How to Report your Side Hustle!

Foreign.

Welcome, everyone, to the Main Street Business Podcast with Mark Kohler and Matt Sorenson. We missed you last week. We missed a week last week.

We missed you. Hopefully you missed us.

Yeah. Well, if you're listening now, I think that means you missed us. You're like, man, I want some good tax planning strategies. I'm really missing out on that.

Yeah. Well, if you felt that void last week, we did, too. And you know what? The only excuse, and it's the truth. If I have another announcement from the irs, the sba, or legislation in the news before the weekend, I'm going to blow a gasket. We can't keep up. It's crazy. Last week was a whirlwind. We're like, what do we hold the podcast on?

I know, but, hey, there was some good news. Like, the IRS gave some good news. IRA, HSA, ESA contributions. You now have until May 17th. If you didn't hear, we knew the tax deadline was extended, but your IRA, like I said, HSA, ESA contributions were extended to May 17th. So that was actually good news. In all of the news and chaos and legislations and pronouncements from sba, irs, everyone else.

Yeah. And let's vet that tip. That should be one of our tips this morning. Right now for everybody is morning for us. Some of you might be listening to this on a treadmill in the evening or driving home in the commute, but it's morning for us. Okay? Now, that tip literally is critical, and it came out with IRS Notice 2021 21. And everybody knew the 1040 was extended to May 17, but we didn't know about your IRA contribution. Your Roth, your Coverdell, your hsa, all of those strategies that are typically a deadline for April 15, for 2020 got bumped to May 17. Now, this is a big deal because this gives you some time to breathe. I've already had clients go, oh, my gosh, I was hoping to do that, but I just gave up because it's been such a whirlwind this year. Matt, give us a couple of examples of where even just the backdoor idea, because I have clients that are just yesterday said, I can do a Roth. Oh, my gosh.

Yeah, yeah, yeah. I mean, lots of people are active this time of year and at directed ira, where we handle, you know, all these types of accounts back to our Roth IRAs, HSAs, all those accounts, we do them ESAs, it's a popular time. So if you were thought, well, I'm high income, I don't qualify to make a Roth IRA. Contribution. No, you can do the backdoor Roth IRA. We've got a whole show on that. Get in 6,000 for 2020 and just throw in another 6,000 right now for 2021. If you got it, you can get 12 grand in right now. That's the nice thing about this time of year that I like is you can kind of just make two contributions in one. So let's say you haven't. You had a high deductible health insurance plan last year and you didn't contribute to an HSA yet. Make your last year HSA contribution. Make this your HSA contribution. Just do it all in one and get it in there. It's a great time to just start building up the account. Maybe you got some stimulus money, you know, maybe your business is back on its feet now from the pandemic. Whatever your financial situation is though, you got the money, you got, you know, now I guess what do we got? A month and a half to get this money in. And I like just thinking about doubling up on the contribution. That's personally what I do is just try and get them all at the same time rather than doing the same thing every year. Just double up.

Yeah. And you don't have to be rich to do this. And for some of you that are listening to the podcast for the first time, maybe. What's this side hustle tax thing? We'll get to it, but we'd like to share a tip every week. You don't have to be rich to do this. You may be like, I'm barely making ends meet, guys, what the hell? I'm here talking about a side hustle and I'm trying to get my tax return done on TurboTax. But here's the point. I had a call with a client yesterday who has a 16 year old daughter that's doing babysitting. And he's like, one of the side questions was, how do I start a Roth IRA for her? She doesn't have a day job. She doesn't have a W2. She's only 16. And I said, she, she can open a Roth IRA for last year and put in $1,000. What do you think she may do in babysitting? He was like, she probably made 150, 200 bucks a month last year. Well, that's $2,400. She doesn't even have to file a tax return. And she can contribute to a Roth IRA for last year. And I think the second point is these contributions aren't. We really are not looking for you to get a tax deduction, the creme de creme, is to get that money in a Roth ticking away tax free. Even a crypto Roth. Matt, some people may have not heard about this. You got a crypto Roth.

That's right. Yeah. Your Roth IRA can buy and sell crypto. Now, taxes on a side hustle that you personally are doing. Of course, that's not that complicated actually. Taxes, buying and selling and using crypto to buy stuff. Pretty tricky using a Roth IRA though, tax free. So if you want to make big gains in crypto, if you think it's going to go to the moon, why not do it in a tax free way so you get to keep it all when it goes up rather than send half of it to the IRS into your state?

