Author Archives: support52

Understanding Your Taxes If You’re A Side-Hustling Independent Contractor

In today’s day and age, it’s not uncommon to come across people who have side hustles to make some extra cash, especially since the start of the Covid-19 pandemic. The fact that many people have found themselves unemployed, making less money overall, or just have more free time than they did before gave even more rise to an already rising trend.
Side-hustles have provided people with the much-needed supplemental income, which has benefits and drawbacks. And while side hustles are a relatively new thing, a hustler’s tax obligations are not.

Income Tax Rules For Common Side-Hustles

Income Earned from Selling Products Online

Before the pandemic, many people were ahead of the curve by selling products on websites like Facebook Marketplace, Etsy, and Pinterest, and usually accepted payment through official online channels such as Venmo or PayPal. These are only a few websites people use to sell and market their fresh ideas, but the income reporting methods are similar for each one.

The tax form a hustler would use for any income gained through these channels isForm 1099-K: Payment Card and Third Party Network Transactions,if they’ve made 200+ transactions and made $20,000 in gross income from those transactions.

Since 1099’s are sent to you and the IRS, it is important to make sure that you’ve got the right forms when tax time rolls around. If you don’t receive one and you think/know you should be receiving one, it is important to contact the company as soon as possible. Also, it’s a good idea to keep track of your records and sales. Even if you do not meet the requirements for receiving a 1099-K, the income must still be reported.

Income Earned From Tips
With waiters and waitresses making most of their income from tips, many are unsure about the taxes associated with gratuities. There are plenty of hustlers who work their regular 9-5 during the week and then pick up a few waiting/bartending shifts on the weekends to earn a few extra bucks. Some may think that waiters, waitresses, and bartenders get to cash in their tips and move along with their day, but that is not the case. This is especially true considering the federal minimum wage for waitstaff is listed at $2.13 (different states may vary), according to theU.S. Department of Labor.

With these wages being so low, it isn’t an out-of-this-world idea to say that the IRS may notice if the only income tax is paid on comes from those wages and that’s it. Whether the tips are cash, shared, or charged (credit/debit card), they need to be reported to the IRS if the total amount is more than $20-$30 (depending on the state you reside in) within any given month.

What About DoorDash, Uber, etc.?
Fortunately, if a hustler’s hustle of choice is a delivery service, like Uber, DoorDash, or Instacart, a hustler should not have to worry too much about separately filing their tips. A delivery employee’s tips are added electronically to their wages, so it’s already there and removes a bit of the headache come tax time.
If a hustler makes more than $600 from a business, they should receive a Form 1099-NEC from the employer. However, even if a hustler does not receive a form from their employer, all income must still be reported. And again, since 1099’s are sent to you and the IRS, it is important to make sure that you’ve got the right forms when tax time rolls around. If you don’t get them, contact your employer as soon as possible.

Cash Money
Whether someone is working for an employer or themselves, they may receive a cash payment for their services. A side-hustle can also be an odd job here and there. For example, if a carpenter takes a side job building a deck for one of their neighbors separate from his work as a full-time carpenter at a company. This additional income should still be reported, especially if it’s cash.

Not reporting cash income to the IRS may result in tax evasion charges.Tax evasioncharges can carry up to five years in prison and a $250,000 fine. Aside from failing to report your income to the IRS, the IRS can also charge you for filing a false return. A false return consists of false or misleading information on your tax return, which can carry up to three years in prison and up to a $250,000 fine if a hustler is found guilty.

Avoiding IRS Penalties As An Independent Contractor
Many make the mistake of not reporting their cash income to the IRS but doing so can create an unnecessary headache and some potentially hefty penalties. If the IRS finds out that income is not being reported, they will take action to get what they’re owed.Since cash income is becoming more and more prevalent due to side hustles, it is a must to make sure that you are reporting income to the IRS. While it may be tempting to try and hide the cash from the IRS, the penalties a hustler could face should make you think twice before tucking that cash under the mattress.

