Side Hustle Taxes

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
User avatar
tduff311
Posts: 39
Joined: Thu Aug 31, 2017 3:32 pm
Location: Medina, Ohio
Contact:

Side Hustle Taxes

Post by tduff311 » Tue Dec 05, 2017 6:10 pm

So my wife started a new side hustle this year as a photographer. We weren't sure if it would pan out but, as it turns out, she is doing fairly well so far and there's promise of more.

So, my question: should we establish this formally as a business?

We only played this on the side with modest seriousness, but now it's evident it is more.

The first thing we are looking at is upgrading her PayPal personal account to a business account and using the API to permit more business options, such as connecting her photo online business account to more delivery options for her products.

If you agree that becoming an 'official' business is the way to go, what are the steps/items to check off in doing this?

I am a Federal employee and do all of our family taxes, but I have little experience in the business side, and her knowledge and experience is less on the topic.

Thanks!

ps We are concerned that the taxable increase in our family income will cause the loss of some pretty serious medical assistance my 6 year daughter receives for her genetic medical disability.
The future is not some place we are going to, but one we are creating. The paths to it are not found but made, and the activity of making them changes both the maker and the destination.

aristotelian
Posts: 3162
Joined: Wed Jan 11, 2017 8:05 pm

Re: Side Hustle Taxes

Post by aristotelian » Tue Dec 05, 2017 6:34 pm

Open a solo 401k. You would be able to defer nearly all of her income so you won't have to worry about paying estimated taxes. This is what we do for my wife's yoga teaching income.

livesoft
Posts: 57249
Joined: Thu Mar 01, 2007 8:00 pm

Re: Side Hustle Taxes

Post by livesoft » Tue Dec 05, 2017 6:36 pm

I don't think the business aspect makes any changes to taxes. One would still file Schedule C as a Sole Proprietary whether one had called it a business or not, right? For instance, a solo 401(k) can be used by that sole proprietorship without registering the business anywhere.
This signature message sponsored by sscritic: Learn to fish.

SRenaeP
Posts: 643
Joined: Tue Jan 19, 2010 9:05 pm

Re: Side Hustle Taxes

Post by SRenaeP » Wed Dec 06, 2017 8:36 am

livesoft wrote:
Tue Dec 05, 2017 6:36 pm
I don't think the business aspect makes any changes to taxes. One would still file Schedule C as a Sole Proprietary whether one had called it a business or not, right? For instance, a solo 401(k) can be used by that sole proprietorship without registering the business anywhere.
Anecdotal data says that an EIN is required to open a solo 401k.

In order to keep things 'clean', I would suggest OP's wife create a business name/DBA and receive all payments in that name as well as open a separate business bank account. Schedule C would still be the proper form to report her income.

-Steph

Isabelle77
Posts: 137
Joined: Thu Dec 17, 2015 1:43 pm

Re: Side Hustle Taxes

Post by Isabelle77 » Wed Dec 06, 2017 10:18 am

My husband has done voiceover work as a side hustle for the last 15yrs. Our cpa recommended sole proprietorship and we contribute to a SEP IRA every year, very straightforward. We do use a separate checking account.

livesoft
Posts: 57249
Joined: Thu Mar 01, 2007 8:00 pm

Re: Side Hustle Taxes

Post by livesoft » Wed Dec 06, 2017 10:41 am

SRenaeP wrote:
Wed Dec 06, 2017 8:36 am
Anecdotal data says that an EIN is required to open a solo 401k.
I have a solo 401(k) and an EIN for it. Getting the EIN did not require any registering of a business in my case.

The IRS has publications online for small business owners and other taxpayers. Browse the titles at:
https://www.irs.gov/publications

See Publication 334 for instance.
This signature message sponsored by sscritic: Learn to fish.

J295
Posts: 1231
Joined: Sun Jan 01, 2012 11:40 pm

Re: Side Hustle Taxes

Post by J295 » Wed Dec 06, 2017 5:04 pm

You can get EIN online FYI and won’t need to form a corporation or LLC to get one.

Solo 491k is great in our experience.

Make sure you have insurance coverage. While you probably correctly understand that photography is not a business that creates much liability exposure, think about taking a high school graduation picture and you ask your subject to move just a little more to the left and they trip and fall, or your equipment is placed somewhere at a wedding reception and someone trips and falls, or you are driving to a job site and you cause an accident. Are these covered by your homeowners policy? Doubtful.

TurboTax business/premier can be helpful

DrGoogle2017
Posts: 668
Joined: Mon Aug 14, 2017 12:31 pm

Re: Side Hustle Taxes

Post by DrGoogle2017 » Wed Dec 06, 2017 5:35 pm

SRenaeP wrote:
Wed Dec 06, 2017 8:36 am
livesoft wrote:
Tue Dec 05, 2017 6:36 pm
I don't think the business aspect makes any changes to taxes. One would still file Schedule C as a Sole Proprietary whether one had called it a business or not, right? For instance, a solo 401(k) can be used by that sole proprietorship without registering the business anywhere.
Anecdotal data says that an EIN is required to open a solo 401k.