Yep. Well, we've got articles on this and other videos regarding contributions to IRAs, Roths and education IRAs, which are called Educational Savings Account, ESA or a Coverdell. Like cover your cover your head. Dell, Dell Computer cover, Dell D, E, L, L. Check those out. We've got all those types of accounts that you can set up at directed IRA and you have until May 17th. All right, so let's put that aside. Tip number two, PPP was extended as well last week, which was a whirlwind. So now instead of March 31st is the deadline, you have until May 31st, two extra months. Now, on that note, Matt, I was meeting with the client literally last Monday, and they said, hey, we're selling this piece of farmland. We need a little advice. And da, da, da, da, da. And I said, let me see your tax returns. They had a schedule C with some income on it. And I said, this is side hustle, people. This is for you. He had a schedule C. C as in Charlie some income. And I said, well, did you get your PPP just off the cuff, you know, just like high five me, you know? He said, no. Our accountant said, I didn't qualify. And I go, what? Really? Yeah. He goes, we didn't even get round one. And I said, hold the phone. And we totally sidetracked and said, no, you totally qualify. And I said, call your banker right now. And we put the banker on speakerphone, we called the banker and I said, we got a schedule C under the new gross income rule. Let's run the numbers in five minutes. We determined they were qualified for over 17 grand of tax free income, free PPP money. Right then and there. They both at one point teared up and were fairly emotional. This was a big deal. 17 grand free. And then they Got mad because there's like, why do we get such crappy advice out there?

Yeah.

And they're so frustrated. But Matt, you've experienced this too. And the ppp, you've got a sweet article on this.

Yeah.

Can you explain the difference between round one and round two? I think that's what side hustles out there need to hear.

Yeah. I think round one is pretty easy to get. So if you've not got PPP at all, all you need to say is that, you know, your business faced economic uncertainty in the pandemic. That's it. You qualify for ppp. Okay. What business didn't and still doesn't? Right. Even businesses that have survived. What? There's still a ton of uncertainty about what's going to happen right now. You know, is it going to come back? Is the vaccine going to work? Are people going to have side effects from the vaccine? We don't know. There's all these unanswered questions. So now round two was a little more specific. Round two, they made you say, no, no, no. You gotta show a gross receipts decrease from pre pandemic to. During the pandemic of about, what is it? 30%, right.

25.

25 or sorry, 25%. And so you have to be able to show loss. And so some people that records are a mess or that maybe you only had a 10% loss or a 15% loss, but frankly that 10% or 15% loss in revenue is what you would take home. You know, we've seen a lot of businesses really fail and have. And hurting because the owner of the business had a 10%, 20% loss of revenue. But that was the money they took home. Everybody else is getting paid, but not them. And so. But they aren't, they're not qualifying for round two. But you do still get round one. Round one still out there. What was it then? Till the end of May now.

Yeah, May 31st.

So yeah, get on that if you haven't. We've got a lot of articles on our site and prior podcast episodes too to go check out that.

And let me say it a different way.

And can I say you can get it for a side hustle?

Yeah. Okay.

Before the pandemic, you can get it.

This could be one of your best podcasts you listen to. We're going to talk about the tax reporting shortly here in just a couple minutes. But let me say what Matt said a different way. If you didn't get round one, you can still get it, but you don't get two because you're late to round one, so you get round one, game over. That's cool. It's an easier way to qualify. Anyway. If you did get round one, you may want to run this report and go, did I have a 25% reduction in sales? Matt said a loss in sales. Same thing. I just want to say it a little differently so it clicks with some of you. So if you got round one, you got to run the report or numbers yourself and self verify to the bank that, yeah, I had my sales went down in 2020. So you can get round two. But if you didn't get round one, you can't, you know, belly up to the bar and get one and two. You've got to. You just go back and get one. But, folks, here's the last point. You don't have to call our law firm or accounting firm to get a consult on this unless you're completely befuddled. You can literally just go online, read an article or two, catch a couple videos of ours to get up to speed, and then you call your bank. Some go, where should I go get my ppp? Do I go to the sba? No. Do you walk into your bank? You could, but you can go straight to your bank's website and see if they're offering it. If they're not, then you can shop nationwide. You don't have to go to your bank. I think it's easiest if you do. But you could. But you could go anywhere in the country, to any bank even. There's some national. Like, I think Quicken's doing them and

yeah, Even like, like PayPal is doing them and like, you know, a lot of square. Yeah. Yep. So a lot of the fintech providers got in on it too, so it's out there. And the, the rush from PPP has slowed down, so you'll get a little more responsiveness out there as well.

Okay. Now, Matt, you did your daughter's tax returns last night, who had side hustles. Now, to hear Matt Sorensen hacking out a tax return last night might put the fear of God into some of you. But how'd you do?

I can do it. I can do it. And. And I. So I have two daughters in college, both of who have side hustles. They both have a little W2 job as well. And I'll walk through it. And so we want to walk through the process on how you do that. Some of the things to think about, where you're going to do it and what you're going to put stuff in on the forms, I'll go over some of the things my daughters were confused about and then talk about what to do after because both of them had a refund. And I'll tell you what we did.

Ooh. Now, Corey was saying, I had a lot of feedback on a couple videos last week that people are like, just show us what. What it looks like on the tax return. So, Matt, what did you. Let's start with everybody. The basics. Okay, so I got. I had a side hustle in 2020. Okay, what was step one for you?

Okay, step one is you got to gather your 1099. Okay, so let's say. Now this is an important point, because one of my daughters has does Doordash. Okay? So she. She's in college and she's getting a 1099. She had a 1099 from DoorDash. My other daughter did one of the other. I don't think maybe it was Uber Eats. I can't remember. She'd want the other, like, kind of food delivery things. And. But she was paid less than $600 and did not get a 1099. Okay, so you might have done some side hustling a little bit with somewhere, but unless they paid you 600 or more, they're not going to send you a 1099.

