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. 


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