3 Uncommon Tax Tips for Running a Side Business

At Molen & Associates we’ve specialized in business income tax preparation for people who have it as both their primary and secondary incomes for over 35 years. Here I’ll explain three uncommon tips I give my clients when they let me know they’re going to start a business on the side.

How much will the self-employment tax affect you?

Put simply, the self-employment tax is 15% of your net profit from self-employment activities in an extra tax. It goes towards social security and medicare. However, there is a cap on how much you can pay into the social security administration each year. This is based on some indexed tables and varies each year, but for 2020 the social security tax is capped at $8,537.40. This means if you earn more than $137,700 as an individual, you’re already paying the max into social security. If this is the case, then you won’t be subject to the total 15% self-employment tax as only the medicare portion will be in effect. The medicare portion is 2.9% of the total 15%, which could significantly lower your expected tax on business income.

Even if you don’t pay the full $8,537.40 of social security tax on your full-time job, you may eventually reach that cap as you pay the full 15% self-employment tax, which could then reduce future tax on your side business profits.

Establish a business bank account

Okay, I know you think this one may not belong on this list as an “uncommon” tax tip. However, let me explain why this belongs in a rarer category. Unknown to many is that the IRS can require the use of a separate bank account as a qualifier for using the Schedule C “Business Income and Expense” form used to report your side business’ activity on your personal return.

It’s important to note that in most cases you’ll want to start your business by registering for a DBA, or “Doing Business As” which will then allow you to open a business account at a bank in your business’ name. By doing this you’ll meet one of the important, but lesser known, qualifiers to be able to use a Schedule C form.

I’ll add to this that many people just up and form an LLC for their new business without seeking proper tax advice. Forming an LLC shouldn’t be done on a whim, you should call us for some insights before doing so!

Charitable contributions from your business

As a sole proprietor (meaning your business is un-incorporated) your business cannot make charitable contributions. This comes as a surprise to many who think they can write a check from their business account and use it as a write-off. To be clear the contribution is still valid, but it comes from you as a sole proprietor, not from the business. This means you’ll have to use it as an itemized deduction. The Tax Cuts and Jobs Act passed in 2017 and makes itemizing very difficult as the new standard deduction is $12,000 for a single filer and $24,000 for married filing joint filers. Often this results in far fewer benefits to itemizing deductions and more people claiming the standard deduction. This in and of itself isn’t bad, it came as a great benefit to many, but it means we have less flexibility in filing in some cases.

Here’s the tip though, if you’re contributing to a 501(c)3 from your business account try and make sure you’re getting some type of exposure in return. For example, if you’re sponsoring a charitable event make sure your business name shows up on a list of other sponsors. The check given to the organization is no longer a gift, rather an exchange for marketing services. This doesn’t always work and sometimes you’re giving a gift that will bring you no tax benefit, but when applicable it can really help. This is especially true when a charitable gift is deducted as an itemized deduction and it only reduces your income tax. If it’s an exchange for marketing then it can reduce not only the income tax, but also the 15% self-employment tax, which could almost double its tax deduction potential.

I hope you’ve either learned or found something that will help the side business you currently run, or plan to begin. If I didn’t enlighten you enough, or you’re interested in more, please call us for a free 15-minute consultation. Over 30% of the 2,500 tax returns we prepare annually deal with some form of business income and I personally guarantee you that we’ll teach you something you don’t already know to help you pay less taxes.

Kevin Molen

Tax Advisory Manager

The Molen & Associates Difference

Mike Forsyth

“Super helpful and timely. This is our first year with them and we look forward to trusting them with our taxes and business books for years to come.”

Caitlin Daulong

“Molen & Associates is amazing! They run an incredibly streamlined process, which makes filing taxes a breeze. So impressed with their attention to detail, organization, and swift execution every year. Cannot recommend them enough!”

Sy Sahrai

“I’ve been with Mr. Molen’s company for few years and I felt treated like family respect and dignity. They are caring, professional and honest, which hard to find these days. Love working with them.”

Change Independent Contractors into Employees Trouble-Free

Independent contractors are a vital part of the American workforce. They work for themselves, usually providing services to other businesses. While this setup offers many advantages to both the contractor and the hiring business, it can also create tax problems.   You...

Is retirement the same thing it used to be?

The modern concept of retirement has only been around for about 100 years. Though relatively new, what retirement looks like and how people are planning for retirement has changed significantly in the last few decades. With roughly 9000 Americans reaching the average...

Cash in: Beat The Taxman With 11 Tax-free Income Breaks

No one likes paying taxes, but what if there were a way to reduce the taxes you owe each year? Luckily, several tax-free income breaks can help lower your tax bill. Here are 11 of the best ways to beat the taxman. Break 1: accumulation and withdrawals of tax-free...

I owe to the IRS, what do I do now?

We know owing taxes can be a headache, especially if you don’t have a CPA or tax advisor to walk you through the process. If you fail to pay your taxes, in most cases you will only face interest or penalties, rather than going to prison for tax evasion. Even if you do...

Credit, Debt and Personal Finances 101

In an era of credit cards, services that allow you to “buy now, pay later”, and access to loans at your fingertips, it is easy to indulge in lifestyle you can’t necessarily afford on your budget. Before your fall too deep down the rabbit hole – or if you may already...

Buying an Electric Vehicle? Know These Tax Law Changes

 Are you thinking of buying an electric vehicle or a plug-in hybrid and taking advantage of the Electric Vehicle Tax Law Changes? If so, you have much to consider—thanks to the newlyenacted Inflation Reduction Act and Electric Vehicle Tax Law Changes. Let’s get...

Dealing With The New 62.5 Cents Mileage Rate

Due to rising gas prices, the Internal Revenue Service (IRS) announced an increase in the standard mileage rate for business travel. As a result, small businesses that make use of the standard mile rates can deduct 62.5 cents per mile for business mileage.  This is...

FAQ on Student Loan Cancellation

What is the Student Loan Cancellation? Last month, President Biden laid out a plan to cancel up to $20,000 in federal student loan debt per borrower. Beneath this seemingly simple plan comes quite a few questions about how, exactly, it will work. Naturally, borrowers...

Need to Change from 1099 to W2? Read More About This Safe Harbor Relief

IRS declared independent contractors as employees: Can Section 530 help?  Are you going through an IRS audit? Though we know that is bad but what happens if the IRS declares that many of your 1099 independent contractors are W-2 employees, now what?    Safe-harbor...

The IRS is Watching Cryptocurrency Closely

The IRS wants to know of any bitcoins or other cryptocurrencies you have. It will appear at the top of the first page of your Form 1040, below your address and name. The IRS wants to monitor crypto purchases and sales starting this year.   Anyone filing a tax return...

Request an Appointment Today

1 + 3 =

Call us at

Pin It on Pinterest

Share This