Taxes are the part of a side hustle most people try not to think about. That works right up until the first tax season, when you're digging through emails at midnight trying to remember what you sold.
This lesson won't do your taxes for you, and I won't pretend it can. What it will do is help you understand the basic ideas, keep the right records, and walk into a meeting with a tax professional with good questions written down.
The short version
- This is general US information, not tax advice, and rules vary by state and country, so check with a qualified tax professional.
- Set money aside from every payment and keep clean records, because nobody is taking taxes out for you.
- Bring a written list of questions to a tax pro early, before you have a pile of sales and a pile of confusion.
The basic idea, in plain words
If you've read the business basics lesson, you already know the headline. In the US, side income is generally taxable, even when it's small and even when nobody sends you a form. Here's a little more about what that means.
Income, expenses and profit
Income is the money that comes in from sales. Expenses are the money you spend to run the business, like a domain name, software or a payment processor's fees. Profit is roughly what's left when you take expenses away from income.
In general, it's your profit, not your total sales, that matters most for income tax. That's why tracking expenses matters. An expense you never wrote down can't help you.
Self-employment tax
When you have a regular job, your employer takes Social Security and Medicare out of your paycheck. When you work for yourself, nobody does that. Self-employment tax is generally how people who work for themselves pay into those programs.
You don't need to understand the math. You just need to know it may exist, so it doesn't surprise you.
Setting money aside
The easiest way to avoid a nasty tax bill is to never treat all your sales money as spending money. Some of it may belong to the government later.
Here's a simple way to handle it:
- Open a separate savings account just for taxes. Name it something obvious, like "Tax money. Do not touch."
- Every time a payment comes in, move a portion into that account right away.
- Ask a tax professional how much to set aside, based on your actual situation.
I'm not giving you a percentage. The right amount depends on your income, your state, your expenses and the rest of your household's taxes. The bookkeeping lesson shows how to build this into a weekly habit.
The habit of setting money aside matters more than getting the amount perfect on day one.
Estimated payments, in general terms
At a regular job, taxes come out a little at a time all year. Side income usually doesn't work that way. Because of that, the IRS may expect some people to make estimated tax payments, meaning you pay part of your expected tax during the year instead of all at once.
Whether you need to make them depends on your situation. So does how much and when. Your state may have its own version too.
This is exactly the kind of thing a tax pro can sort out in one conversation. The IRS website also has general information on estimated taxes and self-employment if you want to read up first.
Records your tax pro will want
Good records make your tax pro's job easier, which usually makes the bill for their time smaller. They also protect you if anyone ever asks questions about your return.
Keep these in one folder for each year:
- Sales records. Exports from your store or payment processor showing each sale, the date and the amount.
- Fees. Payment processor and platform fees, which are often listed separately from the sale.
- Expenses with receipts. Software, hosting, supplies, advertising and anything else you bought for the business.
- Refunds and chargebacks. A chargeback is when a buyer's bank reverses a payment.
- Tax forms you receive. Some payment platforms send tax forms. Save them, but don't assume a missing form means you owe nothing.
- Notes on mixed-use items. If you use your phone, car or a room in your house for both business and personal life, write down how you use it.
That last one matters. Things like home office space and using your own car often have special rules. Don't guess at them. Write down the facts and ask.
Questions to ask a tax professional
Write these down and bring them. Cross off the ones that don't apply. Add your own.
About your setup
- Based on what I sell and how, how should I report this income?
- Does my business structure change anything about my taxes?
- Does my state or city have its own tax rules I need to know about?
About money during the year
- How much should I set aside from each payment?
- Do I need to make estimated payments, and if so, how and when?
- If my income goes up or down a lot, when should I check back with you?
About records and expenses
- What records do you want from me each year, and in what form?
- Which of my expenses are generally deductible, and which aren't?
- Do any special rules apply to my home office, phone, internet or car?
- How long should I keep my records?
About other taxes
- Do I need to worry about sales tax on what I sell?
- If I sell to buyers in other countries, does that change anything?
Sales tax is its own animal, and it gets its own lesson next in this track. For now, just make sure it's on your list.
Finding a tax professional
There are a few kinds of people who prepare taxes. A CPA, or certified public accountant, is licensed by a state. An enrolled agent is a tax professional authorized by the IRS to represent taxpayers. There are also other paid preparers with different levels of training.
When you call around, ask whether they work with self-employed people or small online sellers. Ask what they charge and what they need from you. A good one won't mind basic questions. That's the job.
Do this next
Taxes don't get easier when you ignore them. They just get later.
Veteran. Gen Xer. Thirty-plus years building things on the web. I write these so you can skip some of the expensive mistakes.