Hobby Meets Hustle — a brand-new video series, and the first of its kind, from TurboTax — will showcase small business owners, entrepreneurs and self-employed individuals who want to turn their passion into profit. These hard workers want to make their dreams come true in the business world, but they know it’s not all about creativity and dedication. Finances need to be considered — especially when it comes to small businesses and self-employment income tax.
Meet our first spotlighted small business owner, Nicole Manago. Nicole is a 26-year-old candlemaker based in Southern California. Nicole founded her company, Sinta Studios, and she describes it as a “minimalistic brand selling hand-poured eco-friendly candles inspired by the tropics of the Philippines.” The products are also deeply personal for Nicole.
“As a Filipino American, I grew up with all of the Filipino traditions that my immigrant parents raised me with,” Nicole states in the first installment of Hobby Meets Hustle. “My mom, unfortunately, passed when I was 14, so I would love to bring scents that remind me of her and bring back the memories of her.”
She says pricing and the overall tax process are her most pressing challenges. “I know nothing about taxes as a self-proprietor,” she explains. “I’d love to know what I can write off.”
Does this sound like you? Are you making the leap from corporate employee to self-employed — and don’t know where to start when it comes to your finances? If so, you’re in the right place. Check out our Hobby Meets Hustle videos for guidance and inspiration, and get a comprehensive breakdown of self-employed tax tips for small business owners below!
Self-Employed and Small Business Taxes
The good news about small business and self-employment tax is that it follows the same basic principles as personal net earnings and income tax. Sure, there are a few key differences — but as long as you know the basics, you’ll be well-equipped to understand what you need to do.
The bad news is that those “key differences” can get a little tricky. That’s because they depend on your business structure and other factors — which means one person’s self-employed tax may not look anything like another person’s small business tax. As such, there’s no one-size-fits-all cheat sheet for filing. Luckily, we’ve got the software and expert tax support to help — but more on that later.
For now, let’s start with the easier stuff:
Small Business Owner, Self-Employed Person or Both?
If you’re a small business owner, you’re always self-employed. However, a self-employed person doesn’t necessarily have to be a business owner.
Other examples of self-employment include freelancers like writers and artists, personal trainers, property managers and sometimes even lawyers. Some self-employed people are “independent contractors,” which means they work with a business but aren’t considered an employee.
Taxes for self-employed people and small business owners are similar, but not identical. For example, in some cases, the term “self-employment tax” (or SE tax) only refers to social security and Medicare taxes and is separate from income tax.
What Do You Pay?
Unlike with other forms of profit, taxes aren’t automatically removed from self-employment income. That means you’ll have to calculate and pay more kinds of taxes on your own, including:
- Medicare tax.
- Social security tax.
- State tax.
- Federal tax.
- Federal Insurance Contributions Act tax (FICA tax).
A small business owner may also need to pay property and employment taxes.
When Do You Pay?
Every time an employee at a traditional job gets a paycheck, they’re paying social security and Medicare taxes. Small business owners and self-employed people, on the other hand, don’t have anyone to automatically withhold those funds — which is where an estimated tax payment comes in.
An estimated tax payment is your way of regularly fulfilling your tax bill. You’ll generally do this four times per tax year (which is why it’s sometimes called “paying your quarterly taxes”), and you’ll base your estimation on the current tax rate, recent income and more. You’ll also file a tax return at the end of the tax year.
Do You Pay More?
Income tax, Medicare tax, social security tax — oh my! When juggling all those numbers, it can start to feel like taxes are taking a big bite out of your small business or self-employment income. But do you really pay more than the average employee?
In some ways, the answer is yes. That’s because, in 2022, employees at traditional jobs pay about 7.65% of their income toward social security and Medicare taxes, and their employers pay an additional 7.65%. When you’re the boss, you’re paying both of those halves — although this may count toward your tax deductions.
Calculating Your Small Business Tax
In our “Hobby Meets Hustle” series, small business owner Nicole sits down to create a strategy for her finances. She discovers that there are quite a few factors to consider in terms of expenses, profits and taxable income — all of which will impact her tax return.