Some people go, why didn't get a 1099? I don't have to report it. I think a lot of millennials that are kind of getting into this world of small business think, oh, I didn't get a 1099, so I'm off the hook. You get audited, the IRS is going to look at your bank account. But by the way, we are both tax attorneys, CPAs. We've dealt with the IRS for years, and we've been in those.

I'm a tax prosecutor. I put someone in a couple people in prison for not paying their taxes. So.

Okay, but here's the point, everybody, if you go, well, I didn't get a 1099, you. It could be a report on your Venmo. It could be a report on your PayPal, it could be on your Etsy account. You need to add up every dollar you earned because you don't want the IRS to come back and find that you didn't report all your income. Now, this is separate from your W2. Your W2 is going to go on a different line. But what we are going to be ultimately creating here is what's called a Schedule C, as in Charlie. And you can put all of your side hustles into One schedule C. And

you now you may not have a 1099. I'll give an example of one of my daughters, Claire. I just to, you know, I'm just going to share their information here. They're cool with it. She had a photography business, you know, and people paid her directly. They'd give her cash or they'd venmo her. Right. Well, that snow. And they're not going to give her a 1099. Right. So some of you are going to have businesses where even if you were paid over 600, no one's sending you a 1099. It's your job to go track all that income and to keep records of what income you did receive. Okay. So step one, I think is figure out what your income was. Most of you are going to get a 1099. Let's drive Uber. Whatever you're doing, doordash or, you know, you're consulting or whatever, we know all the different things out there. So. But if you don't have that 1099, you're going to have to create that record yourself of what the income was. Get it as accurate as possible. You have a tax reporting obligation to the IRS to get this right.

Yeah. Now I'm going to show the diagram here in a minute, but let's summarize what we have here so far because we want to make this simple. You had a side hustle last year. If you have 1099, great. If you don't, pull out a spreadsheet. I did this with my daughter and son in law literally two days ago. They said we need a P and L for 2020 because they're working on a loan to buy a home that they're fixing and flipping and, and a little duplex thing and they need. The bank needed a P and L. That's called a profit and loss. And they said where's your W2? And they gave it to him. And then they go, but you have a side business. What is your P and L? So that you may be asked that with the side hustle person. So the P and L is the same thing you're going to put on your tax return. It's your income minus all your expenses. And then you have a line at the end and it says profit or loss. Now don't worry if it's a bad thing. You have a loss or show lower income. We want to do that for the irs. The lower you can show an income, the less tax you pay. That's the beauty. Like that's the beauty of a Side hustle, you get write offs you don't normally get with the W2. So gather your data, put it in a spreadsheet and start with income.

Yeah. And this is the form you're going to be using is the schedule C, which is called profit or loss from business in parentheses, sole proprietorship. Okay, this is what you're going to be. This is the form you're going to be working from.

Okay. Now before we go to step two, in fact, if I may say, step two, Matt, I'm going to go to the white, yellow, the iPad here and Corey will inject this over us. But let's just do a little picture here. Oh, and I don't want to do it in real red. Let's do this in black.

Okay.

All right, erase that line. Okay, here we are. So the first step before you get to schedule C is you're going to input your data in one of these tax softwares. Maybe you're doing tax layer or TurboTax or there's, there's 10 or 20 out there. TurboTax is the big 800 pound gorilla. Gorilla. But you're going to start by inputting your data as the taxpayer. And the main goal is you're going to be reporting on a 1040. Now Matt, when you went through this, you came up against the big question that everybody starts to, their brain starts to blow a gasket is they say, am I dependent on someone else's return? You need to check some of these boxes before you even get to the income you're going to put in your social. You're going to put in all this little data of your full name. La da la la la. And then this question of standard deduction. Are you a dependent on someone else's return? What'd you do? Can I ask?

Well, my kids or my kids in college are not a dependent on someone else's return. They're not on my return. They're on, you know, they're even though they're in college, they support themselves. So if you're financially supporting yourself, the majority you are independent, okay? You're not a dependent to someone. And so you will file your own return, which for you is a good thing. Those of you that have done this and are doing it, you guys got stimulus money, right? And those of you that say it for these kids in college is, you know, if you were on your parents return as a dependent, you didn't get stimulus money and your parents didn't even get it for you either. It was just a loss, loss for both of you. So for those of you that do have a little independence and do your own tax return, the government rewarded you with some stimulus money. But from here on out, it's a great way because as you're going to see here, for many of you that have a side hustle, whether you have a big W2 job and a side hustle or you're college student or in between jobs or whatever with a side hustle, I think it's good to have your own return do it yourself. This Schedule C is not. Don't be intimidated by it. We're going to break it down here. Like we said, it's tax planning opportunity. You've already made the money.

