National Small Business Week was created to recognize the critical contributions of America's entrepreneurs and small business owners. Did the idea of no deadlines, meetings, or performance evaluations lure you in or was it perhaps the idea of making your own schedule. Whether you are self-employed or just using side-hustles (a.k.a. gigging, freelancing, moonlighting) to supplement your day job, when Uncle Sam recognizes your income it can be a rather unpleasant wake up call. Let's look at some of the things you can do to limit your tax bite
Obviously, the more you make the more you will owe in taxes. A safe estimate is to put away about 40% of the profit from your freelancing to cover your taxes. Once significant amounts of money starts to roll in, you will need to make quarterly estimated tax payments so you don't owe a big chunk of money, including a penalty, when you file your taxes. Though tracking your income (and expenses), may seem boring, taking the time to determine the tax impact from your gigging now can save you "wallet-ache" later.
The proliferation of smart phone usage has increased the use of on-demand types of jobs, which are really just a new spin on contract work. One important thing to remember is although you might say you are "working for" one of those companies, technically you now own your own business. As an independent contractor, you are likely to get a Form 1099-K or 1099-MISC, but with some companies, the commissions and fees that are taken out of your pay aren't reflected on your 1099 and your expenses are not tracked either. As the business owner, you are responsible for tracking the expenses and paying the taxes, after that you can use your money how you want.
For example, a relatively common side job is driving for Lyft, Sidecar, or Uber. Are you an on-demand car-sharing driver? Then, things like mileage, parking, tolls, and even breathe mints, toothpicks, and drinks for your customers are deductible - just keep a record of them and don't forget to include the tips you receive as income since they are also taxable. All the income you receive from side gigs must be reported, even if you don't receive a 1099.
- Keep Good Records - of both income and expenses. Good records typically mean more deductions and lower taxes. You might not know when you are sitting on a nice deduction, like a tax-deductible gift for a business lead, but your tax pro should catch it. Keep a journal of business related activity. The SBA has some good resources, check out their introduction to accounting.
- Get Tax Help at Tax Time - almost by definition as a small business it means going it alone. When it comes to taxes, small businesses have some of the most complicated considerations. Get help finding all the deductions you deserve and pay the least taxes you can.
- Use the free resources on the IRS.gov page, Self-Employed Individuals Tax Center, to help get you started.
It is satisfying to build something with your skills and talent, especially a small business that makes money. Use all of your skills and tools and get all the help you need to ensure you are a success and keep all the money you can.