How to avoid a business tax audit

You can lower your odds of a tax audit by taking certain steps with your tax return and avoiding others – you just need to be “DIF” score savvy. DIF stands for “discriminate information function,” a program the IRS uses to determine if your small business-related tax return is ripe for an audit. While DIF details are secret, the steps below can help you reduce your odds of being audited. Each choice you make (how to file, when to file, what deductions to claim) has an impact on your audit odds. Here are 19 things you can do to avoid a business tax audit:

Be accurate. thorough and neat. Sloppy returns and math errors raise flags. Using tax preparation software makes your return look more professional and helps you avoid mistakes. Accuracy starts with keeping good records; if the IRS ever questions anything on your return, the burden is on you to prove it’s right. If your records are sloppy, it will be difficult.

Refrain from rounding numbers. Calculating your income and losses with only rounded numbers could make the process easier for you in the moment, but any inconsistencies in the money you’re being taxed on will immediately stand out as a red flag for an IRS auditor. Cutting corners here could cause you issues later.

Explain yourself clearly. Avoid vague business expense categories such as the infamous category some business owners use called “miscellaneous.” If your business is claiming unusual deductions of some kind – anything an IRS reviewer might not have come across a thousand times before – provide an explanation or documentation.

File electronically. Electronic tax return filings are convenient and, in some cases, even required. Electronic filing gives IRS fast access to 100% of your return and in nearly every instance, online tax-filing solutions have ways to check your information for errors. By using the built-in tools, you can ensure that your data is accurate. Many solutions like TurboTax offer an audit protection guarantee in which you will receive representation (or defense services) should an audit be initiated against you.

Make your estimated tax payments, and issue 1099 and W2 forms on time. Late quarterly estimated payments, nonpayments and underestimated amounts draw the ire of the IRS. Know the deadlines and meet them. File 1099s and W-2s using easy online tax services.

File on time. It’s easy to file for an extension, so there’s little reason to miss the initial deadline. Just remember that any money you owe is still due by the original filing deadline; the extra time is for doing the paperwork.

Beware of your income-to-deduction ratio. Your tax-audit odds for a small business rise if the difference between expenses and income exceeds 52%. Total deductions are only part of it. One especially large deduction can also raise flags, even if others are small or in line with other businesses in your industry.

Be wary of taking a home-office deduction. Tax returns that include a deduction for a home office are a prime IRS target, so if you plan to take a home office tax deduction, make sure you know the rules. A home office must be a completely separate room or area used exclusively for business. Here again, a CPA can be invaluable in helping you do it right, or perhaps decide if the benefits aren’t worth the hassle.

Make sure you only write off eligible travel and meals. With the passage of the Taxes and Jobs Act of 2017, businesses are only allowed to deduct 50% of their meals and travel expenses conducted for a business.

Watch those startup cost deductions. Many startup entrepreneurs and new business owners assume that money they’ve spent to get the business up and running can be deducted immediately. That’s not always the case, though; many startup costs must be depreciated over time.

Don’t mix personal and business deductions. The IRS is on the lookout for small business owners who try to deduct travel, entertainment or other costs (cell phones, merchandise, etc.) that are personal and not business-related. Remember that only business-related expenses can be deducted. Make sure you understand the rules on what portion of business entertainment costs are allowable as a deduction. And avoiding taking mileage deductions for personal use of a vehicle – that’s another IRS audit hotspot.

Make your hobby a true business. If the business you are claiming all those deductions for looks more like a hobby to the IRS, you could trigger an audit and end up owing back taxes. A real business has revenues at least some of the time and looks, acts, and spends like a business as well.

Reconsider your business structure. Owners of a sole proprietorship who file a Schedule C for each business get audited the most. To avoid the higher risk of sole proprietor audits, consider making your business a corporation or limited liability company.

Hire Best Tax + Accounting. Tax rules that affect small businesses are impossibly complex, far-reaching and downright confusing. Even for relatively straightforward situations, getting professional tax preparation advice can be a huge help in avoiding audit triggers for your particular case or industry. We do tax and accounting work for out-of-state clients, virtually.

Avoid the independent contractor trap. Another favorite IRS is misclassified workers. If your business uses freelancers and other types of independent contractors, make certain they qualify for independent contractor status. Otherwise, the IRS may determine they are employees and stick you with a big bill for back payroll taxes plus penalties.