Yeah, I love it. And I will say this too, if some of you are like, well, I didn't get the stimulus check. My parents didn't get it, but I am going to report now as my own independent tax return. You will get the stimulus check as a credit on your tax return because you may have not gotten it, but the government says, hey, if we didn't send it to you, we just didn't know to send it to you. So by filing a tax return, you, you're now waving your flag going, whoa, I'm over here. I want my stimulus check. So you will get it as a credit on your tax return. Now, if your parents, they could be playing some shady business, claiming you as a dependent when really you're taking care of yourself. So before you start checking boxes on here and all the tax software, there's usually a little hyperlink that says, what is a dependent? Go through the rules and say, oh, this is me. I am really a dependent on my parents who are. Or I'm really not. It depends on your age and your again, supporting yourself type questions and call your parents go, hey, did you claim me as a dependent? Yeah. Well, what the hell? I was going to claim myself. And your parents go, oh, well, it helps us on our tax return. Well, I got to file my own tax return. Darn it. And so this could be a little conflict. Yeah. So call your parents and find out if they claimed you. You can't. It's too late.

Now, many of you watching are past this. You're like, guys, I'm past this. I'm not past my parents and being independent on their return. I've been filing my for years. But maybe this is your first time having the Schedule C. Okay, so you're going to go through that. Now, the next thing after saying you're a dependent is you may have other things you're going to need on the return. Of course. Right. You're going to need your W2. If you got a day job for a spouse, you're probably filing joint. You want to get their W2, of course. Then all your other tax forms you might have, you had some education expenses, those are great tax credits, child care tax credits, all those things that you're going to typically have on a return already. And you should be familiar with these if you've done your own return before. But the schedule C is what is this new thing for those of you new to it and those of you who think you may have been doing it wrong that we want to hyper focus on now? Okay, before we say one preliminary thing, I thought maybe on standard versus itemized.

Yeah. And I think before we jump to schedule C, we need to point this out one last time too, is, let's go to my, the whiteboard now. And you see this little 1040 here. What Matt said is very helpful because he says in this little, these little lines and you're Talking about lines 1, 2, 3, 2A, 3A, 2B, 3B, all this kind of stuff, this is where you might get a 1099 from Robinhood. You might get a little something from Acorns or many. Again, some of you that are younger are starting to dabble in a little stock trading. Maybe GameStop hit big for you, you know, or something. And some of you are like, well, I was trading crypto. Well, Coinbase is going to send you a 1099 as well. You may have had some stock transactions, some cryptocurrency transactions. So we're not going to go there today. But this is where you're going to report all that first. Is that okay? Do you want to say anything else on that before I comment on itemized.

No.

Okay. Yep. Good.

Yeah.

Okay. Now on the standard deduction, the standard deduction for last year was 12,400. Straightforward. Now it's different if you're joint married, head of household, blah blah, blah, but for a single individual it's 12, 4. Now the tax software is going to kick that out. Now they're estimated now over 85% of Americans are doing the standard deduction. They've increased this under the Tax Cuts and Jobs act to help middle income Americans or you the side hustle, you know, single or married individual under 150 grand of AGI and you're like, hey, I need a tax break. So they increase the standard deduction, which is a big thing. But some of you Might itemize, which means you take mortgage interest, property taxes, charity, medical, and you might do this, what's called a Schedule A. So I'm going to write this off to the side. And so you might do the standard deduction or this Schedule A. Now, we're not going to go there again today, but you're. The tax software you're going through is going to ask you a bunch of questions and you get to take the greater of the standard or the, or the Schedule A. So you'll go through those steps and the software will tell you, you know, standard is better for you. You're like, ah, damn. And you'll take that. So now this, the Schedule C starts to come in. And this is, this is a big deal because it comes in from another schedule. So let's just. Matt, why don't you do. Where would you go next? And I'll start diagramming this too.

All right, let me start hitting Schedule C. Okay. All right, so there's a couple preliminary parts before you get to income and expense on Schedule C. The first section is just information. Name of proprietor, your proprietor just put your name. Okay. You don't have an office. It's your home address. Okay. Now when you get to. Some of these questions are going to be like accounting method, cash accrual, you're going to be cash, okay. If you don't know your cash, okay, now you're going to put in there you participate in the business. Yes. If you started it that year. Yes, you want to check. There's some preliminary questions in here. And then did you make payments to other people? You may have made payments to other people. You have. If you are a business owner, which you are here doing Schedule C and you paid other people, did you file 1099s for them? Now, many of you don't. So you're typically going to go, no. Okay, now we're going to get to the two main sections, though, which are income and expense.

And as a little aside, for those of you that are again wanting to see the diagram in here in some of these forms, I'm going to put this up on the whiteboard so some of you can see this is wages is line one, interest is line two, dividends are line three. Then you've got IRAs, pension, Social Security, capital gain or loss. And that Schedule D, I'm going to put that off to the side here is if you're buying and selling cryptocurrency, for example, or stocks. So a Schedule D is going to also come around and you're going to get a 1099 for any of those types of transactions and that'll get reported on schedule D, which comes in on line seven. Now here's where this schedule C. Now

let me just say, even on schedule D, I just want to make a misconception here is. Let's say you bought GameStop stock and you took a loss, okay? Happened to a lot of people, okay, Track that. That loss is gonna come back and help you later in life. And you will probably even be able to take 3,000 that lost to apply it against income this year, possibly. So don't think because there's a loss on this or a negative number to just throw it away and just skip that part on the form. No, this is going to help you later and at least give you. You can take a little bit of that loss this year, possibly.

