Ryan W Schroederus CPA

linkedin

Starting a New Business or Side Gig? Your Tax Considerations


There’s a lot to think about when you’re setting up a new business venture. Don’t forget about your tax obligations.

Maybe you’ve been planning for your small business launch for a long time, doing all of the things you have to do before you open your physical or virtual doors. Or perhaps an unexpected layoff or closure forced you to move fast. Either way, you’re in for a flurry activity as you ready products or services.

Be sure to add your obligations to the IRS and state taxing agencies to your to-do list. It’s better to do those tasks early so they’re out of the way as you start building your business. Even if you’re only taking on a side gig as an Uber driver or an Etsy seller, you’ll have to do some setup work. Here’s a look at what’s expected.

Determine whether it’s a business or a hobby

Are you sure that what you’re taking on will be considered a business by the IRS? Are you embarking on this activity to make a profit, or is it something you’ll do for sport, recreation, or pleasure? Here are nine questions the IRS wants you to answer as you determine your status.

Select a business structure

If you’ve determined that what you’re taking on is indeed a business, it’s critical that you select the right business structure. This will have impact on how you prepare and file your taxes. This classification will often be a sole proprietorship, but there are others, including:

  • Partnerships,
  • Corporations,
  • S corporations, and,
  • Limited liability companies (LLCs).

If you’re not sure which business entity is most appropriate for you, we can help you sort it out. It’s very important to get this right.

If you’ll be filing your income taxes as a sole proprietor, you’ll file a Form 1040, among other IRS tax forms and schedules.

Apply for an Employee Identification Number (EIN), if you’ll be hiring staff

If you’ll be hiring employees, you’re in for a lot of paperwork. Before you start that, you need to apply for an Employee Identification Number (EIN). It’s free, and the IRS issues these immediately.

Know what business taxes you’ll be required to pay

Depending on what business entity you chose, you’ll have to determine which business taxes you’ll have to pay and how to pay them. Here are five of the most common:

Income taxes

Unless you’re a partnership, you’ll be required to file an annual income tax return (partnerships file informational returns). You’ll choose a form based on your business structure. For example, sole proprietors file a Form 1040 and related forms and schedules.

Estimated taxes

The federal income tax is pay-as-you-go. Since no one is withholding taxes for you, like an employer would, you’ll have to keep up with them yourself. Sole proprietors, partners, and S corporation shareholders must pay quarterly estimated taxes if they expect to owe $1,000 or more when they file taxes. For corporations, the threshold is $500.

You’ll have to estimate how much you’ll make and what you’ll take off in deductions and credits four times a year and submit the payments to the IRS and state taxing authorities. There are several ways to pay. This isn’t easy, and there are penalties for underpayment. Let us know if you want our help.

You can submit a check or money order to the IRS to pay estimated taxes, or pay in several other ways.

Self-employment tax

Since you won’t have an employer paying your Social Security and Medicare taxes, you’ll have to pay these yourself. This tax is calculated on the Schedule SE. You must pay the self-employment tax if your net earnings from self-employment are $400 or more. But there are many exceptions.

Employment taxes

Hiring independent contractors doesn’t require any special tax consideration since, as self-employed individuals, they’re responsible for their own income taxes. But if you’ll be hiring employees, you have a lot of work ahead of you in terms of employment taxes, since you’ll be responsible for:

  • Social Security and Medicare taxes,
  • Federal income tax withholding, and,
  • Federal unemployment (FUTA) tax.

You’ll also have to deal with state income tax withholding, if applicable. We recommend you let us assist with this huge, paperwork-heavy task.

Excise tax

You may also have to deal with excise taxes if you operate certain types of businesses or manufacture certain products. Again, we can help you sort this out.

Keep Good Records

Business taxes can be complicated, and it’s very important to get them right to avoid tangling with the IRS. Even if you don’t make a lot of money on a side hustle, you may still be expected to claim your income and expenses on a Form 1040 and Schedule C. Our best advice is this: Keep very detailed records throughout the year. Let us know if you want help planning for your first self-employed year.