Have you been considering starting a side hustle to help supplement your income? If so, there are some tax implications that you’ll want to be aware of. This post will go over the basics and provide some tips for how to handle them.
Taxes: they’re not just for big businesses anymore. These days, more and more people are running their own side hustles- whether it’s painting houses on the weekends or tutoring students in math after hours at work.
But even though these individuals may have very little income coming from their employers, they still need to pay taxes – which can be tricky if they don’t know what deductions are available to them.
Many people are running a side hustle. If you’re one of them, make sure you know what taxes apply to your business and how to file those taxes correctly. This is especially important if you’re doing any kind of freelancing or other work that’s related to the digital economy.
In this post, we’ll go through some basic tax tips for when you’re running a side hustle in Australia as well as cover some common questions about filing taxes for your side hustle.
Genius Tax Tips For Your Side Hustle
This isn’t the glamorous side of entrepreneurship and success, but it is one of the most important. With the accumulation of zeroes in your bank account comes the inevitable grind to comply with financial regulations.
Rather than doing the bare minimum to keep the taxman happy, wising up to the intricacies of the rules can result in more money in your pocket. Your side hustle or fresh startup is where every dollar matters, so it pays to arm yourself with some intel when it comes to tax time.
Mark Chapman, Director of Tax Communications at H&R Block, has given us the inside scoop on how to approach tax as a fledgling entrepreneur. The company prepares almost 800,000 tax returns per year from 470 offices around the country, so Mark certainly knows the ins and outs. He’s provided us with some stellar tax tips, which you can read in full below:
Declare Your Income
“If you’re running a business, all the income you earn from your business will be taxable. So, every sale you make will count towards your taxable turnover and will need to be declared on your income tax return. If you get paid in cash, don’t forget to declare it. The ATO traps many businesses that – deliberately or otherwise – don’t record cash sales.
In addition, if your turnover exceeds $75,000 – or even if it looks like it might exceed $75,000 in the near future – you’ll need to register for GST. This 10% tax is added to all your taxable sales and needs to be paid across to the ATO every quarter. You can offset the GST you pay on your purchases and expenses against the GST you owe; only the net figure is paid to the government.
Keeping track of your income is essential, so that means you need to keep good records. There are lots of accounting software packages out there that will help you keep on top of your figures but if you’re not a numbers person, consider getting a professional bookkeeper to do the job for you. Sure, it’s an extra cost, but it’s one less stressful task to worry about.”
We use Xero at Luxity Media (publisher of Boss Hunting) and swear by it, but there are plenty of other easy to use options as well.
Claim Your Deductions
“Every dollar you spend on purchases and expenses that relate to your business can be deducted from your profits. You then pay tax on the difference between your income and deductions.
So, make sure you claim all your business expenses, whether that’s the cost of buying stock, heating your office, marketing your brand or travelling to meet customers (or any of the numerous other expenses you might incur).
When it comes to deductions, the key rules to remember are:
- Your business must have incurred the expense
- The expense must relate to your business and can’t be private or domestic in nature (so you can’t claim for the cost of your weekly groceries or your household bills)
- Any expenses that are partly business-related and partly private or domestic need to be apportioned (which can be crucial if, for instance, you run your business from home and can claim home office costs)
- Make sure you can prove your business spent the money. An invoice or receipt is ideal, but a bank or credit card statement can also be used as proof in many cases.”
Get Your Structure Right
“If you’re starting up a new business, do you want to be a sole trader, or do you want to run the business through a company or trust? You might not have given it any thought, but this is an important question, and if you make the wrong choice, you may have to live with that choice for many years.
Companies often pay tax at a lower rate than individuals – but there are many other factors to consider. For example, if you set up as a sole trader and you’re in a business with a high risk of litigation – a surgeon perhaps – you could find all your personal assets, like your home, at risk if you get sued.
Setting up as a company will therefore protect your personal assets. Trusts can be useful for asset protection purposes and allow you to stream some of the rewards of the business to family members.
My key tip on business structuring is to get professional advice before you do anything. Good advice now could save tax down the line as well as making it easier to sleep at night.”
Take Advantage of the Tax Breaks
“Tax isn’t all bad news. There are incentives in the tax system that can be invaluable for new businesses if you know how to use them.
First of all, if you need to buy any capital equipment for your business – such as a car, a van, computer equipment, office furniture or plant to manufacture a product – you can claim an immediate deduction for the full cost of each capital item that costs less than $25,000 (as opposed to writing off the cost over several years, which is how these assets are normally treated). This special incentive is set to end on 30 June 2020, so it pays to take advantage whilst it lasts.
In addition, whilst you’re still assessing the feasibility of your new business, you might be able to claim deductions for expenses you incur, even though the business hasn’t started yet (and indeed may never start if your research shows the business isn’t feasible). Deductible costs can include professional advice on structuring your business, researching the viability of the business and developing a business plan.”
