Tax Tips For When You’re Running A Side Hustle

Have you thought about launching a side business to boost your income? If so, there are a few tax repercussions you should be aware of. The fundamentals will be covered in this article, along with some advice on how to handle them.

Taxes: they no longer apply only to large corporations. More and more people nowadays are operating their own side businesses, whether it be painting houses on the weekends or giving math lessons to children after work.

However, even though they may receive very little money from their employers, these people still have to pay taxes, which can be challenging if they are unaware of the deductions that are available to them.

Many people have side businesses. If you fall into this category, make sure you are aware of the taxes that relate to your company and how to file them properly. This is particularly crucial if you work in the digital economy or engage in any type of freelancing.

In this article, we'll go over some fundamental tax advice for Australians who own side businesses as well as address some often asked tax-related problems.

Brilliant Tax Advice For Your Side Business

Although this isn't the most glamorous aspect of success and entrepreneurship, it is one of the most crucial. The unavoidable grind of adhering to financial standards comes along with the increase of zeroes in your bank account.

Knowing the nuances of the rules can put more money in your pocket than performing the bare minimum to appease the taxman. Every dollar counts when it comes to your side business or a new startup, so it pays to be prepared come tax season.

H&R Block's Director of Tax Communications, Mark Chapman, has shared his insider knowledge on how to handle taxes as a budding businessperson. Mark most certainly is familiar with the ins and outs of taxes because the company produces nearly 800,000 tax returns annually from 470 offices across the nation. You can read the complete list of excellent tax advice he gave us below:

Make Your Income Known

"If you own a business, all of the revenue you receive from it will be subject to taxation. In light of this, each sale you make will contribute to your taxable turnover and must be reported on your income tax return. Don't forget to declare cash payments if you receive them. Many companies that intentionally or unintentionally fail to register cash sales fall victim to ATO traps.

In addition, you are required to register for the Goods and Services Tax (GST) if your annual revenue is more than $75,000, even if it simply seems likely to do so in the near future. Every one of your taxable transactions is subject to a tax of 10%, which must be remitted to the ATO on a quarterly basis. Only the nett amount is turned over to the government; the GST that you pay on your purchases and costs might be deducted from the GST that you are obligated to pay.

Because it is essential to monitor where your money is going at all times, you must keep meticulous records. If you struggle with numbers, you may want to consider hiring a professional book-keeper to handle the task on your behalf. There are many accounting software programmes available that can assist you in keeping track of your finances; however, if you struggle with numbers, you may want to consider hiring a professional book-keeper to handle the task on your behalf. Even if there is an additional charge, it is still one less stressful duty that needs to be thought about.

Even while Xero is the one that Luxury Media, the company that publishes Boss Hunting, uses and recommends, there are many more straightforward options available.

Make a deduction claim

Every dollar that you spend on things and expenses related to your company might be deducted from the income of your business. After that, you will be taxed on the amount that is left over after subtracting your deductions from your income.

Therefore, be sure that you are claiming all of your company's expenses, including those for heating your workplace, promoting your brand, and travelling to meet with clients (or any of the numerous other expenses you might incur).

When it comes to deductions, the following are the most important criteria to keep in mind:

• The cost must have been incurred by your company.
• The expenditure needs to be of a personal or household character and must be connected to your company (you cannot claim the cost of your weekly grocery or housekeeping expenses).
• Any charges that can be divided into those incurred for one's personal life and those incurred for one's business must be allocated (which can be crucial if, for instance, you run your business from home and can claim home office costs)
• Be sure that you can provide evidence of how the funds were used by your company. Even though an invoice or receipt is the prefered method of verification, a statement from the customer's bank or credit card company can often be used instead.

Take Care of Your Structure

"If you're beginning a new firm, should you operate it as a sole proprietorship or as a corporation or trust? Although you might not have given it much attention, this is a crucial decision that you might have to live with for many years if you make the wrong one.

Companies frequently pay taxes at a lower rate than people do, but there are many other things to take into account. A surgeon, for instance, who chooses to operate as a single proprietor, may find that all of his or her personal assets, including their home, are in danger in the event of a lawsuit.

Thus, incorporating will safeguard your own assets. Trusts can be helpful for protecting your assets and distributing some of the profits from your business to your family.

My first piece of advice for structuring a firm is to first seek professional guidance. The good counsel given now could reduce future tax liabilities and ease nighttime sleeplessness.

Benefit from the Tax Breaks

It's not always horrible to have to pay taxes. Tax advantages can be highly beneficial for new businesses, but only if their application is properly understood.

If you need to purchase any capital equipment for your business, such as a car, a van, computer equipment, office furniture, or a factory to manufacture a product, you can deduct the entire cost of each capital item that costs less than $25,000. This applies whether you need to buy a car, a van, computer equipment, or office furniture (as opposed to writing off the cost over several years, which is how these assets are normally treated). Because it is planned that this particular offer will end on June 30, 2020, it is in your best interest to take advantage of it while you still can.