So, what does she need to know — and what do you need to know?
Here are a few things to consider when calculating all those taxes:
Your business structure will determine all kinds of important things, from your tax deductions to your total SE tax. That’s because the Internal Revenue Service (IRS) taxes businesses based on where they fall on a list of five legal structures:
- Limited Liability Company (LLC).
- Sole proprietorship.
- S Corporation.
- C Corporation.
These structures can be complicated and closely related, which is one more reason small business tax isn’t always cut and dry. For example, according to the IRS, all businesses except partnerships must file an annual income tax return, while partnerships file an information return — and this impacts how you prepare and file your taxes.
Does your small business have employees? If so, you’ll need to take a few extra things into consideration when calculating your taxes.
You’ll start with a Form W-2, also known as a Wage and Tax Statement. This form allows you to record wages, bonuses, tips and noncash payments made to your employees. You’ll keep track of taxes you withheld for them, including income, social security and Medicare taxes where applicable.
In addition, according to the IRS, you’re responsible for paying the Federal Unemployment (FUTA) Tax. Employees don’t pay this tax, but employers do.
Remember that you’ll need to file both income taxes and SE taxes for your small business. Depending on what industry you’re in, you may also need to pay:
- Fuel taxes.
- Manufacturing taxes.
- Environmental taxes.
Tax Write-Offs for Small Businesses
If refunds are the best part of tax season, then tax deductions are certainly the second-best part. Luckily, small businesses tend to have these in spades. That’s what Nicole learns as she calculates expenses and how they can be written off.
Let’s take a look at a few things that could become tax deductions:
Some Labor Expenses
Employees can help you save money on your small business tax return. That’s because some labor expenses, including certain salaries and commissions, can be deducted in their entirety.
Did you know you can deduct 100% of advertising expenses for your small business? The specifics will depend on what advertising methods you use — for example, newspaper ads could be a tax deduction, but you’d have to list printing and postage separately.
Home Office Supplies
If you use part of your home as an office, you may be able to deduct certain supplies, tech devices and even furniture. Read that fine print carefully, though; these things must meet specific requirements before they can be considered “business elements.”
How To File Your Small Business Taxes
The most important thing to know about filing small business taxes is that record-keeping is key. You need to make clear, correct notes about every expense, payment, charge and exchange — especially if you have one or more employees. You should also keep receipts whenever possible. This helps you organize all the information you’ll need to fill out various forms when tax season rolls around.
Next, you’ll want to make sure you’re using the right IRS form — or, in most cases, forms. Keep in mind that you’ll need different paperwork depending on your business’s legal structure, whether you have employees, what industry you’re in and more.
After that, check out the IRS Small Business and Self-Employed Tax Center. Here, you’ll find the latest updates on the tax rate, possible tax deductions, definitions of taxable income and other helpful resources.
But what about quarterly taxes? And finding every tax credit, tax deduction and tax break? How can you be sure you’re filing correctly while also leveraging all the benefits and options available to you?
The best place to start is with tax software — or, better yet, a trusted tax professional. That’s exactly what business owner Nicole discovered when she received three years of free access to TurboTax Live, plus one year of free access to QuickBooks and Mailchimp. Now, she can hand off her tax return to the experts — and, better yet, she’ll get advice on how to plan and budget for tax costs in the future.
Turn Your Hobby Into A Tax-Friendly Hustle With TurboTax
“For those who are hesitant to start a side hustle, I would advise to just go for it,” says Nicole. “You never know where you’ll end up!”
She’s right, of course — and with great tax advice and expert help right at your fingertips, there’s nothing stopping you. Now is the perfect time to turn your hobby into a hustle. Whether you’re currently a small business owner, a “one of these days” entrepreneur or a self-employed person, TurboTax is here to help handle your taxes so you can focus on your passion.
Check out TurboTax Business or TurboTax Self-Employed to get started!