Set Money Aside For Your Taxes
“This might seem obvious, but unfortunately, failing to set money aside to pay tax is one of the most common pitfalls that new businesses fall into. Particularly if you’re coming out of a paid job, you’re probably used to getting your taxes deducted straight from your pay packet by your employer. But now you’re in business on your own account, nobody is going to be deducting anything, so you need to proactively manage your cash flow to set money aside for future tax bills.
Remember, with small businesses, cash flow is king. So even if you seem to be trading profitably, if your customers aren’t actually paying your invoices, you’ll struggle to pay your debts, and one organisation you definitely don’t want to end up in debt to is the ATO.”
Tax Tips For When You’re Running A Side Hustle
Tax time doesn’t have to be as painful as you think (we promise!). You can probably think of a zillion fun things to do right now that don’t involve tax. We get it: figuring out finance stuff can drive you up the wall.
It doesn’t have to be so painful, though (we promise!). Whether you work a side hustle, have started making some extra coin from your hobby or have just crossed over into full-time self-employment (hurrah!), it’s super-important – and totally possible – to wrap your head around tax. And hey, being on this very page is a good place to start.
We’ve put together an explainer with help from Amanda Newton, a trained accountant, a former small-business owner and GM of partner experience at Xero (basically, she knows what she’s talking about).
Quick disclaimer: the information below refers to Australian taxation law and is not intended to be relied upon as legal, accounting or tax advice. Make sure you get some independent, professional guidance if you’re unsure.
I have a day job and make a bit of money from my side hustle. Do I have to declare those extra earnings? Yes. If you consider your side hustle a business, you’ll need to declare any money you make from it, no matter how big or small the sum.
How Do I Know If What I Do Is A Hobby Or A Business?
There’s no one qualifier on determining if you’re a business. But, if you approach your venture in a business-like manner – for example, you make or do things in order to make a profit, advertise your services/wares, have an ABN (Australian Business Number) and believe your hustle is going to grow over time – you’re probably running a business.
Is There A Financial Reason To Turn My Hobby Into A Business?
The main benefit is that you can claim tax deductions on business expenses (and therefore potentially pay less tax). You can also register for a .com.au domain and get access to government concessions for businesses.
I’ve figured out I’m running a business. What tax obligations do I have? This depends on the structure of your business. The four common business structures – sole trader, partnership, company and trust – all have different obligations. Think about what structure suits you, and chat to an accountant from early on in the process.
If what you do is going to be a side hustle (or a business that only involves you), you might start small as a sole trader. Then, simply register for an ABN and presto, you’ve got a business! On the other hand, if you think it’ll be more complex, want other people involved or really want to build it into something bigger in the future, you can look at creating a partnership or company.
If you’re a sole trader with an ABN, you’ll have to report your business income as part of your individual tax return once a year. This is because the other business structures require an additional tax return, separate to an individual return.
When Do I Need To Pay My Taxes?
There are different timelines for different kinds of businesses. For example, if you’re a sole trader and are not registered for GST, you’ve got an annual filing date of October 31st. If you lodge that through a tax agent, though, you’ve got until May 15th the following year. If you’re a small business with payroll and are registered for Single Touch Payroll (STP), you have different filing dates throughout the year.
You only need to register for GST (goods and services tax) if your business makes (or you expect it to make) $75,000 a year or more. If that’s the case, you’ll need to charge 10 per cent GST on top of what you sell. You’ll also need to lodge a business activity statement (BAS). Most businesses lodge these quarterly, but times can vary depending on your circumstances.
What’s The Deal With Expense Claims And Deductions?
In a nutshell, claiming expenses can help lower your tax bill. It literally pays to keep a record of expenses throughout the year – this includes everything you’ve spent on your business, from stationery to a new laptop. Even if you’re unsure, just keep the receipt. Here’s the ATO’s guide to what expenses you can and can’t claim. (A good tax agent or accountant can also guide you through this process.)
How do I avoid being slugged with an unexpected tax bill? If you’ve been tracking your business throughout the year and it’s doing well, it’s a good idea to set aside money to pay tax regularly so you don’t get a big shock when you file your return. A tax agent can help you figure out how much you might have to pay, then you can put aside a part of that sum every fortnight or so. The ATO has a tax calculator, too, which allows you to estimate your tax and plan ahead.
What are PAYG Instalments?
This is one way to pay your tax directly to the ATO in regular instalments, rather than as a lump sum at the end of a financial year. So if your business is brand-spankin’ new, but you still reckon you’ll make a good profit, you can register to voluntarily pay tax during the year (this is usually in quarterly payments). It’s like forced savings to ensure you’re not out of pocket down the track.
Keep in mind the ATO will automatically sign you up for PAYG instalments if your business income reaches a certain threshold, and it will automatically remove you from the system when you no longer meet that threshold.
