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.”

Should I Open an HSA?

Should I Open An HSA Account? Are you considering a Health Savings Account (HSA)? If so, it is vital to understand what exactly an HSA entails. With this guide, you'll learn all about it: the advantages of an HSA and how it can help you manage your medical expenses....

Personal Finance Tips for Young Adults

As someone who has been working for most of their life, I wish there was someone out there who had shown me the correct way to save money for my future. Now that I am in my 30s, I have been getting better at saving money, but there are some personal finance tips that...

How to Track Expenses

There are many different methodologies, tools, tips, and tricks for tracking expenses, and it ultimately depends on your lifestyle and how actively and accurately you want to track them. This is information I’ve pulled from other sources and compiled into a few...

How To Accurately Record Commuting Mileage and Increase Tax Deductions

Increase Tax Deductions With the Business-Mileage Rule Using the Business Mileage tax deduction can be tricky. There are lots of situations that count while others do not. We don’t like commuting mileage. You should dislike it, too. It’s personal. It’s not deductible....

Bookkeeping 101

As a new business owner, you will certainly have some responsibilities you won’t be able to avoid. One of those non-negotiable part of your business is producing financial statements. It can be overwhelming trying to master a topic such as bookkeeping but don’t worry...

Bankruptcy – Everything You Need to Know

Everything you need to know Filing for bankruptcy protection is considered a statement on your ability to repay your debt to your creditors. Filing for bankruptcy will also put a halt to foreclosure or legal actions against you, and it stops creditors from calling and...

Top Tax Tips for 2023

Tax Refunds May Be Smaller This Year Plan now to learn these 2023 tax tips avoid surprises in the future! If you’re expecting a tax refund in 2023, it may be smaller than last year, according to the IRS. Your annual balance is based on taxable income, calculated by...

What is an EA?

Have you ever seen the title EA next to a tax professional’s name and wonder what it means? Or maybe you’re familiar with the title and you’re curious about the differences between an EA and CPA? Either way, in this blog I will be answering these frequently asked...

History of Federal Income Tax Rates: 1913 – 2021

The United States federal government levies taxes on the income of its citizens and legal residents. The Internal Revenue Service (IRS) is the agency responsible for collecting these taxes.  Federal income tax rates have changed several times since 1913, when the...

Familiarize Yourself With Tax Terminology

Yes, I know, tax terminology feels like a whole new language. For most people all of tax forms can be even more confusing than a foreign language. What’s the difference between itemized deduction and standard deduction? What’s Income tax?  These words and more tax...

Request an Appointment Today

3 + 14 =

Call us at

Pin It on Pinterest

Share This