Whether 2020 was the year to grow your business or start a side hustle, there are a few things to keep in mind when filing your taxes.
Profits are taxable income. Even if your love of sublimation or photography is just a hobby that you didn’t start up as a profitable business, if you profited from it, you’ll need to report it on your taxes, according to the IRS. With recent tax reform, hobby expenses are no longer deductible even though the income is taxed. For small business income, however, the rules are different.
File a return on business income over $400. If you made over $400 from your business, you’ll need to file a tax return on that income. If you’re considered the sole proprietor of your business and self-employed, then in addition to paying the taxes on your income for 2020, you’ll need to set up a schedule to pay future estimated taxes every quarter to the IRS. You should expect to pay taxes at a higher rate as you are the only one making contributions to both Social Security and Medicare taxes.
If you formed a partnership, corporation, or LLC, check with the IRS Business Structures reference for any forms and tax structures you’ll need. You might also want to consider getting help from a tax professional to help guide you through the process since different business structures affect how you are taxed and how often taxes are paid.
Document and save your business receipts and expenses. If you’re paying quarterly taxes and want to itemize your business expenses, you must show proof of expenses and income. If you choose to itemize deductions if they exceed the standard deduction, here are a few business expenses you can deduct:
• Equipment purchased to run or make products
• Materials used to make products
• A portion of your phone and internet expenses
• Client business meals (50%)
• Workshops, classes, or webinars (virtually or otherwise)
• File storage fees for digital files
• Advertising costs (including social media)
• Website expenses
• Software costs
• Professional membership fees
• Mileage to travel for business purposes
• Home office expenses
Save all of your receipts (photograph or scan paper receipts), track your mileage, and keep your files backed up. Even if you don’t end up itemizing, tracking expenditures helps you evaluate and plan for future growth.
Ask a Tax Pro. Have questions about how much you should pay taxes on and when? What about your state and local taxes? Are you confused by all those boxes on five different forms? Consult a professional who can help you mind the store, so to speak. A tax pro can help guide business decisions that affect your taxes and keep you out of hot water with the IRS, which is much less forgiving of mistakes. Make it a point to maximize your deductions and minimize your taxes using solid advice. Happy 2021!
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This content is not intended to be a replacement for tax or legal advice.
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