If you earn $600 or more in income that does not have any taxes withheld, you will most likely be receiving a 1099-MISC tax document at the beginning of the next year. This income must be reported on your tax return no matter how much you make during the year. Income from a 1099 is generally either from side work you may have done in addition to your normal job, or it is from a full-fledged business that you run.
In either case, it will be counted as income on your form Schedule C of your 1040 tax return, and since there are not any monies withheld for taxes, you could potentially owe as a result. To avoid this, keep track of any legitimate expenses associated with earning this income. Below is a list of some common expenses to keep track of during the year.
Keep a mileage log of all of your business-related driving. Keep receipts from all oil changes and auto repairs, as these will have odometer readings, which are considered third-party documentation to support the mileage deduction should you ever be audited.
These are deducted at 50 percent on your tax return. You will want to put the full amount in when you do you taxes, and the software will take half. Keep in mind that you will want this expense to be reasonable to your income. It is a red flag to the IRS if your meals expense is excessive in relation to how much you earned.
This is a tricky one. While you can technically take a business use of home deduction for your home office space, it is not a great idea if you own your home. When you sell your home, you will need to recapture all of those deductions against the sale, which can be a hassle. Honestly, the deduction is not really worth it for the trouble it can cause down the road. Now if you rent, you can reasonably take the percentage of your home that you use for business and write it off.
If you work out of your home it is generally acceptable to write off a percentage of your utilities on your tax return. Twenty to twenty-five percent is a pretty safe bet, but consult your CPA if you have concerns.
If you use your phone predominately for work, this is a great deduction. Alternatively, you can take a percentage if you do not feel comfortable deducting the entire cost.
This is just a short list of the most common expenses to track. For a complete list, check out the Schedule C form on IRS.gov.
All the deductions you take will lower the amount of income that will be reported on your 1040, which will effect whether you owe taxes. If your business is really taking off, you may want to consider making estimated payments each quarter to offset the tax liability. The IRS penalizes tax payers who owe more than $1,000 on their return.
Another strategy that helps minimize tax liability would be to withhold more taxes from your regular employment. This is only an option if you or your spouse have a job with a W2 at the end of the year. If you go this route you will want to either withhold at a higher rate or have an additional withholding payment deducted each pay check.
If your business is doing well and showing a decent net income, the goal here is to make sure you have paid enough taxes either by making estimated payments or by withholding more from your regular job so you avoid penalties and an unexpected tax bill come April.