If you’re unsure of the type and amount that should be tracked for your taxes, don’t worry! There are many new business owners who feel similarly.
It’s time to live the life of your dreams. And I’m here for you every step of the way- because no one can take that away from YOU! Not even the taxman!
3 Mistakes Business Owners Make with Self-Employment Income
New business owners often make the mistake of thinking they are too small for a separate account. All income goes into ONE, which can be either personal or self-employed and this leads them to believe that there won’t always be enough activity on their end with regards to how much money comes in each month due solely because it’s all combined under one heading – “income.”
This is the one mistake that can cause major accounting errors. If you don’t know how to differentiate between employee income and self-employed, then your taxes might be higher taxes!
It’s important to maintain a separation between your self-employed and personal income because it simplifies bookkeeping. Plus, you’ll be protected from accounting errors that cost money!
The second mistake people make with their self-employment income is thinking that if they don’t receive 1099 from their client, then the money isn’t taxable. I’m going to burst your bubble and tell you this is 100% incorrect!
The reason we have 1099s is to ensure that self-employed people are reporting their income, and the government wants a record of this so they can keep track. It also acts as an extra check on where the money goes in case anything goes wrong with filing taxes or hiding profits from tax collectors!
Even if you don’t receive 1099, you are responsible for reporting your self-employment income. Stop cheating the system!
These new business owners are waiting until they’ve made a certain amount of money before considering their income as business-related. What’s happening is that the entrepreneur continues to operate in hobby territory instead of really naming it for what it actually stands -a business.
There are many ways to make money in the United States, one way is called hobby income. This type of earnings comes from a personal passion that you have but no intention on turning a profit with it; instead wanting only for your workday activities and passions together generate cash flow where he/she doesn’t need an actual job at all!
But, once you start to engage in that activity with the INTENT of profit (even if not making money) then it’s about intent. You move from being just a hobbyist and into self-employment territory- even though no dollars are coming out!
What is Self Employment Income?
This means that if you are self-employed, there will be no paycheck with your earnings being deductions for federal income tax and state taxes.
Where do self-employed income can come from?
- Selling your products
- Affiliate commission
- Independent contractors income
- Ad revenue
- Direct Sales and MLM Business
What’s Not Self-Employment Income
When you get a paycheck, there are usually some amounts taken out for taxes. This is your employment income and it should go into the personal account.” You might also have self-employed earnings which would be put in your business account don’t mix them.
Gift income is not self-employed, but you may have been wondering if it’s taxable. The answer: No! One can give up to $14k in gift money without having to pay taxes on them and that doesn’t require any kind of compensation from yourself – just enjoy the blessings!! Make sure to deposit it in your personal account.
When You Need to Start Tracking Your Self-Employment Income
You need to start tracking your self-employed income as soon of you receive the first dollar from that new business venture.
The benefits of tracking your progress are many and can be used for various purposes, such as tax preparation or making strategic decisions about the future growth trajectory of your business.
How do we keep track of my numbers?
The most basic way to track your income is by keeping a journal. You can just write down every time somebody pays you, what it was for and the amount paid out of pocket. This may not seem like much now but as soon as things start booming this will give us some good insight into where our money comes from so we know if there’s anything new worth chasing after!
You can also use a spreadsheet to track your income and expenses. I have this free Bookkeeping Spreadsheet that will help you enter all of the data, then it does everything in calculating for me!
Using a digital accounting program like QuickBooks Online (my fav), Xero or Wave will save you time and money. They’re easy to use but they do take up more of your day-to-day life because it’s so hands-on with these programs!
If you’re a new business owner, make sure to avoid these three mistakes when it comes to your self-employment income. And if you need help keeping track of your income and expenses, we have a free bookkeeping spreadsheet that can make the process a little bit easier.