Yep, I love it. And a lot of people seeing the return are going to go where the freaks of schedule C. You guys keep talking about this. Well, it's two layers deep because on line eight, right on the front page, as you guys can see, I'm indicating here, line eight says other income from schedule one. And you're like, oh, well, let's go look at schedule one. So when you go look at schedule

one, this is like a choose your adventure book, you know, this is so exciting.

It's like a journey. It's like a little trek. Okay? So if you go over to schedule one here, you've got taxable refunds, alimony, business income, other gains, rental real estate, farm, unemployment compensation. See, some of you that got unemployment, it's going to come in on the Schedule 1. And many of you listening here said, I picked up a side hustle because I had to get, you know, I had this unemployment thing going on. So you've got adjustments like educator, education expense, educator expense, sorry, health savings accounts, just, just alimony paid, all sorts of weird things. So that's schedule one. Well, on schedule one, line three, it says, what's the result? Income or loss from your Schedule C? So that now takes us over to schedule C. So if you're looking at the whiteboard now, we're here with a little star. We're finally to schedule C. So it kind of you've. So as you're filling out your tax software, the software is doing this for you. It's going to say, let's fill out schedule C, which is going to pop into schedule one, line three. We're going to net it against all this other crap. And, and then we're Going to bring it back up to schedule to line eight on the front page of your return. So it's kind of this little trek you're going to go through. And Matt, I just wanted to highlight that. But I like what you said about schedule C. You're going to just kind of state the name of your business and fill it out. So where would you go next? What did you and your daughters do?

We went to basically part one here of adding up the different income. Now, they had multiple 1099s because not only do they were they doing the doordash type stuff and they both had W2s too that were previously put on the return, but they get a 1099 from me and my escort. They do a little bit of work for me through the year and so I pay them. A great tax strategy, by the way, paying your kids, even your adult kids from your business. So they had multiple 1099s. And again, these could be different things. Right. You could be doing Uber and you could have an Etsy store. Okay. You can throw it all into one schedule C if you want. All right. Don't think you gotta do a separate schedule C for each little 1099. Okay. So we aggregate those into the income in part one here.

Yeah. And your tax software may say list all this different income whether you had a 1099 or not. Just worry about gross income and. But some of you may go, well, where is that on my tax return? It's just the software doing the work of adding it up all for you. And that accumulative total is going to go online one and you're good.

Yeah. Yep. Now there is a question that gets popped up Mark though that you know, we didn't deal with because this. They were providing services. My kids just following this example here. But what about someone that was like had an Etsy store and was selling products or maybe an Amazon store, they have costs of goods or something. What should they know how to answer? Some of these questions are going to come up in this part one here on. On your income even before you tell all your expenses.

Yeah. Now everybody that's driving Uber or things like that, we're going to come to auto and mileage and cell phone and all that in a minute. But there's this thing called cost of goods sold. C, O, G S. Cost of goods sold. Now my daughter Alison, Matt, she's got this on her little P and L because for some you that might know, she has a Etsy store, she buys and sells kind of that are a Little older, they look cool. Everybody's into them. And then they. She goes to, like, secondhand stores, army surplus stores, and she'll buy this clothing and then go sell them on Etsy and mark it up five or ten times. So vintage clothing is what she sells on bygone clothing. So I asked her, I said, how much did you spend on clothing this year? And she goes, here's all my purchases. And she goes, beep, beep, beep, beep, beep. And that would be cost of goods sold. Now, for some of you that are a little bigger operation, you have to do inventory as of December 31, because if it's still on your shelf or in your closet or on a rack, you have inventory. This hasn't been sold. So you have to look at how much did I buy minus my ending inventory? And that's what I get to write off. Because that inventory sitting on the shelf is like cash in the bank. It hasn't been sold yet. So it's not a cost of goods sold because you haven't sold it yet. It's just inventory sitting in your basement.

So let's say, for example, you had $10,000 of goods that you bought, let's say vintage close here, and you sold 9,000 of that inventory. You know, you would have 9,000 of cost of goods sold. Right. But the thousand left that you'd bought that hadn't sold yet, that's going to carry on into next year. And this is inventory, like Mark said. So it's not going to basically reduce your income here yet.

Yep. I love it. Okay, so it's part one of schedule C. You're going to come up at the end of that process. You're going to come up with line seven that says gross income. So gross receipts or sales minus cost of goods sold, and a few things get you to gross income. That's line seven. Okay, now I'm going to scroll down here, those that are watching the whiteboard on YouTube. So we take gross income, and now we go to part two. And this is where we get to subtract all of our expenses. This is the fun part. So, Matt, tell me some of the ones you wrote off. I'll give some ideas here, too. This is good for everybody.

Yeah, well, of course we did auto deduction. I mean, big for doordash. You're driving around. And so now let's say you were crappy at having a log of this. Okay. When you're riding off auto, you're supposed to be able to track your miles. All right? And I know many of you, especially on a side hustle, this is the last thing you want to be doing. But the cool thing about the services is you can look at all of the rides or the deliveries you made and you can easily go through. Not easily, but you can go through and add up what the distance was between all those. You know, now you got to add some mileage in to get there, you know, or kind of as you're going between places, you might have some in there too. So you're going to want to typically take mileage. So when you get into the auto and I think this is going to be line nine. Yes, line nine. Car and truck expense. Most people are just going to take mileage. Can you hook me up mileage rate 2020 mileage?

