This article is not financial, legal, or tax advice, we have not considered your personal circumstances and strongly advise you to seek your own professional advice.
The way we work has changed. In 2022 more people than ever are taking part in the gig economy or starting their own side hustles.
Gone are the days of tax reductions straight out of your pay! So how do you manage tax for your new side hustle?
Dynamic business spoke to Mark Chapman, Director of Tax Communication at H&R Block, to find out the dos and don’ts of side hustle tax.
What are the tax implications of starting a business?
When starting an enterprise, there are so many things to think about that tax implications could easily slip through the cracks.
Mr Chapman said, “Far too many people who’ve made the transition into owning their own business haven’t given any thought to the tax implications.”
“For instance, the income you receive from your business is taxable and must be declared on your tax return. You might think your side-hustle is just a hobby, but the ATO will disagree!”
How is business tax different from income tax from paid work?
Mr Chapman said, “If you’re coming out of a paid job, you’re probably used to getting your taxes deducted straight from your pay packet by your employer.
“But now you’re in business on your own account, you need to proactively manage your cash flow to set money aside for future tax bills. This might seem obvious but unfortunately, failing to set money aside to pay tax is one of the most common pitfalls that new businesses fall into.
“You might also need to register for GST. For most businesses, you only need to register for GST if your turnover from your business (combined with any other business you run) exceeds $75,000.”
Is it always best to go professional for tax advice?
When it comes to getting tax advice, Mr Chapman recommends always consulting a professional tax agent or accountant. Getting your tax off on the right foot will save you hassle and hardship in the long run.
He said, “Always consult a professional. Most people find it far less stressful to simply pass on all their information to a tax agent and leave it to the agent to complete their BAS and tax return, safe in the knowledge that the work done will be accurate and complete.
“An experienced agent will usually be good at sniffing out those obscure tax deductions you didn’t know you could claim so they can often pay for themselves several times over. Best of all, the tax agent’s fee is also tax deductible!”
Are there any tax breaks available for people starting a side hustle?
Paying business tax isn’t all doom and gloom. There are plenty of tax breaks to encourage you to keep doing business.
Mr Chapman outlined some of the available tax deductions for side hustles and small businesses.
He said, “If you offer your services through a sharing economy platform, they generally take a fee or a commission out of the price you charge your customer for the service. That fee or commission is tax-deductible.
“If you run the admin side of your business from home, don’t forget to claim the appropriate proportion of home-office expenses, such as internet fees, landline or mobile phone bills, costs of office furniture, etc.”
What are some tax perks of starting a side hustle?
Mr Chapman said, “Running your own business also comes with some tax perks. For instance, you have access to all the tax concessions available to small businesses, including the full-expensing of capital assets, which is available until 30 June 2023.
“That means you can immediately deduct the cost of any plant, tools or equipment you use in your business, including items such as computers and even most motor vehicles.
“In addition, you can potentially claim a tax deduction for any feasibility studies, market research or establishing a business structure – even if the business doesn’t ultimately go ahead.”
So we know small business owners have to pay tax, but how much should they set aside? And how should they pay?
“Obviously, this depends on the level of profitability of your business and the type and quantity of deductions you can claim. A good accountant should be able to look at your books and roughly gauge the amount you need to set aside for taxes.
“If you are running a business as a sole trader, your business results are simply declared on your own personal tax return and you pay tax at your own marginal rate (up to 45 per cent).
“If you are running a company, there is a specific tax return for companies which needs to be filled out. The rate of tax payable by companies is typically just 25 per cent so this lower rate of tax needs to be borne in mind when considering a business structure.”
Read more:Death of the spreadsheet: It’s time businesses look to the cloud for a clear accounting view
Read more:Let’s Talk: Top tax tips to consider post COVID-19
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