How does a side business affect my tax deductions?

[meick77]

Hi, 

I am thinking of starting a side business as a sole-proprietor. I have a full-time day job with a regular salary. I want to know if my business expenses will affect my deductions and tax return? IE if I make 50k at my day job, but I don't make a profit from my side business the first year, will deductions from my side business come off the taxable income I make at my day job?  

[VolvoGirl]

Yes you can show a net loss and it gets deducted from your other income.

Some general info on self employment...........

You will need to keep good records.  You may get a 1099NEC at the end of the year if someone pays you more than $600 but you need to report all your income no matter how small.  You might want to use Quicken or QuickBooks to keep track of your income and expenses.

There is also QuickBooks Self Employment bundle you can check out which includes one Turbo Tax Online Self Employed  return....

http://quickbooks.intuit.com/self-employed

When you are self employed you are in business for yourself and the person or company that pays you is your customer or client.

To report your self employment income you will fill out schedule C in your personal 1040 tax return and pay SE self employment Tax.  You will need to use the Online Self Employed version or any Desktop program but the Desktop Home & Business version will have the most help.

Here is some IRS reading material……

IRS information on Self Employment

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center

Pulication 334, Tax Guide for Small Business

http://www.irs.gov/pub/irs-pdf/p334.pdf

Publication 535 Business Expenses

http://www.irs.gov/pub/irs-pdf/p535.pdf

You pay Self Employment tax on $400 or more of net profit from self-employment in addition to any regular income tax.  You pay 15.3% SE tax on 92.35% of your Net Profit greater than $400.  The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare.  So you get social security credit for it when you retire.  

[meick77]

Is sole-proprietor considered self employment? IE a clothing brand?  

[VolvoGirl]

Yes, everything is self employment.  Unless you set it up as a corp or partnership or LLC and need to file a separate Business return for it.  If it is not a separate Business return then it is a disregarded entity and gets reported on Schedule C in your personal return.

Here is a blank Schedule C

http://www.irs.gov/pub/irs-pdf/f1040sc.pdf

And instructions http://www.irs.gov/pub/irs-pdf/i1040sc.pdf

[meick77]

Thank you very very much for the response!

[Hal_Al]

The expenses of a side business are business deductions. As such, they are unrelated to your personal deductions.  That is, you get your business deductions in addition the your standard or itemized deductions on Schedule A.  Business deductions go on Schedule C. 

[Mike9241]

i offer a warning. if the side business is continually unprofitable (, the IRS could take the position it's a hobby.

Basically, according to the IRS’s hobby business tax rules, if profit is rare, you have a hobby, but if you regularly earn a profit, you have a business. Specifically, if you turned a profit in three of the last five years, you probably have a business.

 with a hobby the income is taxable but deductions are limited to hobby income and can only be taken if you itemize.