Well, I was going to look at the Mark J. Kohler calendar, which is like way handy dandy. So for some of you that haven't bought the calendar yet, even my producer, I'm borrowing his calendar. Mine's in my bag.

57 and a half cents a mile. That's what you're getting for 2020.

Yeah.

So. So if you drove let's just make sure you understand this. If you drove a thousand miles on your side hustle, that would mean a $575 expense against your income.

Let me just rattle off all these expenses and I, Matt and I have either podcasts or videos or articles on all these topics, but you're going to fill these in and you're going to see this on schedule C. Your tax software will take you through this. But anything, let me say this is a kind of a precursor because this kind of bugged me when I was, I was a new accountant. What if there's no line for cell phone? Well, what the heck, there's no line for cell phone. That's a pretty big expense. It goes in other so line 27A takes you to another little schedule that has other and this little other is kind of the catch all. I love the other lines because this is where we're going to write off maybe kids in our business as outside labor, cell phone gifts, all sorts of things that you might spending that you're like it really doesn't fit into another line. So don't worry about that. They'll all go in 27A for other but here's some write offs. Advertising commissions, contract labor depreciation, employee benefits. If you had employees in your deal. Insurance interest, interest paid on mortgages or other legal and accounting services. Office expenses. There's everything you buy At Best Buy, Apple Store, all those things. Pension or profit sharing plans. Again a big one for larger businesses. Rent or lease payments, vehicles, machinery, equipment, repairs and maintenance supplies, taxes. Oh, travel. That's separate from auto travel. That's airfare, hotels, meals. Meals is a big one. Utilities, wages for employees if you had them. And then you have this catch all called other. So you're going to try to dig up everything you can think of. Absolutely everything is cell phone, electronics, Internet costs. Anything you can think of we want to throw in there.

Yeah. And for those of you that have, you know, maybe you have a Etsy store or you're selling products or stuff online. What are the think of the things you use in your business? I think a lot of people take for granted the things they're using in their business. These are expenses. Do you have a camera that you take pictures with of stuff you post for sale? Okay. Or maybe you're a photographer. Are you writing that equipment off? Okay. When mark. Okay, that those are things you're going to take a depreciation expense for and you're going to get a write off for it. Do you have a laptop that's used in your business? Okay. That's also going to be something you would expense typically or you might depreciate over time. So just, just be a little aware and think through your business and things you use. You might have just used personal funds to buy it and didn't realize crap. This was actually something I used in my business.

Now I'll throw this out, which is weird. I don't know why the IRS does this after all your expenses except one, it's going to go, the total is going to go on line 28. So we take gross income on line 7 minus line 28 and your software will do this for you. But you want to know where it's going people. You just don't want to trust that software blindly print this thing out and look at it. If it doesn't make sense. You, you can't blame the software. You are ultimately the one on the hook. When you send in the stack recorder. You don't know how many clients over the years are like, well I use the software, it told me I could do it. No, you said what you wanted to say on there. Hoping to get that bigger. Like Matt said, there's that little calculator up in the right hand corner going bigger refund, bigger refund. I'm going to check that box. I get a bigger refund. And you don't even know what the box Does. Don't do that.

Okay, careful.

Yeah. So tentative profit is line 29. And then there's one expense that they hit you with and that is that you get to do later. They want a line. Specifically for it is home office. Okay? So you're going to do your home office on line 30. And my pen is dying here on my iPad, so I've got to charge this bad boy, but line 30, and then you end up with. Drumroll, line 31, profit or loss. How to go for your daughters. Did they have profit or loss?

They had profit, both of them, but. Well, yes, they both have profit. But here's the. I mean, for them, you know, they're college students not making a lot of money. They have education expenses on there. You know, they got refunds. Okay? And so that's the thing. I want to make sure everybody realizes this income on schedule C is not going to crush you. Yes, you're going to pay income tax on it. If you have profit. Yes, you're going to have to pay some self employment tax and then Medicare and Social Security. And for those of you that get down to the end of this thing on schedule C and your net income is more than 40 or 50 grand, we want to talk to you about doing an S corporation. Okay? This is, this means you're a little bigger than just a side hustle. Congratulations, that's a good thing. All right, I'm not, we're not saying quit your day job yet, but you might want to graduate your side hustle to what's called an S corporation because you will save taxes by moving to an S corp. For those of you just, you know, maybe you're netting out 10 or 20 grand a year or less than that, and it's something you like doing that gives you some extra income. Great. Just keep cranking it out on schedule C. Track your income, be diligent on your expenses. Those that are better at keeping records and doing their bookkeeping, keeping a separate bank account for your business income and expense is probably the number one thing. For those with a side hustle, just to keep you organized, those that are organized get the most deductions because you remember it like right now. For those of you doing this, and let's say you're doing this in April of 2021 and you're trying to remember the expenses you had back In January of 2020, you don't remember what do you remember that money you were spending for that? So try to keep good records. It's going to help you in the