Don’t “forget” to report income. The one thing the IRS hates above all else is unreported income. And don’t kid yourself – the tax agencies are far more sophisticated about tracing money than they’ve ever been. The IRS has extensive data on typical income levels and deductions for every type of business that exists. If yours is out of line with others like you, an IRS tax audit could ensue.

Report barter and auction income. The fair market value you receive through business barter transactions may indeed be taxable, even if you did not receive cash. Likewise, taxable income generated from selling items via online auction websites needs to be included in your return.

Avoid overpaying your shareholders. If your business is run through a group of shareholders, make sure you’re not paying those individuals an excessively high wage. That will raise major red flags for an IRS auditor, since that can be seen as an underhanded way to lower taxes by undercutting profits.

Be honest. Every year, the IRS gets better at using high-tech means to track your business income. Some things are just obvious. If you claim lots of expenses but show little revenue to pay for them, the tax folks get curious.

Saver’s Tax Credit: An Incentive to Save For Retirement

A lot of people struggle to find the funds they need to build their retirement savings. Fortunately, a non-refundable tax credit, known as a retirement savings credit, can make saving a lot easier. Often referred to as a saver’s credit, it allows eligible individuals to benefit from tax considerations in addition to the deductions they may get on contributions to their IRAs or employer-sponsored plans. By reducing tax debt, the credit offsets the cost of funding a retirement account and ultimately boosts savings potential. qualified

Key points:

  • The Saver’s Credit is open to qualified taxpayers who contribute to an employer-sponsored pension plan or the traditional IRA and Roth.
  • The figure of the credit is determined by several factors, such as tax filing status, a person’s contributions to the pension plan, and adjusted gross income.
  • This credit is not available to people under 18, full-time students, or any person declared to be dependent on another taxpayer.

What is the saver’s credit?

This is a non-refundable tax credit available to eligible taxpayers who make deferred contributions to government-sponsored SIMPLE, SEP, 401(k), 403(b), or 457 plans. It is also available for traditional and Roth IRA contributors. Those who contributed to tax-advantaged savings accounts for people with disabilities and their families (called ABLE accounts) are eligible for the saver’s credit.

Based on income levels, the credit is worth 50%, 20%, or 10% of a person’s eligible contribution, but there are defined limits. The maximum credit allowed for the head of household is $2,000, while couples filing jointly can claim up to $4,000.

Who is eligible?

To qualify for the saver’s credit, a person must be at least 18 years of age at the end of the applicable tax year, must not have enrolled as a full-time student and cannot be claimed on another taxpayer declaration as a dependent.

Finally, a person’s AGI must not exceed the following limits:

 As the graph illustrates, the lower a person’s AGI, the higher the saver’s credit.

For example, Jamal, whose filing status is single, has an adjusted gross income of $ 19,200 for 2021. He contributes $800 to the employer-sponsored 401(k) plan, plus $ 600 to his Traditional IRA. Therefore, Jamal is entitled to a non-refundable tax credit of $ 700 [($ 800 + $ 600 = $1,400) x 50%].

The effect of the saver’s credit

Applying for a saver’s credit by contributing to a retirement plan can reduce a person’s tax burden in two ways. First, the contribution to the scheme itself is considered a tax deduction. Second, the saver’s credit lessens the actual taxes owed, dollar for dollar.

Consider the following example. John, a married retail worker, made $ 38,000. That year, he gave $1,000 to the IRA, while his unemployed wife earned no income. After subtracting his IRA contribution, the AGI shown on his joint return is $ 37,000. In this case, John is entitled to apply for a credit of $500 at 50% for the IRA contribution.

When are retirement savings ineligible?

Any amount of money paid into a pension account that exceeds the authorized limit must be withdrawn from the account within a certain period. The returned part of the contribution is not eligible for saver’s credit. Additionally, suppose a person changes jobs and transfers money from one pension account to another, for instance, from a traditional IRA to an employer-sponsored 401 (k) plan. In that case, that contribution is not eligible for the saver’s credit.

The Bottom Line

Saver’s credit can increase the savings power of a person’s pension. Those who qualify for this type of credit and do not take full advantage of this are wasting an easy way to add meaningful value to their savings. It would be best if you consult us before taking a saver’s credit.