The tax season officially closed its 2023-2024 cycle on April 15, when the long-awaited “Tax Day” happened: that date is the deadline for filing tax returns, and those who have not done so by then or, failing that, have requested a postponement, may face fines and reprimands from the authorities.
Now, the IRS has issued a series of recommendations for small businesses, urging them to use its Small Business and Self-Employed Tax Center on the official website IRS.gov. It is a platform of very valuable and interesting tools for those small business owners and self-employed, where they are taught to understand how to comply with their federal tax obligations.
What the IRS wants to emphasize is that there are small business owners who operate as freelancers, independent contractors or other categories of taxpayers, which means that there are different tax requirements that everyone should be aware of.
Are Extra Incomes Taxable in the US?
Here’s an important detail: Many American taxpayers don’t even know that their additional income counts as small business income, even if it comes from another source, and it should be included when filing their annual tax returns.
As explained by Alex Beene, professor of financial education at the University of Tennessee at Martin, many of these taxable individuals now have secondary gainful activities, in the new ways of working from home or online, and they have not realized that some of these secondary activities become small businesses before the IRS.
Don’t Forget to Report These Incomes to the IRS
For example, if you have a virtual store where you sell handmade products on Etsy, rent a room in your house on Airbnb, or work as a driver on a ride-sharing app, these incomes should be reported if they exceed $400 net per month.
At the time of filing the return, it is essential to keep a detailed record of all invoices issued and payments received, as well as the expenses associated with the commercial activity. This is crucial to avoid complications in case of a tax audit.
There are certain cases in which the side activity can be considered as a “hobby” and does not require federal tax filing, as long as it is not expected to generate economic benefits, is not managed as a formal business and does not closely track the associated costs and expenses. If you think that your side activity qualifies in this category, you should consult with a tax expert.
On the other hand, consider that you may be eligible to deduct various expenses related to this small business or side activity, such as the mileage made by a car used to work on a transportation application, or office tools and equipment for such jobs.
Before filing the tax return, it is advisable to have a clear estimate of how much your earnings will be taxed at both the federal and state levels, in order to avoid unnecessary surprises and expenses during the tax season.
Income Taxes: How Much Should I Pay to the IRS?
In 2023, the federal government implemented a 12.4% tax on income up to $160.20, while Medicare charges an additional 2.9% to self-employed workers within the United States.
In addition to federal taxes, it should be considered that state and local taxes can be added and increase the tax burden. However, states like Florida, Texas, and Alaska do not tax personal income.
To avoid a significant tax burden at the end of the tax year, the IRS offers small businesses the option of using Form 1040-ES. This form shows the expected taxable income from self-employment. In addition, the IRS allows the payment of estimated taxes on a quarterly basis, which helps to spread the tax payment throughout the year.