interim I love what Matt said. And if you are a little bit of that went over your head, folks. Go YouTube. When to use an S Corp. When to use an S Corp. That's S as in Sam Corporation Corp. This is when to use an S Corp. You type in Kohler and you're going to see a sweet little video on that and you'll see the numbers and why. Matt explained that. Now another thought is too. Everybody hang on. We got a couple major important points. You may think you're done. Why do all this? You may say, I got a refund anyway, or I didn't owe any tax or I had a loss. The reason why you're doing this is your first staying out of hot water with the IRS. Because if you don't report this with your 1099, even if you had a loss, the IRS is going to go, what's going on? I don't know if you had a loss. I don't know if you had a gain. You know, this is like taking out that boyfriend or girlfriend and the ghosting them. The IRS is like, you got a 1099, then you ghosted me. They're gonna assume the worst.

They're gonna put 99 you got. You know who else got one? It has your name on it and Social Security number. The irs. Yeah. They're looking for something from you now.

Yeah, yeah. Do not ghost the irs. You're gonna be the next, you know, special on American greed. And that's not a good thing. So anyway, go. Well, I'm just a small fish. It's not worth it. The irs, the number one audited return. Number one, every accountant will tell you this is the Schedule C because too many people jack it up. They don't want to do it right. They cut corners and they're late with their tax return or they don't record it at all. And the IRS will find you. The computer system is built to identify you, not a human is not going over this. There's this. You think Google's got a sweet algorithm? So does the irs. And they're going to look at your tax return and go, red flag. So, number one, you're doing this is stay out of hot water with the irs. Number two, this puts you on the map with bankers to build credit. It makes you legit. It's not a bad thing. You're building a financial history here that's very, very powerful. So when we have podcasts on buying a rental, starting a small business, getting an SBA loan, they're going to want to See this very important.

Yeah, yeah. And for many people that kind of just, you know, you're doing the grind, you're doing your side hustle, you're making some money, you're spending some money. This can be a wake up call to like how financially beneficial is this to me? Like, look at all these expenses I have and how much and I'm, you know, it's kind of a good way to get insight into how you're actually financially performing by running this income and tracking your expenses. Any business has to do that to make smart decisions about how to proceed.

I'm here on. If you're watching YouTube. I'm pointing at Matt waving. I got. I just had a feeling. Let me in, let me in, let me in, let me in. Okay, because this is a big one. Now let's sit back too. Let's say you made 10 grand with a side job working at 7:11 in the middle of the night. And you made 10 grand. Just a little thing. That's a W2. You're gonna pay tax on the entire 10 grand. W2. But you also drove for Uber and you made 10 grand on Uber. Are you gonna pay 10 tax on the entire 10 grand? No, because we're gonna write off your cell phone and the home office and the dining and the cell phone and the electronics and the laptop. All of a sudden. Yeah, Miley, you're only paying. Mileage is a big one. You're only paying tax on the net of the Uber job. This is why owning a small business saves you taxes because you're not going to pay tax on the entire amount. You get all these kick ass write offs to get there. Love it.

Love it. That's why the number one tax strategy is owning a small business.

That you heard it here first. Okay.

Now I'm gonna go with Red Mark Kohler. I stole that from him.

Yeah. So if any of you are watching this on YouTube or you get over to it, we'll put the link to the video down in the podcast is. I'm going to take a red line and watch how this goes. Profit or loss on line 31 goes up here to the bottom of your schedule C. Oh. Then it goes from the bottom of the schedule C over to line three on schedule one and it's netted against any other things on schedule one. And then the bottom of schedule one goes over here to line eight on your 1040 and that's where it hits. Then you do you get your standard deduction? What tax bracket are you in? Did you itemize a couple other credits come into play. There's a few more moving parts, but your tax software is going to kick that out and plug it into your 1040. And then boom, up in the right hand corner, you're going to typically see refund or owing.

There you go.

That's the magic.

That's Schedule C in a nutshell.

Yeah.

Now, can I say what we did next? We completed this and like the story for my daughters, they were getting a refund. You know, they've got some stimulus money. And the first thing I said we're doing, we're putting the money in Roth IRAs. Now, my older daughter already had one. She's been contributing for a couple years and she's a senior in college. Then my, my second sophomore, we put in the full amount for 2020 because she has the money. And it's like, okay, cool, let's get that in. What else are you going to do with it? Let's not blow it. Put it into a Roth ira. Now, why would we put it into a Roth ira? She's not going to get a tax deduction for it. But this money is going to grow tax free. No tax on the money that she makes this. Now she can go trade it. We did a trading account. She can go trade it and it's going to come out tax free at retirement.

Now.

Also, the cool thing about the Roth ira, to keep in mind, many of you may be familiar with retirement accounts and think, well, crap, when you put money in a retirement account, don't you just pay a 10% penalty to get it out? Not the Roth IRA. The six grand you put in every year or maybe only put in a thousand or whatever, the contributions you put into a Roth IRA you can always pull back out tax free. So you're like, well, I want to buy a car in a year, or I want the money for a down payment on a house, or I want to go on this cool trip to celebrate something cool. You just had the best savings account in the world that if you keep that money invested, it comes out tax free. When you want to pull it out, you get it out tax free, no penalty anyways.

