Not sure what type of income you should be tracking for your taxes or if you count as a “real” business? You’re not alone! SO MANY new business owners are confused about what counts as business income, what counts as personal income, and what they actually need to be tracking for tax time.
But I got your back. Because I don’t want you making ANY mistakes when it comes to your self-employment income. In fact, I want you to be the Beyonce of your self-employed income- which means you’re oozing with so much self-confidence that NO ONE- not even Becky- can take you down.
‘Cause, friend, you have it in you to conquer this self-employed business game.
Mistakes New Business Owners Make with Self-Employment Income
The first mistake new business owners make is thinking they’re too small for a separate business account. All of their income goes into ONE account, which is usually their personal checking. And by income, I mean ALL the money they live off, which can be a mixture of self-employed income and personal income.
This one mistake will make your bookkeeping a giant pain in the ass, and even more importantly, can cause major accounting errors. When you file your taxes it’s SUPER important that you know the difference between employee income and self-employed income. If you don’t, you may end up paying way more in taxes than you’re supposed to.
Maintaining separation between your self-employed and personal income not only streamlines your bookkeeping, it also provides an extra layer of protection from accounting errors that cost you money.
The second mistake people make with their self-employment income is thinking that if they don’t receive a 1099 from their client, then the income doesn’t count as taxable income. I’m going to burst your bubble for your own sake and tell you this is 100% not true.
The thing about 1099s is that, while people are required to file them for anyone they pay over $600 in a tax year, sometimes people don’t file them. Plain and simple- people don’t do the thing they’re supposed to do. But the real reason that we have 1099s is as a system of checks and balances. The government wants to be absolutely sure that self-employed people are reporting their income and 1099s hold them accountable to that.
This means even if somebody doesn’t file a 1099 for you, you’re still responsible for self-reporting your self-employment income.
Also, people can file 1099s retroactively which is why you want to be sure you’re self-reporting. You DEF don’t want to get a backdated 1099 for a year that you didn’t self-report and have the IRS come after you. Because they will.
The moral of the story? Self-report all of your self-employment income regardless of if you receive a 1099 or not.Even if you don't receive a 1099 you're still responsible for self-reporting your incomeClick To Tweet
The third mistake new business owners make is waiting until they’ve made a certain amount of money to start considering their income as business income. What’s happening is they’re keeping their business in hobby territory instead of really naming it for what it is- a business.
In the U.S. there’s something called hobby income which people use to mask their self-employment income. The difference between hobby income and actual self-employment income is that hobby income is money generated by a hobby where there’s NO intention to make a profit.
Here’s an example:
For fun you do flower arrangements and give them as gifts to your friends. Your friend is getting married and is like, “Hey! I would love it if you made the flower arrangements for me and I’ll pay you.” You agree, do it that one time, and make a little bit of money. That’s hobby income- because your intent is not to have a flower arrangement business. It’s just a one-time thing.
But, once you start to engage in that activity with the INTENT to profit (even if you don’t profit- it’s about intent) then you move into self-employment territory. So even if you don’t make any money, if you’re obviously building a business, writing off all your costs, marketing your services, then you move from a place of being in a hobby income scenario into a self-employment income scenario.
Get really clear about where your income falls. Honestly, if you’re reading this blog then you probably have self-employment income, which means it’s time to start naming it for what it is and treating your business like a REAL business.
What Counts As Self Employment Income
Self-employed income is any money you receive for business services you provide where there are NO employee withholdings. This means there is no paycheck where money is deducted for federal income tax, state income tax, Social Security, Medicare- all that good stuff.
Anytime you’re paid for your products or services and there are no employee withholdings, it’s self-employment income. It doesn’t matter how you receive the payment, it can still be direct deposit or a check, if there are no withholdings you are self-employed.
Self-employed income can come from a lot of different income streams. It can come from:
- Selling your products
- Affiliate commissions (yup- if you’re an affiliate and receive commissions, it’s self-employment income)
- Independent contractor income
- Ad revenue (if you have ads on your site and someone’s paying you for that space)
- Direct sales and MLM businesses (like LulaRoe, Paparazzi, Doterra, etc.)
If you have any confusion about if you are an employee or self-employed, double check with the person paying you. It’s better to be absolutely sure than to be ‘vaguely under the impression’ with stuff like this.
What’s Not Self-Employment Income
This one’s pretty easy- employee income!
As I’ve mentioned, employee income is when you get a paycheck and there are employee withholdings. Anytime you have a mixture of self-employed income and employee income you’ll deposit your employee income (paycheck) into your PERSONAL account. This income is taxed differently than your self-employed income and you don’t want to get the two mixed up.
Another thing that doesn’t count as self-employed income is gift income. If somebody gives you money as a gift, like for a wedding, education, or just because, it’s NOT self-employed income. Someone can give you up to $14,000 in gift income without having to pay taxes on it and you don’t need to pay taxes on gift income.
Any gift income you receive should be deposited into your PERSONAL checking account.
When You Need to Start Tracking Your Self-Employment Income
You need to start tracking your self-employed income as soon as you receive your very first self-employed dollar. You might be thinking, “But I only made a little bit of money! I don’t want to pay taxes on it! Why are being you so mean?! STOP TRYING TO MAKE FETCH HAPPEN!”
And here’s the thing…you’re not necessarily tracking just to pay taxes on it. You’re tracking it so you can give your tax preparer accurate numbers. If you give your tax preparer numbers that are true and accurate, they can make smart decisions on your behalf. But if you give them a jumbled mess it’s a million time harder for them to figure out the best strategy for your finances.
The other reason you should start tracking your numbers now is that this is financial data. This is information you can use later to make strategic decisions about your business.
For example, a year into your business you might want to look at your financial growth and see if your strategies are working. If you haven’t been tracking anything then you won’t have any numbers to compare or measure- which means you won’t be able to answer crucial questions like, “How much did my business grow in the last year?”
So beyond the taxes part of things, tracking your self-employment income early give you data to work with. You’ll have information that you can use to move forward in your business.
How do we keep track of all of this especially when you’re a teeny tiny business owner?
You can do it a few ways. If you’re just getting started and you need something super simple you can keep everything in a notebook. You can just write down every time somebody pays you, what it was for, and the amount. This is the most basic tracking system.
You could also use a spreadsheet. That’s a really easy free way to begin tracking your income without having to commit to a digital accounting program. I have a free Bookkeeping QuickStart spreadsheet
that’s set up help you track your income and expenses. It has all the formulas set up so all you have to do is type in your data and BOOM everything is calculated for you!
Finally, you could use a digital accounting program like QuickBooks Online (my fav), Xero, or Wave. These programs do have a higher time and monetary investments but also make automating your bookkeeping super easy.