Welcome to the Tax Insights Podcast, where we break down complex tax topics into bite-sized how-tos. In this episode of Tax Insights Podcast, Jeff Dvorachek creates a discussion around distinguishing a side business from a hobby and the considerations as it evolves into a legitimate venture. Jeff shares valuable insights into recognizing when a business has outgrown its hobby status and delves into tax-saving structures.
Tune in for expert advice on navigating the complexities of growing businesses in 2024.
In our latest Tax Insights with Hawkins Ash CPAs, we’re discussing the exciting journey from a side hustle to a legitimate business. Discover valuable tips, advice, and insights on record-keeping, structures for tax savings, and navigating the quarterly tax landscape. Whether you’re just starting or experiencing significant growth, Jeff provides essential information to ensure you’re on the right track.
Host: Jeff, today on the program, we wanna talk about, you know, maybe those side businesses, those little ways in how you made, you know, some extra revenue last year. Maybe it was just a hobby business, but you realize you actually made some good money doing it. And as we look ahead at 2024, how do you know or what should you do to maybe say, you know what, this is no longer just a hobby business, but this is a legitimate business and we need to do better record keeping. We talked a little bit about that last week. Just some ideas, advice, insights, for those listeners that are making some money on the side and making some good money on the side.
Jeff: Yeah, most businesses, they start off as just a sole proprietor. Let’s say a single member LLC if you go talk to your attorney for some liability protection. And, you know, you’re pretty much just running your cash receipts, cash disbursements, just plugging away. But like you said, Terry, all of a sudden, you know, this thing gets more popular and you start spending more time on it and you start making more money on it. At that point, there’s different things that you can do in order to save taxes, different structures that you can do. But let’s say that you wanna stay a small business for now. You know, there’s also taxes that you have to pay on a quarterly basis now. So there’s lots of things to consider as your business grows.
Host: So how would one determine if this is just a hobby business compared to going to the next level? Like, is there a rule of thumb, shall we say, from a dollar revenue gross sales perspective? Or is that really different case by case? Like how do you determine that?
Jeff: It is different by every business. But if your business starts to net, after taking all of your gross income minus all of your expenses, let’s say now that you’re paying taxes on 75,000 or 80 or even $85,000 worth of net profit, that’s the time to really think about maybe different entities than just being a sole proprietor because it can save you a lot of money, not necessarily in income tax, but in the self-employment, the old social security and Medicare that all of us employees pay.
Host: Yeah, and again, Neil, that’s why I think it’s important for individuals if they are having a business on the side, shall we say, and they are starting to grow that business and grow it obviously through revenue to have a conversation with the experts over at Hawkins Ash to make sure that they’re still doing things legit, because at the end of the day, you don’t want the IRS coming after you and say, hey, you didn’t do this properly.
Jeff: You’re right, and the other thing that we’ve talked about quite a bit, Terry, is cash flow in small businesses. As you make more money, obviously, you have to pay more taxes, and the IRS says, hey, you have to pay those taxes on a quarterly basis. So don’t forget about the potential of having quarterly taxes to pay because where before the IRS really only charged you about 3% interest if you didn’t make your quarterly estimates on time, but now that rate has slowly increased, and now it’s about 8% interest is what the IRS charges you if you don’t make those quarterly’s on time. So that’s something you want to look at as a small business owner too.
Host: And obviously, I can’t speak on behalf of the government or the IRS, but I would imagine that they’re not so lenient on like, oh, you didn’t know? All right, we’ll let you not pay that. That’s generally not how our government works, correct?
Jeff: Right. Usually, if you have a pretty good payment history with the IRS, you can get out of the penalties if they charge you any kind of penalties for paying it late or things like that. But underpayment interest is really hard for the IRS to abate.
Host: Yeah, Jeff, great information. Listeners, make 2024 a great year for you and your business.
Host: Jeff, what is the best way for our listeners to reach out to the team, the experts over at Hawkins Ash?
Jeff: I would go to our website, Hawkins Ash dot CPA. And go to that CPA HQ section and sign up for our email alerts because we give a lot of good information out on emails. And there’s not a lot of emails, but the information that comes out is really good.