You may be able to deduct expenses incurred while you are still determining the viability of your new business, despite the fact that it has not yet gone into operation (and may never do so if your research reveals that it is not feasible). This is true even though your new company has not yet launched. Obtaining professional guidance on how to organise your company, conducting research on the viability of the endeavour, and developing a business strategy are all expenses that qualify for tax deductibility.

Set Aside Money For Taxes

Although it may seem simple, one of the most frequent mistakes made by new businesses is forgetting to set aside funds to pay taxes. If you've previously held a salaried position, in particular, you're undoubtedly accustomed to having your company directly deduct taxes from your paycheck. However, since you are now operating your firm on your own dime and no one will be making any deductions, you must actively manage your cash flow to set aside funds for upcoming tax liabilities.

Never lose sight of the fact that maintaining a healthy cash flow is of utmost importance for small businesses. As a result, regardless of whether or not it appears that your company is lucrative, you will have a difficult time paying your bills if your clients are not actually paying them. There is one agency to which you should avoid getting into debt at all costs, and that is the ATO.

Tax Advice For Those Running Side Businesses

We promise that tax season won't be as terrible as you anticipate. Right now, there are probably a gazillion enjoyable activities that you could perform without paying taxes. We understand how frustrating it can be to figure out financial matters.

However, it doesn't have to be so unpleasant (we swear!). It's crucial - and absolutely doable - to get your head around tax, regardless of whether you have a full-time job, a side gig, or have just begun earning additional money from your hobby. And hey, you can start right here on this page.

Amanda Newton, a certified accountant, a former small-business owner, and the general manager of partner experience at Xero (essentially, she understands what she's talking about), helped us put together an explainer.

Immediately after this disclaimer, it should be noted that the information following applies to Australian tax legislation and is not meant to be relied upon as legal, accounting, or tax advice. If you're unsure, be sure to seek some impartial, professional advice.

I also have a day job, and I make some side income. Do I need to report those additional earnings? Yes. No matter how much money you generate from your side business, if you treat it like a business, you must report it to the IRS.

How can I tell if what I do is a business or a hobby?

There is no single criterion to determine whether you are a business. However, if you approach your endeavor in a businesslike manner, for instance, by making or doing things to make a profit, advertising your services or goods, having an ABN (Australian Business Number), and anticipating that your hustle will gain momentum over time, you are most likely running a business.

You can evaluate if you're running a business or a hobby by consulting the ATO's more in-depth breakdown for online sellers (with with a fun quiz).

Is It Profitable For Me To Turn My Hobbies Into A Business?

I've realized that I am a business owner. What taxes am I liable for? This depends on how your company is set up. Each of the four popular business structures—a sole proprietorship, a partnership, a corporation, and a trust—has specific responsibilities. Consider what structure will work best for you, and see an accountant as soon as possible.

You might start out as a single trader if what you do is going to be a side job (or a business that only you are involved in). After that, just apply for an ABN, and presto—you have a business! On the other hand, you can consider forming a partnership or business if you believe it will be more complicated, if you want additional people to be involved, or if you genuinely want to grow it in the future.

If you are a sole proprietor with an ABN, you must include a report of your business income in your annual personal tax return. This is so that tax returns for the various business entities can be filed in addition to individual returns.

When Must I Pay My Taxes?

For various types of enterprises, there are various deadlines. As an illustration, if you operate as a sole proprietor and are not registered for GST, your annual reporting deadline is October 31. However, you have until May 15 of the following year if you file that through a tax agent. You have various filing deadlines throughout the year if you are a small business with payroll and are enrolled for Single Touch Payroll (STP).

Only if your firm generates (or you anticipate it will generate) $75,000 or more in revenue annually do you need to register for GST (goods and services tax). In that situation, you'll also need to add a 10% GST to the price of your goods. Additionally, you must provide a company activity statement (BAS). The frequency at which businesses file these varies depending on the situation.

What Are Expense Claims And Deductions All About?

In short, declaring costs can help you pay less in taxes. It literally pays to keep track of all of your business-related expenses throughout the year, from stationery to a new laptop. Regardless of your uncertainty, please save the receipt. The ATO's guide to what expenses you can and cannot claim is available here. (An effective tax preparer or accountant can also help you with this process.)

How can I prevent receiving a surprise tax bill? It's a good idea to consistently set aside money to pay tax if you've been monitoring your business throughout the year and it's been successful so you don't receive a nasty surprise when you file your return. You can estimate your potential tax liability with the aid of a tax advisor, and you can then set aside a portion of that amount approximately every two weeks. You can also estimate your tax and make plans with the ATO's tax calculator.

How do PAYG Instalments work?

This is one option to pay your tax to the ATO on a regular basis in installments as opposed to all at once at the conclusion of the fiscal year. Therefore, if your company is brand-new but you still believe you'll turn a profit, you might register to pay tax voluntarily throughout the year (this is usually in quarterly payments). To make sure you won't run out of money in the future, it's like being compelled to save.

Remember that if your business income exceeds a specific threshold, the ATO will automatically sign you up for PAYG instalments; conversely, if your income falls below that threshold, the ATO will automatically remove you from the system.

