Turning your hobby into a side hustle can often be intimidating for many individuals. Not only is there the fear of failure and uncertainty involved, but there is also a lot to learn when it comes to filing your taxes the following year. Despite these potential roadblocks, taxes should never deter you from going after your passion project, especially if you work with a tax saving professional to help you accomplish your goals.
At Tax Saving Professionals, we help many of our clients navigate the world of new business. There are numerous considerations when turning your passion project into tax savings and following the IRS’ specific rules will allow you to reap the tax benefits that accompany owning a small business. These tips below will help you start your new project, while staying tax compliant and prepared for your first year in business.
The IRS states that the best way to determine if your passion project is a business or hobby is if it’s meant to make you a profit. A true hobby (not a business venture) is an activity that is not done for profit. However, determining which applies to your passion project isn’t always as clear.
A few things to ask yourself as you’re making the distinction between a hobby and business include…
While you will need to file an income tax return if your net earnings from self-employment were $400 or more, being aware of this distinction between hobby and business from the IRS can help determine how you move forward in your passion project.
Keep Your Current Job
While it may be exciting to jump into a new passion-filled side gig, it’s important to save up some money before leaving your current role. Keeping your current source of income not only protects your bank account, but it also ensures that your investments and other assets are protected as well.
Maintaining your current income also allows you to make decisions in your passion project with a clear mind. Jumping into a new project requires a lot of decision making, and if you are worried about not maintaining your income, you may make decisions out of fear instead of what is truly best for your business. Holding onto your current stream of income can be vital for your passion project to take the time it needs to flourish.
Organization is key when running any business, and your passion project should be no different. Consider utilizing an invoicing database to keep track of payments due, total income, expenses and more. Not only will this allow you to provide better service to your clients, but it will also make tax season a breeze.
Another way to keep track of expenses easily is to get a credit card for your business. This will track everything for you and make the process of filing exemptions easier for your tax professionals. Be sure to include the not-so obvious expenses, like home office needs, business insurance, and work-related care use.
Even before you make your first dollar from your passion project, an accountant can help you develop a tax plan to save you money and add longevity to your savings. It’s also critical that your tax professional is involved in your business throughout the year—not just at tax time. This will help ensure that you are doing everything possible to maximize your company’s tax savings.
A tax professional can also help you in case your business is ever audited with the IRS. Not only will your tax advisor have your tax history readily available, they will often represent you in your case as well. Having a reliable tax professional is more than a good strategy: it’s a business necessity.
With your passion project, you can either file your taxes as a sole proprietor using your social security number or you can register your business as a partnership, corporation, S corporation, or limited liability company (LLC). There are many benefits to the different filing options, so we highly recommend speaking with a tax savings professional early on in your business venture.
Regardless of how your company files, as a self-employed individual, you will be responsible for the full 12.4% Social Security tax on up to $137,700 and a 2.9% Medicare tax on all your earnings. If you’re unsure of how this will impact your taxes overall, we recommend checking out our tax saving assessment calculator to help you calculate potential savings to offset your tax liabilities.
You will also be responsible for making payments quarterly if you estimate that you’ll owe more than $1,000 in federal taxes. To determine your quarterly tax amount, you should use Form 1040 ES. You will take the total gross income that you expect to earn this year and subtract any deductions. Then simply use the Tax Rate Schedules to determine how much you owe. Failure to pay quarterly taxes by the due date can result in penalties from the IRS, so it’s critical to work with a tax professional as you navigate your side hustle.
Another tax item to consider when determining how you will establish your business is if you will need an Employer Identification Number (EIN). While you don’t necessarily need one for your passion project, it is free for you to apply for an EIN online, and can be a necessity if you want to open a bank account or credit card. You will also need an EIN if you want to turn your passion project into a non-profit.
Bottom line: Turning your passion into a side hustle can be a very lucrative venture for many. Be sure to consult your tax professional early in the process to maximize your savings and limit potential IRS penalties. Have any further questions for us? Give us a call at (772) 257-7888 or check out our tax savings calculator to see how we can help you with your taxes today.