IRS Issues Advice to Small Businesses

The IRS has issued a range of advice for small businesses this tax season as they look to make the most of their finances under the government's rules.

The Internal Revenue Service urged small businesses to use its Small Business and Self-Employed Tax Center on IRS.gov this week as part of National Small Business Week.

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Many small business owners operate as self-employed, independent contractors or gig workers, meaning there will be different tax requirements than if they operate purely as a business with employees.

Many Americans may not even be aware that their side income counts as a small business's revenue, but taxpayers need to include these profits while filing their yearly tax returns.

"We talk so much about a lot of taxpayers now having a side hustle without realizing some of those side hustles become small businesses," Alex Beene, a financial literacy instructor at the University of Tennessee at Martin, told Newsweek. "The IRS offering resources to small businesses during National Small Business Week is a brilliant move because the agency is more than likely seeing many new small businesses handling taxes for the first time."

For those with a side hustle, whether that's operating an Etsy shop or participating in a rideshare app, you must report it on your tax return if you bring in more than $400 as net income.

To properly file, you will need to keep track of all invoices and payments received as well as your business expenses accrued. Otherwise, you risk running into trouble in the case of a tax audit.

In some cases, your side hustle may not need federal taxes filed if it fits certain "hobby" criteria. This includes if you don't expect the hobby to be profitable and you don't operate the hobby as a business or keep track of any costs or expenses.

To ensure your side hustle does not need to be reported, however, you should speak to a tax professional first.

You could be eligible to deduct a range of costs from your small business or side hustle, including car mileage, subscriptions, tools or office equipment.

Before filing, it's advised that you should have a solid idea of how much the federal and state governments will tax your earnings so that you don't overspend before tax season.

The IRS site offers federal tax information to everyone looking to start their own business as well as those looking to operate more efficiently. Those who already have employees can use the IRS center to quickly find employer identification numbers and file and pay taxes.

You can also look to the IRS to officially close your business from a federal tax perspective. There's also a range of webinars and workshops for small businesses looking to more thoroughly understand business income and expenses.

The federal government took a 12.4 percent tax on 2023 earnings up to $160,200, while Medicare taxed 2.9 percent for self-employed Americans.

City and state taxes can also add up. However, some states like Florida, Texas and Alaska do not charge an income tax.

If you want to avoid a large yearly tax burden during tax season, the IRS also allows small businesses to use Form 1040-ES, which shows your expected income subject to self-employment taxes. The IRS also allows you to pay quarterly estimated taxes and pay in advance.

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Taxes were due April 15, but if you didn't meet that deadline, you can still file. Those who haven't already should file a return as soon as possible and pay as much as they can to reduce their future penalties and interest.