In order to keep things 'clean', I would suggest OP's wife create a business name/DBA and receive all payments in that name as well as open a separate business bank account. Schedule C would still be the proper form to report her income.

-Steph
You can apply to an EIN. I didn’t have a separate bank account either. However, I did have a business name associate with my husband’s consulting business.

ccieemeritus
Posts: 433
Joined: Thu Mar 06, 2014 10:43 pm

Re: Side Hustle Taxes

Post by ccieemeritus » Thu Dec 07, 2017 3:25 am

I am not a lawyer or tax accountant.

You have to report income from the photography on your 1040. I think you could do that as “miscellaneous income” or schedule-c (business income).

The advantage of schedule-c is that it lets you deduct business expenses (a new camera for example).

If you lose money after deducting expenses, the IRS will eventually get suspicious that it’s really a hobby. My advice is to make a profit :-)

In my case, a year or two after first filing a schedule-c, my local city hit me up for a business license tax. I found that very annoying.

User avatar
deanbrew
Posts: 1204
Joined: Wed Jul 21, 2010 12:05 pm
Location: The Keystone State

Re: Side Hustle Taxes

Post by deanbrew » Thu Dec 07, 2017 1:40 pm

aristotelian wrote:
Tue Dec 05, 2017 6:34 pm
Open a solo 401k. You would be able to defer nearly all of her income so you won't have to worry about paying estimated taxes. This is what we do for my wife's yoga teaching income.
Good advice. If the side income isn't needed (or to the extent you want to save it for retirement), then contributing to a retirement account will reduce income. I'm not an accountant, but if your wife decides on a self-employed retirement account, you can do a Simple IRA, SEP IRA or Solo 401k. Ask your accountant about the plusses and minuses of each - I have had a SEP IRA for years, but opened up a Solo 401k last year so I could move more money into it than I could a SEP. I had to get an EIN, but that was very quick and easy to do online.

Although it isn't absolutely necessary to set up a business checking account, it does make it much simpler to keep track of business income and expenses. I set up my free business checking account as "My Name dba Business Name". I deposit all business checks to it, whether they are made out in my name or my business name. I would suggest getting Quicken Home & Business or something similar so you can track all income and expenses. You could use Quickbooks, too, but that is more expensive and more complex software more suitable for companies that have employees and payroll.

You will need to report income and expenses on Schedule C. If she ends up making money not offset by expenses, you will owe local, state and federal taxes. You will need to pay estimated quarterly payments to all three, as required by your state and local municipality. Doing so isn't hard, but you need to remember to do it by the four required dates.
"The course of history shows that as the government grows, liberty decreases." Thomas Jefferson

User avatar
FraggleRock
Posts: 231
Joined: Sun Feb 12, 2017 6:50 pm

Small business accounting and taxes

Post by FraggleRock » Thu Dec 07, 2017 1:59 pm

tduff311 wrote:
Tue Dec 05, 2017 6:10 pm
So, my question: should we establish this formally as a business?
...
The first thing we are looking at is upgrading her PayPal personal account to a business account
1. Setting up a sole proprietorship in my state [Colorado] is done online, takes 5 minutes and costs $5.
2. The business should have its own EIN. https://www.irs.gov/businesses/small-bu ... ein-online
3. She should use "real accounting" software for the business. Quicken is not the answer. You need to track income, expenses (by category). Personally, as a Mac user, I use AccountEdge https://www.accountedge.com for my software.
4. Look at Square https://squareup.com as Paypal is a ripoff.
5. You have to pay estimated taxes (state/federal) every quarter. I have found that 20% of income is a good number to start with. For me the spilt is 10/90.

thangngo
Posts: 437
Joined: Sun Feb 26, 2017 2:08 pm

Re: Side Hustle Taxes

Post by thangngo » Thu Dec 07, 2017 2:05 pm

tduff311 wrote:
Tue Dec 05, 2017 6:10 pm
So my wife started a new side hustle this year as a photographer. We weren't sure if it would pan out but, as it turns out, she is doing fairly well so far and there's promise of more.

So, my question: should we establish this formally as a business?

We only played this on the side with modest seriousness, but now it's evident it is more.

The first thing we are looking at is upgrading her PayPal personal account to a business account and using the API to permit more business options, such as connecting her photo online business account to more delivery options for her products.

If you agree that becoming an 'official' business is the way to go, what are the steps/items to check off in doing this?

I am a Federal employee and do all of our family taxes, but I have little experience in the business side, and her knowledge and experience is less on the topic.