How Can I Make Tax Time Less Stressful?
The key is to have it all as streamlined as possible. Technology has made things much easier for us; 20 years ago, everyone kept their receipts in a box and manually entered them into a spreadsheet. Software like Hubdoc automatically sends photos of your receipts to your accounting software so that it’s ready for you when you need it. Systems like Xero will show you how much you earned in the year, keep track of how your business is performing month on month and allow you to access that data right away.
If you’re feeling overwhelmed, see a tax agent who can walk you through it all (their fee is tax-deductible!). When you’re just starting out, you might not think you’re making enough money to get a tax agent, but doing so can be a worthwhile investment in the long term. Getting the right advice early on, especially from someone who specialises in your area of work and knows the nuances of your industry, can do a lot to set you up on the right path.
Second Job Side Hustle Tax Tips
There are many benefits to having multiple streams of income. Some people invest in property. Some people grow their share portfolio. Some people start a side-hustle. Many Australians turn their skills and hobbies into a profitable side-business to earn a little extra cash from photographers to gardeners to pet trainers. Whichever way you start and build a second stream of income, there are things you’ll need to know about your taxes, so you don’t run into trouble with the ATO.
Hobby or Business
It’s important to know if your side-hustle is really a hobby or if you’re going to pursue it as a business actively. If you intend to open a business, you’ll need to register your business name and obtain an ABN (Australian Business Number). You’ll also need to keep business records, have a separate bank account and obtain registrations and licenses to run your business if required. If you run a hobby, you won’t have any additional tax or reporting obligations, but you won’t be able to make any claims or deductions on your tax.
Many new businesses and side-hustles startup as a sole trader, however, you may need to set up another business structure to protect your assets if you’re involved in litigation. Tax structures such as companies and trusts are designed to protect your assets. However, if you’re a sole trader, your personal assets are at risk.
When you run a side hustle, you’re open not only to litigation but to things going wrong as well. So it pays to protect your side hustle with an insurance policy. There are several types of business insurances, including property, vehicle, personal liability, workers compensation, product liability, cyber liability interruption and crime insurances.
Insurances can be customised to your business needs and requirements. However, running even a small side hustle opens you to a level of risk against lawsuits and personal damage. So take care to protect your assets.
Superannuation is an amount set aside by your employer that forms part of your wage that you receive at your preservation age. Having a side-hustle might mean you need to set some money aside and contribute to your superannuation fund for your retirement.
Make super personal contributions from your after-tax income, for example, from your bank account directly to your super fund. You might be able to claim a tax deduction for your super personal contributions by passing the 10 per cent rule. You can also consider salary sacrificing your superannuation through your side hustle. This is a great way of ensuring your super grows at a reduced tax rate.
Businesses that turn over a gross amount of $75,000 will need to register to collect and pay the goods and services tax (GST). You will need to report monthly, quarterly or yearly to the Australian Taxation Office (ATO) and pay the GST you have collected after calculating the GST credits you can claim back on your Business Activity Statement (BAS).
Set Money Aside To Pay Your Tax
Having a profitable side-hustle might be a great way to earn extra income, but it pays to have a separate bank account to keep an eye on your cash flow and set money aside to pay your tax. Spending all of the money you earn from your side-hustle could have serious consequences at tax time, especially if you’re used to having an employer that takes care of your personal income tax and super contributions for you.
There are a range of tax incentives that you might have access to when starting up your side-hustle. For example, the instant asset write-off allows businesses to purchase capital equipment – furniture, machinery, laptops – and claim the cost as a tax deduction.
From 12 March 2020 until 30 June 2020, the instant asset write-off has increased from $30,000 up to $150,000. In addition, business eligibility has been expanded to cover businesses with an aggravated turnover of less than $500 million (up from $50 million).
There are eligibility criteria your business needs to meet in order to claim the instant asset write-off. First, don’t go purchasing equipment until you have spoken to a tax accountant. A tax agent can help you determine if claiming a deduction versus depreciating your assets works better for your business.
There is a range of running costs you’ll be able to claim from your side-hustle. If you’re running a business from home, you’ll be able to claim expenses such as:
- Professional services
- Advertising and marketing
If you have a dedicated home office, there are claims to be made against your rent and mortgage interest. There is potential Capital Gains Tax (CGT) on the profits made by selling your home if you do decide to claim these expenses. It’s best to speak with a tax accountant who can advise your best options for claiming expenses on your tax.
When claiming tax deductions, the ATO has three golden rules:
- You must already have incurred the expense
- The expense must be claimed on your business expenses only
- You must be able to back up your claim
Keeping track of your expenses is essential. There are a lot of accounting packages available, and it might be worth investing in keeping on top of your records. If you do have a lot of claims to make, you might consider hiring a bookkeeper. Not only will they save you time and keep your records accurate, but you’ll also be able to claim their expense against your taxes.