Contributed by Arete Financial Solutions
According to a recent survey, 45% of Americans have a side hustle in addition to their full-time job. In Maricopa County the formation of businesses rose from 4.7% to 31.9% between 2019-2020. Whether out of necessity or passion, these side jobs will have important tax consequences come April 15.
“1099 contractor income is self-employment income. It is extremely important to seek guidance from a tax professional when you have any kind of business,” says Enrolled Agent Mary L. Reha, co-founder of Arete Financial Solutions. “Working with a professional who knows and understands the tax laws in this constantly changing area can save you a lot of money.”
According to Reha, those who started a side business last year need to carefully consider key items that are critical in properly and lawfully filing their 2021 taxes.
Paperwork needed: As a 1099 contractor, you need to bring documentation of your income, expenses, bank statements, P&L or revenue statements, balance sheets, vehicle mileage or actual expenses and receipts for any asset over $2,500 to your tax preparer.
Overlooked expenses: Individuals accustomed to being a W2 employee often don’t realize the many things that can be deducted as business owners. Your tax professional can help uncover expenses incurred that might qualify as business deductions.
Estimated taxes: Self-employed individuals who expect to owe more than $1,000 in federal tax need to pay estimated taxes throughout the year to avoid underpayment penalties. A tax professional can ensure that you make the right estimated payments moving forward.
Retirement accounts: W2 employees often have a 401K, but side hustle owners could also start a SEP IRA where they can contribute up to 25% of their solo business income to a retirement fund.
Legal Structure: In addition to tax consequences, it’s equally important for anyone with a side business to have the proper legal structure to support it. “Although it is a ‘side hustle,’ it is important that people take the necessary steps to protect themselves from a legal standpoint,” says Ted Ashton, Esq., co-founder and director of the Arete Financial Solutions legal team. “Proper formation, insurance and accounting are all critical to the success and protection of you and your business.”
With 70 million Americans involved with a side business, knowing how to prepare for tax day and beyond is imperative. Even though a side hustle might be more of a hobby than a real job for many, it is still a legitimate business in the eyes of the IRS and the law.