The short answer: Is you make $400 or more in net business income during the taxable year, you must file.
Listen to the episode and read the transcript below for all the details.
I’d also love for you to join the Tax Challenge happening next month to help you get all your docs ready for tax season.
Hello and welcome to episode 24 of the unfuck your business podcast. It is the last day of the year and I am super excited to be a hanging out, uh, with you all on new year's Eve chatting about more tax stuff. I mean walk could be more fun, right? So today we will be chatting about when you are required to file a tax return if you are new to the podcast. The way this works is on all of our event episodes. So episode 24 each Tuesday we tackle a question that is posed in my Facebook group. So you can join the Facebook group. It is called Braydon's besties, V. R. a. D. E. N. that's how you spell my name, Braydon's besties on Facebook. Once you click to join, you will get a prompt to answer three questions and one of those prompts will ask you to share a question that you have for me about legal and tax stuff and your business.
I save those and collect them and then try to tackle one every Tuesday on the podcast. So that's what we are doing. Now, the question that we will be answering today is, is there a minimum that a person can earn in cash before they need to report it? Or does one have to self report everything? Does the IRS really care about my Meeker hustle? So great question. Uh, first of all, don't downplay your hustle. Uh, you gotta start somewhere. We are all start from zero and work our way up. But the answer is yes, the IRS does care. The technical rule is that you must file an income tax return if you're a net earning from self-employment was $400 or more during the tax year. So that has a lot of different elements to it. Let's break it down during the tax year. Typically means if you're a calender, your taxpayer, like most of us are than January 1st through December 31st of that year.
So we were talking about 2019 right now and then it States met earnings. So that's your profit. So income minus deductible expenses is the key. So if you can deduct it on your tax return, then it is a valid expense for purposes of this question. So say you had one $1,000 client in $2,000 in expenses, then you operated at an net loss of $1,000 so you did not earn self-employment earnings of $400 or more in net income. And then it Sates self employment. So this one's kind of tricky. A lot of people don't really know what self-employment is and I'm not going to dig into the tax code and give you the exact rule because you know that's kind of boring and that's not exactly what we do on this podcast. I give you more of the generalization. So if you are doing any kind of service that you're not being employed for, you're selling any kind of product or not being employed for, then that's self employment income.
So whether it's, you know, you're making your own earrings and selling those, you're doing coaching and consulting, you're managing your friend's Instagram account and they're paying you that. Those are all examples of income from self employment. So again to read the full rule. Now that we've broken it down, you must file an income tax return if your net earnings from self-employment were $400 or more. Caveat, we are only talking about self employment income in this question. There are other rules that require you to file an income tax return. We won't be covering those if you are uncertain. Other types of income you're required to file. There are other rules as well. Before we wrap this one up, I did want to know there was one major mistake I see a lot of new business owners make and that is not reporting their business when they are operating at a loss.
So if you don't make money, you aren't required to report that, but you still want to for a couple of reasons. The first is you don't want to have gaps in your filing with the IRS. So if your self-employment side hustle, whatever you want to call it, was your only the only thing you did that year and he didn't make any other money. You might not need to file a tax return, but if you have a missing year and your tax returns, that doesn't necessarily look good and the IRS could kind of pull it to look and see what's happening and now I don't want you to freak out because if you're not legally required to do something, then you don't need to worry about it. Worst case scenario is you get asked why did you not file this tax return and then you prove to them that you had no income but by filing the return you don't really need to ever worry about having to prove it because you're basically telling the IRS, Hey IRS, I didn't make any money last year so don't like come looking for my shit.
Basically that's the, that's the quick, quick version of that story. The other reason is because you can show a loss and your business and that is to your benefit. A lot of people are worried about this. They're afraid they're going to get in trouble. You don't really need to worry about that unless you are running an unprofitable business for multiple years. We do have this rule called the hobby loss rules. I'm not going to dig into it too much here, but basically the gist of it is you can't have something that truly is just a hobby and then just write off everything you're spending on it. So for example, a, I do triathlons. I have an expensive trap on bike. The races are very expensive. If one of you wanted to pay me $300 to draft you up a training plan and I'm all of a sudden I'm going to call myself a triathlon coach and deduct all of my expenses for my races as a business expense, the IRS is gonna say, no, no, no, no.
You clearly just have a hobby and now you're making up a business in order to deduct everything that what that is for. But if you genuinely are trying to market a business and operating as a loss, that's fine. The reason why you want to report this is as, let's say you have a whole time job where you make $50,000 and you decide that you are going to start your own business, that you eventually want to grow to take over your full time business and that operates at a $5,000 loss this year. You put that on your tax return and then it shows taxable income of 45,000 so your full time income of 50 minus your 5,000 that you had from your part time business as a loss, your taxable income is 45,000 which means that if your employer was withholding taxes on your $50,000 of income, which they should have done, you actually have less in net income for the year than you were anticipating, which means you're going to owe less than taxes, which means you're going to get a bigger refund.
So in short, if you have a business loss, it's going to decrease the amount of tax money that you owe or it's going to increase the refund that that you're going to get. So it is to your benefit to track those business expenses and report the income, the expenses, and the loss, even if it's a little bit of extra work. I hope that wasn't too confusing. I try to break it down as best as I could without getting too into the weeds on all this stuff. If you enjoyed today's podcast episode and you would like to hear more episodes, make sure to hit the subscribe button so you know when more episodes come up and I would absolutely love for you to relieve or review as well. Don't forget to join the Facebook group and as always, I will be back in your earbuds on Thursday. Thanks so much for tuning in and I hope that you have a fantastic day.
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You'll learn: what the three mistakes are; how to fix them; and also how to work with me to get your legal & tax shit legit.