Fourteen small business side hustle tax tips from expert accountants

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Tax time can be complicated as a business owner, especially if you’re running a side hustle on top of a full- or part-time job. If you’re first starting out it can be incredibly difficult to find good information on how to get your finances in order, especially post July 1. So we spoke to two professional accountants to find out what their top tax tips are for people with multiple income streams.

Stacey Price, financial coach and accountant at Healthy Business Finances

Keep your business and personal finances separate

Even if you think your side hustle is ‘only something small’, you will save so many headaches by keeping separate bank accounts.

You can track income and expenses easier and you will make tax time, GST/BAS time and managing cashflow easier.

If you want to ramp it up even more, have a third bank account for tax savings. Setup a transfer each week or month to set money aside in advance.

Understand the difference between business revenue and business profit

Business revenue is what sales you raise and receive under your ABN. Business profit is your income less your business expenses.

To really nail this, you need to understand what can, and more importantly what can’t, be included as taxable deductions in your side hustle. If you have inaccurate records, this will lead to inaccurate tax calculations and potentially ATO issues. Nobody wants those.

That business profit goes into a separate schedule in your personal tax return (assuming you are a sole trader) and that profit is added to your other income. You are then taxed on the combined taxable income. So it is wise to know throughout the year where you are sitting.

Your employer, if you have a part time or full time job elsewhere, will not automatically take out extra tax to cover any tax required from the business profit. So you need to be prepared.

What should you be setting aside to avoid a big tax bill?

The key to understanding this is knowing that everyone’s profit and income is different – and that you should be tax planning in advance.

Do you have a great accountant you can have some planning meetings with during the year to understand your position and numbers?

The amount you put aside each year could also vary, so while I would love to give a set percentage for everyone, it’s just not possible.

But we go with a “anything is better than nothing” mentality. So if you are just starting out, start small and put money aside, and build up.

Tip: your accountant fees are a tax deduction – so those tax planning meetings are a win-win.

If a business hasn’t earned a certain amount in either sales or profit, is a tax return not required?

This is a common misconception and is incorrect. If you are running a business (and an ABN would indicate you are running a business from the ATO perspective) then a tax return is necessary. What that tax return looks like depends on the business structure.

Put your losses in your tax return

There is also a misconception that if a business is making a loss, there is no need to put that information in a tax return. However, that tax loss is beneficial. Maybe not right now, but it will be in the future.

That loss carries forward to offset against future losses. So don’t ignore the losses, enter them in the tax return. Your future self will thank you for it. This is why keeping accurate records of all income and all expenses is so so very important.

There is a difference between a tax reduction and a tax deduction

Let me try to simplify it. Let’s say you choose to spend $2000 on a computer solely for your business. Your bank account goes down by $2000, however you are not reducing your tax bill by $2000.

Your tax bill will reduce by $2000 X your individual tax rate. So you could spend $2000 to only reduce your tax bill by $400. When you look at things in those simple terms, often you may want to rethink the initial spend in the first place as it might not be the best use of your cash.

Organisation is the key

While your wage income will pre-fill (or it should) into your tax return, your business income and expenses will not pre-fill.

So what systems do you have to ensure you have captured all of the detail, and how detailed is it?

If you are not using accounting software, is your spreadsheet/Google sheet detailed enough and does it even add up?

We see so many Excel and Google sheets with no formulas, no totals, or totals that don’t calculate correctly.

Often, you don’t know what you don’t know. Accountants are not just there for tax time. Perhaps you can seek out a training session with a BAS agent or accountant to help you ensure your business information is correct, the reporting is accurate, there are no gremlins in the numbers which will then impact on a tax return– or cost a bucket load to fix as there are errors everywhere.

Find someone who can talk your language, explain it to you so you really understand. Finding the right fit will be a total game changer.

Don’t be scared of paying tax

While this may sound totally backward, hear me out:

If the reason you have a tax bill is because your side hustle is kicking arse and making a generous profit, then tax is naturally a consequence of that and you should be so proud that your business is making money.

But the key is managing that tax, and that comes with tax planning, understanding your entire financial position, understanding your business structure and having someone in your corner to explain all that to you.

Michelle Maynard, Accounting Partner at Carbon Group

Have separate business bank accounts

We’re saying it again because it’s just that important.

This will make it easier to track income and expenses. If you want to access business funds – transfer to your personal bank account.

Don’t use the business account to pay for personal things. Have a business transaction account and business savings account – put money in the savings account regularly for tax.

Keep an eye on how many sales you make

Once you exceed $75,000 in a 12 month rolling period (not the financial year) you must register for GST.

You will be taxed on top of any other income you earn

You don’t get the first $18,200 of your business income tax free. So work out what tax bracket you are in and withhold tax accordingly. For instance if you earn between $45,000 and up to $120,000 each dollar of side hustle profit will be taxed at 32.5%.

Running a business from home is different to having your home as your place of business

This impacts what deductions you can claim and if it affects your main residence exemption on the sale of your home.

A place of business is where you alter your home into a commercial premises. This could could include a separate entrance, signage to make it look like a place of business and not easily converted back to personal use. For example, converting a room to a hairdressing salon with installed sinks, mirrors and stations

If you have done that then you are able to claim occupancy costs – rent or portion of the mortgage, rates, etc. This will also affect the main residence exemption when you sell the property.

However if you just run your business from home – do office work, store things in the garage, etc – you cannot claim occupancy costs.

You can claim running costs – a portion of electricity, gas, home internet – but you need to keep records of what portion relates to the business and the hours worked from home.

Use an accounting software from early on

If you don’t have a copy of the receipt, you can’t claim a deduction – so use an accounting software to save electronic copies of receipts for you. Then you don’t have to hang onto the physical. Using an accounting software will also allow you to track income and expenses. It’s better to get use to the system when you are on a smaller scale, so you aren’t overwhelmed when things take off.

If you have an ABN you are a business – the ATO will be expecting to see business income and expenses in your return. You can’t have an ABN and then claim it’s a hobby.

Your losses are important

If your business makes a loss (where expenses exceed income),  that loss will be quarantined to offset against future business profit.

Any loss will only be deducted against employment income if you meet one of four tests:

• • have at least $20,000 in sales
  • have made a profit in three out of the last five years
  • have $150,000 in business plant and equipment, or
  • $500,000 of real property in the business

If you don’t pass one of those tests, your business loss can’t be offset against other income – it is carried forward to offset against future business profit.