Hi,
I have a small business on the side that I run on the weekends. I bring in paltry sums that barely cover my expenses, especially when you factor in license fees and insurance. I’m serious about paying all state and local taxes each month, though, even if I make just a few bucks.
My question is basic. How do I do my income taxes this year? I have kept receipts for my expenses, but I do not have receipts for my earnings (I run a sidewalk vending table). For 2010, my gross income from my business was just a little over $200 (I started up in late October, so my business isn’t doing as bad as it sounds :)). Do I just add this figure in with the rest of my salary from my day job? Surely I can get a deduction for business expenses, but I don’t know what form to use if I do this.
Any advice on how to do my taxes this year? Or should I just spend some cash and have a professional do my taxes?
IANAAccountant, but run small businesses. I believe there is a maximum you can earn without filing, and I doubt that $200 gross meets that.
Don’t mix income from different sources, especially if one is a salary and the other is not. File a Schedule C for each business (or combine them if it makes sense). If you don’t have an exact amount from gross income, estimate it (most people would estimate it on the low side, but you seem too honest to do that. )
In the simplest terms, your net income from this business, which must be entered on the 1040, is the gross income less expenses. It gets complicated if you have production or business equipment that must be amortized or is shared with other functions (a room in your house, for example).
It sounds like, in your case, you can handle the necessary paperwork. If you get experience with small numbers, and your business grows, then the next year shouldn’t be too difficult. If it gets out of hand, you may have to use an accountant.
Remember that the IRS has free help lines and publications tailored to small businesses. They will answer any question about filling out a form as long as it doesn’t cross over the line to legal advice. Take advantage of this service.
This sounds to me like a hobby. Put the gross income on 1040 line 21 and forget about the expenses. Hobby expense can go on Sch A under other deductions subject to a 2% AGI floor. Such a small amount will probably not generate a usable deduction. This is definitely the simplest way.
You can instead put it on Sch C, to subtract the expenses from the income and report only the net income. Since that will reduce your income and tax due, it’s preferable over the hobby approach for you… and that’s why the IRS just might try to argue that it is a hobby and does not meet the definition of a trade or business.
To oversimplify the hobby/business issue, the IRS will argue that it’s a business when being a business costs you more in tax; they’ll argue it’s a hobby when being a hobby costs you more in tax. (This is one of many reasons why you do not want to rely on the IRS’s advice about this kind of thing.) The actual determination looks more at things like investment of time and reliance on the income which would both suggest a hobby at this level of activity.
Anyway, if you do put the income on Sch C, more than $400 net income will also require Sch SE for self-employment tax - essentially, an additional 15% tax on top of the income tax. When you get to that point, it’s definitely worth hiring a pro to make sure you maximize your deductions are are properly documenting income and expense.
Not much to add to the excellent advice so far. Schedule C comes in an EZ flavor which is very simple to use for very simple businesses.
The very basics of running a business are that it has income and expenses and assets which are, conceptually speaking, totally separate from your own income, expenses and assets as a person and an employee at some other day job. Your business needs to keep track of its money 100% separately from the ways you keep track of your money. That’s one of the basic differences the IRS looks for tell a business from a hobby.
The easiest way to do this is for your business to have its own checking account. Every bit of money you take in gets deposited there. Every bit of expenses you have get paid from there. Your checkbook register becomes the “books” of the business. And if you’re making a profit and the account gets extra money in it, you’re free to pay yourself by writing a check from that account to yourself & depositing it into your ordinary personal checking. Likewise, if the business needs more money, the way you put money into the business is to write a personal check to yourself, and deposit the check into the business’s account. Then the business can spend it.
The business account can have an ATM / debit card, but best to use it ONLY for making business purchases, not cash transactions (e.g. paying yourself). it makes for better records that way. If your business gets enough volume, it can also be useful to get a separate personal credit card and use it only for business transactions. You only charge business things on it and only pay it from the business account. This also facilitates keeping all the business’s records corralled together and all separate from your own daily spending.
By keeping all the records in this way, you can easily do income taxes. And you can easily find all instances of money flowing between you and the business in either direction.
File a SCH C EZ, with estimated income, and make sure the loss is rather small. Or, just skip it. Yes, you do have to report all income, but as has been said, this could be considered a hobby, and on a hobby there is no net loss, so there’s no reason to file anything on it, really.
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