If you have a full-time job and a side business, here’s what you’ll need to do to file your taxes.
File One Tax Return
Most side businesses are going to go on the same tax return as your full-time job. The main exception is if you’ve formed a corporation or S-corporation that needs its own tax return.
You’ll enter your W-2 as usual. You’ll also complete a Schedule C for your side business income.
Adjust Your Tax Withholding or Pay Estimated Taxes
If you have a side business that doesn’t withhold taxes for you, you’ll need to adjust your tax withholding at your main job or pay estimated taxes.
Even though a side business doesn’t have tax withheld, you still need to pay the taxes you’ll owe on side business income throughout the year. If you wait until you file your tax return, you could have to pay an estimated tax penalty.
As a general rule, you need to make four quarterly tax payments for side business income. So if you expect to owe $4,000 in taxes, you’ll need to pay $1,000 in estimated tax payments each quarter.
You can either make estimated tax payments directly to the IRS or ask an employer that withholds taxes to increase your withholding.
See Estimated Taxes to learn more about the specific rules and deadlines.
You’ll Pay Self-Employment Taxes
In most salaried jobs, you pay 7.65% in FICA taxes and your employer pays another 7.65% for you. With a side business, you’ll need to pay the full 15.3% in self-employment taxes.
You pay these taxes through your quarterly tax payments just like your income taxes.
Don’t Forget Business Deductions
As an employee, you generally can’t take any deductions for work-related expenses. When you have a side business, you can take business deductions.
Deductible expenses might include mileage, software expenses, supplies, or other costs you pay to run your business. Most side businesses also qualify for the Qualified Business Income Deduction which reduces your taxable profit by 20%.
You may be able to take the home office deduction but only if you only use your home office for your side business. If you use your office for your main job or personal reasons, you usually won’t qualify for the home office deduction.
It’s a good idea to set up a separate business bank account and credit card. Get a self-employed accounting app and sync it to those accounts to automatically track your income and deductions and make tax filing easy.
If You Hire Someone
If you hire someone to help you, make sure you know the rules for hiring employees or independent contractors.
If you hire employees, you may need to file payroll tax returns throughout the year and issue W-2s in January.
If you hire contractors, make sure you know the due dates for issuing 1099s.
Check Your Retirement Options
A side business can open up several options for retirement savings.
If you’re not already maxing out a personal IRA or employer IRA, the extra income may allow you to contribute more.
Once you max out those accounts or if your employer’s 401(k) plan isn’t good, you can open up a SEP IRA or solo 401(k). Those accounts let you contribute up to 20% of your business income as the employer. Your contributions as the employer don’t count toward your personal IRA contribution limits or employee 401(k) contribution limits.
Forming an LLC
Many people think that you should always form an LLC for a side business for either tax or legal reasons.
LLCs can help in some situations, but forming an LLC isn’t always the best option. Ask your tax accountant for more information.
Frequently Asked Questions
Assuming you already have to file a tax return because of your main job, the answer is $1. Even though you may not get a 1099 until you hit $600, all of your income is taxable.
Having a side business will increase your taxes because you’re making more. There are moves you can make to minimize your side business taxes.
If you try to use a side business to take a loss to offset your primary income, the IRS may declare your side business a hobby and disallow your deductions.
You may be able to avoid income taxes by contributing all of your side hustle income to a deductible retirement account. You’ll still owe self-employment taxes.