Did you start something new this year, and now it’s blossomed into something you could never have imagined? Maybe you started on Upwork or Etsy or just started taking on a few friends as clients, and all of a sudden, you’re shocked at how much money you’ve earned.
We love a success story. Congrats!
Hopefully, you planned for this, but if not, read on for all you need to know about accounting for your new side gig. Of course, it’s more involved than waiting for your W2 to show up in January, but we can help! Whether graphic design, candle making, photography, or lawn mowing, you can apply these accounting tips for your new side gig to help make tax time go more smoothly. There’s no better time to start than now!
You’ll want to total up all your income, whether it was deposited into your personal bank account or business checking account (if you don’t have a business account, we recommend opening one!). The income reported on your tax return must be equal to or greater than the sum of all the income reported on Forms 1099-NEC or -K that you receive from clients or merchant processors. Save copies of these 1099s; your tax preparer will want them.
You’ll need to know your total calendar year business costs separated by category. For the most part, you can make up the names of the categories yourself. However, keep a few separate: meals, entertainment, assets (i.e., think computer and equipment purchases >$500), and loan payments. These might need special treatment, so your accountant will appreciate having them separated for review.
One thing you couldn’t do on your taxes as a W2 employee was to deduct home office expenses or mileage. Well, now, in business for yourself, you can.
Download a mobile phone app designed for mileage tracking or keep a paper log of your business mileage. Are you driving to a pop-up shop to sell your wares? Are you going to a client location for a meeting? Both of those count as business mileage. Note the date, your starting location, ending location, mileage driven, and purpose. Save the log just in case you’re audited. Give your accountant the total miles driven at year-end.
And no, the mileage from your daily trip to Starbucks doesn’t count. Nor is the fast food you purchased yourself on the way.
Working on your couch doesn’t count, but if you have a designated, primary home office space for your business – measure it! Note your office square footage and your home or apartment square footage. Then, send that information to your accountant at year-end with a list of your total home calendar year expenses. You can include items like utilities (e.g., water, gas, electric), property tax, home insurance, and repairs.
This was a bit more involved than just collecting a paycheck. But you made it this far, so keep going with your side gig. You never know what it will turn into. So to make next year’s tax prep go more smoothly, start fresh on January 1st with good bookkeeping processes in place.
If you still need to, open a business checking account – and a credit card account if you want one. Make sure all business expenses and income flow through these new accounts.
Then, open up a QuickBooks Online account. We recommend starting with QuickBooks Simple Start (pro tip: steer clear of the Self-Employed version). QBO is a great way to keep on top of expenses all year long. Not only will the scavenger hunt at tax time be a thing of the past, but you’ll have access to really useful reports all year long to help you grow your business – like the Profit and Loss Statement.
If you need more help or have questions, we’re here for you. We can help with everything from QBO setup to tax preparation and anything in between. Get in touch with Szweda Consulting, LLC now, or call us at +1-216- 877-9015