Thanks!

ps We are concerned that the taxable increase in our family income will cause the loss of some pretty serious medical assistance my 6 year daughter receives for her genetic medical disability.
On a legal standpoint, your wife should protect herself and you for any potential law suits by register to do business in her home state.
On a income tax standpoint, you and your wife should take advantage of Schedule C and any deductions available to you (home office, traveling, car deduction, etc.). And as other posters pointed out, use solo 401k to defer as much income as she can.

User avatar
deanbrew
Posts: 1204
Joined: Wed Jul 21, 2010 12:05 pm
Location: The Keystone State

Re: Small business accounting and taxes

Post by deanbrew » Thu Dec 07, 2017 2:27 pm

FraggleRock wrote:
Thu Dec 07, 2017 1:59 pm
3. She should use "real accounting" software for the business. Quicken is not the answer. You need to track income, expenses (by category). Personally, as a Mac user, I use AccountEdge https://www.accountedge.com for my software.
Are you aware that Quicken has a version specifically made to track business income and expenses, maintain and reconcile a business checking account, prepare and send invoices, etc.? I've been using Quicken Home & Business for 15 years, and find it adequate for a sole proprietor business. My accountant has never complained with what I provide him to prepare my taxes. The current version is called "Home, Business & Rental Property". Why do you consider this to be inadequate for what the OP describes?
"The course of history shows that as the government grows, liberty decreases." Thomas Jefferson

knightrider
Posts: 148
Joined: Fri Jun 06, 2014 11:20 am

Re: Side Hustle Taxes

Post by knightrider » Thu Dec 07, 2017 2:32 pm

deanbrew wrote:
Thu Dec 07, 2017 1:40 pm
You will need to pay estimated quarterly payments to all three, as required by your state and local municipality.
What kind of local taxes would a business owe?

User avatar
deanbrew
Posts: 1204
Joined: Wed Jul 21, 2010 12:05 pm
Location: The Keystone State

Re: Side Hustle Taxes

Post by deanbrew » Thu Dec 07, 2017 2:39 pm

knightrider wrote:
Thu Dec 07, 2017 2:32 pm
What kind of local taxes would a business owe?
This one will have the most variance, I suspect. I pay a 1.0% local income tax to my county, which gets split up between the county, township and school district. That's 1.0% of net income (after deducting business expenses, pension contribution, etc.). I send in a quarterly check, just like I do for state and federal income taxes. Where I live, employees also pay 1.0%, but they have it deducted from their paycheck and employers send it in. So, I'm paying the same amount as if I were employed, but because I'm self-employed I have to send in quarterly payments.
"The course of history shows that as the government grows, liberty decreases." Thomas Jefferson

knightrider
Posts: 148
Joined: Fri Jun 06, 2014 11:20 am

Re: Side Hustle Taxes

Post by knightrider » Thu Dec 07, 2017 2:51 pm

deanbrew wrote:
Thu Dec 07, 2017 2:39 pm
This one will have the most variance, I suspect. I pay a 1.0% local income tax to my county, which gets split up between the county, township and school district. That's 1.0% of net income (after deducting business expenses, pension contribution, etc.). I send in a quarterly check, just like I do for state and federal income taxes. Where I live, employees also pay 1.0%, but they have it deducted from their paycheck and employers send it in. So, I'm paying the same amount as if I were employed, but because I'm self-employed I have to send in quarterly payments.
Interesting. I've never paid any local taxes in 15 years. My biz is basically computer software so I don't have any physical store.. Just do it from home

User avatar
Epsilon Delta
Posts: 6568
Joined: Thu Apr 28, 2011 7:00 pm

Re: Small business accounting and taxes

Post by Epsilon Delta » Thu Dec 07, 2017 8:57 pm

FraggleRock wrote:
Thu Dec 07, 2017 1:59 pm

1. Setting up a sole proprietorship in my state [Colorado] is done online, takes 5 minutes and costs $5.
What is this "setting up a sole proprietorship"?

I was under the impression that a natural person doing businesslike things under their own name was a sole proprietorship and in general doesn't need permission or registration, unless the particular trade or some particular action it is engaged in is regulated.

Now if you want to use some other name you usually do have to register the name as a DBA (Doing Business As) but this is not setting up a business, it's just registering an alias so the authorities can complete a wanted poster if they need to find you.

Finridge
Posts: 125
Joined: Mon May 16, 2011 7:27 pm

Re: Side Hustle Taxes

Post by Finridge » Thu Dec 07, 2017 10:49 pm

livesoft wrote:
Tue Dec 05, 2017 6:36 pm
I don't think the business aspect makes any changes to taxes. One would still file Schedule C as a Sole Proprietary whether one had called it a business or not, right? For instance, a solo 401(k) can be used by that sole proprietorship without registering the business anywhere.
Yes, even if nothing is set up, if money is being accepted, taxes are payable.

Post Reply