Yeah. And the only person that's going to be mad is me and Matt if you take that money out for anything stupid between now and retirement age. And, and on this note, too, I would recommend all of you get over to YouTube and type Dave Ramsey, Compound interest. Just type those words. He's got a video that's about three or four years old. I think it's One of his best videos. It's about four minutes long and it's only got about 250,000 views. But it's a little eclectic type video where he summarizes the power of saving early in life. And I was on a conference call last night with our, my kids. We did a little family call. We're investing our Roth IRAs all into an LLC. Matt, last night was the big meeting and turned into a big cluster. I mean, everybody was fighting over what we should invest in. So I said, meeting adjourned. Molly, my 18 year old's like, I think we should buy cosmetic stock. My son Dylan's like, we need to buy airline stock because airlines are going to bounce back. And Sydney's like, I want to mine for crypto. And Alison's like, I want to flip an F150. I mean, we're all over the board. But the beauty is as a family, we're investing in our Roth IRAs together. And by the way, Jen was in on Bitcoin. That was her call. And I was about mining. I think I wanted to mine more, but we, but it was fun. And we all got to talk about how we're going to invest our Roths. And they, we talked about the Dave Ramsey video. Because these people that are in their 20s that can start putting away 1,000 or 5,000 a year, it's going to be millions. I am not kidding. It will be millions by the time they're ready to retire. And we meet too many clients that are in their 50s and 60s just staring down the barrel at a really crummy retirement and they're scared to death, just scared to death. So. Well, I don't know, let me think. 1040. Oh, if you are due a refund file immediately, don't wait till May 17, get it off, get that money in your pocket. A lot of times you can put your information in for an auto deposit from the irs. That's a good thing too, because if the IRS has your banking information, that's a bank account you always want to keep open, even if it just has some, you know, chump change in it. Because with the IRS has another stimulus or you're due a refund, the auto deposit. So it's always good to have that set up. If you owe, there's no penalty or interest. If you pay before April 17th. I'm sorry, May 17th, that's the deadline. Now, May 17th went from April 15th to May 17th. Now if you've had a business for a number of years and you've typically owed and needed to make quarterly deposits. There can be interest and penalties on not making quarterly deposits like you should have because the IRS knows you have a business and you typically owe. There's a rule for that that's separate. But if you typically don't owe and you have a side hustle, then there's no penalty interest to wait till May 17. If you extend, there will be some interest and penalty. It's minor, but some interest and penalty for not paying. But always file an extension. And I've got a video and an article on that. Any final words of wisdom, Mr. Sorensen?

No. I mean, this is, I think, really good for those of you trying to work it out on your own. If you get into complex questions, your income starting to get high, that's the time you need an engagement accountant or cpa, you know, to really help you through this. Who does it as a job. But we get it. It's not for everyone. If you don't have a huge 1099 or the side hustle is not huge, you're not going to be chasing down a CPA or accountant. And many of them, frankly, don't want to help you with it. So. But this is a good thing. I think this is one of the things that is you're growing this side hustle into a bigger business. It's kind of good to get in the nitty gritty of your tax planning and learn it, understand your business, understand the reporting process here and then as you grow bigger and bigger, of course you're going to outsource these. But doing this at the front end is gonna make you much more better at managing this and other people as you grow your business, don't be afraid of it.

Yeah. And I love. And final tip for me, I think this is a, this is a big one. As you, we as a country, cross your fingers, rebound from this Covid crisis, and you've expanded this little side hustle to make it through this storm. When you get, when the storm calms, don't kill the side hustle. Keep the side hustle and use it as a little tool or mechanism to fund your future retirement. And if you say, well, it takes 10 hours a week or whatever, that's okay. Get that thing on autopilot as much if you can, automate it. Even if you don't make a ton, try to maintain that side hustle to put money away for the Future. So the W2 is your safety net. It's your foundational basic income. You've got that general, you know, monthly nugget, taken care of and you're okay. But make sure that you don't just give up on the side hustle. It could be building a pool of cash to buy a rental property. It could help be a catalyst for a future business or retirement plan. And, and so this is your gateway drug. You know, the side hustle is a gateway drug to the American dream.

Yeah. And the side hustle can take over the W2. And once the side hustle is so busy that it's. You're wasting time and wasting money to go to your W2 job. That's when you know you quit the W2 job. Okay. You are full time side hustle. And it's not just a side hustle anymore. The main hustle.

Okay, this is going to be the quote on the newsletter this week. So for those of you that don't get our newsletter every week, you've got to get it because it's free and we give tips and strategies. The side hustle in quotes is the gateway drug to the American dream. Oh boy. By Mark Kohler and Matt Sorensen. I'll give you, I'll give you have credit for that.

You can take it. Just say Matt Sorenson was there. Just say. By Mark Kohler and Matt Sorenson was

there because this is gonna, this quote's gonna be, you know, down in stone for generations to come. I don't want you to feel slighted.

Make sure you're signed up for our newsletter so you can see this amazing quote. You'll be reminded of this next week when it comes out. You go to mainstreetbusiness.com to sign up for the newsletter. Also, check out all of our prior shows and thank you for listening.

See you next week.