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We’re getting close to that dreaded time of year again: Tax season.
If you started making money through a side hustle or the COVID-19 pandemic led you to look for a work-from-home opportunity, your 2020 taxes might look a bit different this year.
Ready to make sense of paying and filing taxes on a home-based business—and even learn a few ways to save some money? Let’s get started.
Taxes on home-based business: What you need to know
Here are some things that will help make preparing your taxes less stressful.
1. Yes, you have to pay taxes on a home-based business
If you have a home-based business, you’ll need to pay federal income tax. You’ll also need to pay a 15.6% self-employment tax on any earnings where you make over $400.
2. Open a separate account for your side gig
Your side hustle is a business. Therefore, you need to create a business checking account to keep side-gig earnings and expenses separate from your personal or family account. Come tax time, figuring out the taxes on your home-based business will be so much easier.
3. File your taxes online and use direct deposit
The IRS is warning people that filing last year’s taxes can take longer than usual. Like all of us, the IRS has had a few extra things in their to-do queue. Their representatives are caring for tasks like audits, payment follow-ups, and answering questions related to economic stimulus payments.
According to the IRS, about 90% of Americans file electronically. Even though only 10% of people file paper taxes, that’s still millions of forms to review. If you want to get your taxes taken care of (and get a return) faster, file electronically and provide direct deposit information.
Doing everything online is not only easier and faster, but it’s also safer. When you file electronically, you’re sending personal information through a network that’s encrypted. Sending your tax returns through the mail can pose a higher risk for identity theft.
4. Plan for retirement
Saving some side-hustle money can help ensure a more comfortable retirement. It can also help reduce your tax bill.
Two ways to do this are:
- SEP IRA: You can contribute up to 25% of your net income from your side gig (for 2020, the maximum is $57,000)
- Solo 401(k): You can contribute up to 100% of the net income from your side hustle, though the cap is the same for the SEP IRA ($57,000).
5. Don’t forget about your investments
Investing in stocks is a great way to earn extra money and create some financial security for your future. You will be taxed depending on how long you’ve held your shares and what you’ve earned from sales of shares. Generally, profits you earn can result in a tax of 0%-20%.
6. Avoid waiting until the last minute
Waiting until 11 PM on April 15th to file your taxes will cause an immense amount of stress. Plus, it probably won’t even be enough time to file. Now that you have a variety of side-hustle deductions to run through, tax prep will likely take longer than usual.
Even if you’re sending your records to a tax professional, you’ll want to avoid waiting until the last moment. Tax season is their busiest time of year. Wait until the last minute and they might not be able to take care of your tax documents on time.
You’ll also want to avoid procrastinating on paying your taxes. Paying late can result in an audit or costly fees. Additionally, waiting to pay a year’s worth of taxes at one time can leave you stressed out and broke. Instead, either set aside money each month (around 20% – 35%) in a special savings account just for tax money so you have enough to pay when you file, or pay your taxes quarterly.
Save money while making money: Tax breaks for your home-based business
As a business owner, you are entitled to certain deductions, which can save you a hefty sum of money. Here are a few ways to save money on your taxes this year. (Before filing your taxes, be sure to check with a tax professional. They’ll help ensure you get all the deductions you deserve and avoid costly mistakes.)
- Health insurance: You may be able to deduct the premiums you pay for dental, medical, and some long-term care insurance coverage. The coverage can be for you, as well as a spouse and dependents
- Paying your kids: Need some extra help with your side gig? Hire your kids. Tax laws allow you to deduct all the money you pay to your children, who also don’t have to pay taxes on what they earn (until they earn more than the standard deduction amount for a dependent). Besides saving you some money, it will allow you to help your child learn about making money, money management, and saving for big things (like their college fund!).
- Your home office: Is a portion of your home used exclusively for your home-based business? Then, you can take a tax deduction, which will allow you to write off a portion of your utility bills, mortgage or rent payment, property tax, and maintenance costs. Additionally, any costs used to set up/maintain your home office is also deductible. This includes your desk, office chair, computer, software investments, classes, subscriptions, etc.
Looking for side-gig opportunities to fit your needs?
If you’re looking for a new side gig or haven’t started a side hustle yet but like the idea of working remotely and social selling, consider working with Vector Marketing. Doing so will enable you to do something different, find your purpose, and make some passive income.
The Vector team will provide you with training and support as long as you work with us. We’re just as determined as you are to make your side gig successful.
Do you want to learn more about our part-time work opportunities? Contact us to request an interview!