

You have more power than you might think. Many vendors are willing to lower their rates. For them, making less money is better than making no money.

Do your research beforehand to see what others are paying. Renegotiating doesn’t carry a large risk, but you don’t want to insult your vendors with a ridiculous request.

3. Reduce Your Job Requirements

Experienced workers expect larger salaries. And that experience doesn’t always translate into additional profits for your company. When you’re filling a vacancy in your business, ask yourself if you really need an employee with five years of in-person training.

By hiring recent graduates, for example, you can afford to pay them much less. Although they’re lacking in real-world knowledge, they’ll have the education they need to fulfill the role. Just be sure you choose candidates who excel at learning on the job.

4. Use Low-Cost Advertising Methods

Traditional advertising is expensive. Whether you’re running a PPC campaign or buying space in relevant magazines, the costs add up quickly. The truth is most small businesses can’t afford the level of advertising necessary to see worthwhile results.

That’s why many are turning to more cost-effective advertising solutions. If you rely on your website to convert customers, then turn your attention to search engine optimization. By improving your site’s ranking, you’ll get more eyes on your business and thus more customers.

Even brick-and-mortar locations can benefit from inbound marketing, such as creating informative articles and YouTube videos.

 

5 Useful Tax Tips for Ride-share Drivers to Keep in Mind

5 Useful Tax Tips for Ride-share Drivers to Keep in Mind

As freelance jobs become more and more popular, opting to work as a rideshare driver is a great self-employment alternative that many are choosing nowadays. The way we think about commuting has been forever altered thanks to the popularity of platforms like Uber and Lyft, with an increasing demand for rideshare services, which also opens more positions for drivers to take. However, rideshare drivers must be aware of the tax implications this self-employment option brings. Here are five useful tax tips that rideshare drivers should keep in mind when filing their income.

1.One of the most important steps every freelancer or self-employed worker should follow is to create a system to track their tax deductions. Whether we decide to use an expense-tracking spreadsheet or a mobile app, being consistent and documenting every single business relates expense is a must. This will help us record and identify every deductible expense we made during the year, and facilitate our income tax filing process.

2.Many freelancers and self-employed workers tend to struggle when keeping track of their personal expenses and business expenses. A great way to solve this issue is by having separate bank accounts, one for our personal expenses, and one to use exclusively for business expenses. This will not only help us manage our personal and commercial finances better but will help us keep track of our business expenses, too.

3.Something that many people tend to ignore for some reason is that there are plenty of apps available, both free and paid, that can help us when tracking expenses and deductions. Taking advantage of this reliable and effective tools to document the number of trips we have, how often we charge fuel, the time we’ve spent driving, and any car repair costs will make our filing process more accurate and easier than ever.

4.Now, as rideshare drivers, we should always remember that mileage tracking represents our biggest tax deduction. Therefore, we must be very careful and consistent when recording the miles we drive. Since the IRS requires a mileage log when filing such deduction, we shouldn’t take this lightly. Otherwise, we might not be eligible for this deduction, and this would have a significant impact on our income taxes without a doubt.

5.Lastly, rideshare drivers who work with apps like Uber and Lyft have access to a very resourceful tool, their driver dashboard. This is where drivers can find very useful information, including their annual income, some of the deductions they might be eligible for, as well as the commissions that the apps are taking out of they pay.

5 TAX RECORDKEEPING TRICKS FOR VEHICLE AND TRAVEL COSTS

5 TAX RECORDKEEPING TRICKS FOR VEHICLE AND TRAVEL COSTS

One of the most tiring chores for a business is keeping all required records related to a vehicle and business travel. These records are needed for tax and financial purposes. For taxes, the law is very specific on the records you’re required to keep if you want to deduct your expenses. Anything you can do to save yourself and your staff time and effort without risking write-offs is welcome.

1. Use an app
If you use a personal vehicle for business, you usually need an odometer reading for each business trip to show the portion of vehicle usage for business. This means jotting down the odometer reading at the start and end of each trip to see a customer, go to the bank, or visit a vendor. But this can be automated for you if you use an app designed for vehicle recordkeeping. The GPS on your mobile device reads the exact travel distance for each trip, noting the time and date. You only have to add to this record the purpose of the trip. What’s more, you can find an app that ties into your other accounting system (QuickBooks has its own app) to further simplify tax return preparation.

You can also use an app to keep track of your travel expenses while away on business. Be sure to check on all of the required information needed to deduct these expenses in IRS Publication 463.

2. Rely on sampling
IRS regulations permit you to use a recordkeeping method called sampling. This means if you have adequate records for a part of the year, you can extrapolate the results for the full year. For example, if you keep good records for the first week of each month that show that 65% of the use of your pickup is for business purposes, and your invoices and bills show the same business pattern for the rest of each month, you can treat this partial record as proof of 65% business use for the entire year. Similarly, you can keep records for one full month as proof of the full year’s vehicle usage, as long as the month is representative of your driving pattern for the year.

3. Scan receipts
Instead of saving scraps of paper, hotel printouts, and other written evidence of costs related to business travel, just scan them into your mobile device. Make sure you have a scanner app on your device.

The challenge with scanning receipts is to have a system for organizing them so they can be readily retrieved if or when needed.

4. Forget receipts
When you travel or are out and about in town on business, you don’t need to retain receipts if the cost of the expense is less than $75. For example, on an out-of-town business trip if you take a taxi from the airport to your hotel at a cost of $50, you don’t need a receipt (but must follow other recordkeeping rules for the expense).

But the $75 rule does not apply to lodging. So, if you stay at a Travel Lodge, you’re going to need a receipt regardless of the cost.

5. Rely on per diem rates
Instead of trying to substantiate lodging and meal costs while traveling away from your regular business location, you may be able to use a government-set daily rate:

GSA.gov has per diem rates. There is a basic rate fixed for the government’s fiscal year ending September 30, with higher rates for certain destinations.
IRS high-low substantiation rates: one rate for most locations within the continental U.S., but a higher one for travel to set locations. The rates also apply for the government’s fiscal year (those for FY 2019 are here ).
Note: Self-employed individuals can use per diem rates only for meals and incidental expenses (not for lodging).

Final thought
Work with your CPA or other tax advisor to make sure your recordkeeping practices for your business are in line with IRS requirements and financial reporting standards.