How Can I Reduce Stress During Tax Season?

The important thing is to keep everything as organized as you can. Twenty years ago, everyone saved their receipts in a box and manually put them into a spreadsheet; today, everything is lot simpler for us thanks to technology. Your accounting software will be there for you when you need it thanks to tools like Hubdoc, which automatically transfer photographs of your receipts to it. Systems like Xero will show you how much money you made over the course of the year, monitor how your company is doing month to month, and provide you immediate access to that data.

Consult a tax professional who can help you sort it all out if you're feeling overwhelmed (their cost is tax deductible!). When you first start out, you might not feel like you're making enough money to hire a tax agent, but in the long run, it might be a wise investment to do so. Early counsel from a specialist in your field who is familiar with the subtleties of your sector can go a long way toward putting you on the right track.

Tax advise for a side hustle

The advantages of having several sources of income are numerous. Some people make property investments. Some individuals increase their stock portfolio. Some individuals launch a side business. From photographers to gardeners to pet trainers, many Australians turn their talents and interests into a lucrative side company to make a little extra money. Whatever method you choose to begin and develop a second source of income, there are some tax-related factors you should be aware of to avoid issues with the ATO.

Interest or Business

It's crucial to understand whether your side gig is only a hobby or something you intend to actively pursue as a business. You must register your business name and obtain an ABN if you plan to start a business (Australian Business Number). Additionally, you'll need to maintain business documents, have a different bank account for your business, and apply for any necessary registrations and permits. You won't have any additional tax or reporting requirements if you run a hobby, but you also won't be able to claim any tax benefits or write off any expenses.

Business Organization

However, you might need to set up another business structure to protect your assets if you're embroiled in litigation. Many new enterprises and side hustles start as sole proprietorships. Your assets are protected by tax structures like businesses and trusts. Your personal assets, however, are in danger if you operate as a sole proprietor.

Insurances

Running a side business leaves you vulnerable to both lawsuits and unfortunate events. So it makes sense to use insurance to safeguard your side business. There are many different kinds of company insurance, including those for property, automobiles, personal liability, workers' compensation, product liability, interruption of cyber liability, and crime.

Insurances can be tailored to your company's needs and specifications. But having even a little side business exposes you to some danger of legal trouble and property loss. So be careful to safeguard your possessions.

Superannuation

When you reach preservation age, your employer will start deducting superannuation from your paycheck. You might need to save some money and make contributions to your superannuation fund if you have a side business.

Make super-personal contributions to your super fund, such as from your bank account, using your after-tax income. By avoiding the 10% limit, you might be able to claim a tax deduction for your super personal contributions. You can also think about using your side business to salary sacrifice your superannuation. This is a fantastic way to guarantee that your super grows at a lower tax rate.

GST

Businesses must register in order to collect and pay the goods and services tax if their annual gross revenue exceeds $75,000. (GST). You must submit reports to the Australian Taxation Office (ATO) on a monthly, quarterly, or annual basis. After determining the GST credits you are eligible to receive back, you must also pay the GST you have collected (BAS).

Set Aside Money To Pay Your Taxes

Having a successful side business can be a terrific way to supplement your income, but it's important to monitor your cash flow and set aside money for taxes in a separate bank account. Especially if you're used to having an employer who handles your personal income tax and super contributions for you, spending all of the money you make from your side job could have major tax implications.

Incentive taxes

You may be able to take advantage of a number of tax benefits when you begin your side business. For instance, the rapid asset write-off enables companies to buy capital equipment, such as computers, furniture, and machinery, and deduct the cost from their taxes.

The instant asset write-off has raised from $30,000 to $150,000 between 12 March 2020 and 30 June 2020. Additionally, business eligibility has been increased from $50 million to cover companies with a monthly turnover of less than $500 million.

Your company must meet certain requirements in order to be eligible for the rapid asset write-off. First, consult a tax accountant before making any equipment purchases. A tax advisor can assist you in deciding whether it would be preferable for your company to claim a deduction or to depreciate its assets.

Tax Deductions

You can deduct a variety of operating expenses from your side business. If you operate a home-based business, you may deduct costs for things like:

• Phone
• Internet
• Heating
• Cooling
• Self-education
• specialized services
• marketing and advertising

There are claims that can be made against your rent and mortgage interest if you have a designated home office. If you choose to deduct these costs, you may be subject to Capital Gains Tax (CGT) on the profits obtained from selling your house. It is advisable to see a tax expert who can advise you on the best ways to deduct expenses from your taxes.

The ATO has three guidelines that must be followed when seeking tax deductions:

• You must have already paid for it.
• The cost can only be deducted from your business costs.
• You must be able to support your assertion.

It's crucial to keep track of your expenditures. There are many accounting software options available, so it can be worthwhile to spend money on maintaining your records. If you do have numerous claims, you might want to think about employing a bookkeeper. They'll not only save you time and ensure the accuracy of your records, but you'll also be able to deduct their cost from your taxes.