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.