Do You Have What It Takes to be a Small Business Owner?

Many Americans have a dream of owning a business. According to a survey conducted in 2022, more than 40% of Americans aspire to start or purchase their own businesses. This is a positive thing since small businesses are the backbone of the American economy. In fact, 99.9% of all US businesses are small. More than 33 million small businesses employ over 61.7 million workers, per the SBA’s Office of Advocacy. Yet less than 7% of Americans are small business owners.

If you are considering starting or buying a small business, you need to ask yourself if you have what it takes to become a small business owner. Several vital attributes are common to successful small business owners. Read through the following list and score yourself one point for each attribute that applies to you. The higher the score, the more prepared you are to be a business owner.

Attributes of Successful Business Owners:

  1. Is your spouse supportive of your plan? If you’re married, it’s crucial that your spouse is supportive of your decision to start a business. In the beginning, starting a business will consume a significant amount of your time and energy. Having a spouse who feels neglected or unheard can add unnecessary stress to an already challenging situation.
  2. Are you willing to put in long hours to get your business up and running? During the initial stages of your business, it is essential to focus on raising awareness about your company’s existence while catering to the needs of your early customers. In the beginning, you may be the sole member of your company and will need to work long hours both within and on the business.
  3. Do you have money to invest in starting your business? It’s important to remember that no lender will provide the entire amount required to start a new business. You need to save up a substantial amount of money to invest in yourself and your company. Generally, 15-25% of the total start-up costs are required.
  4. Is there other household income to support your family while you launch your business? Some business owners can start their business on a small scale while maintaining their full-time jobs. This is ideal, but it is only realistic for some people. You may have to give up your secure paycheck to start. It is helpful to have other sources of income to pay the bills until your business begins to generate sufficient revenues to make a profit. Other sources of income might include your spouse’s wages or salary, retirement, disability, investments, and rental income.
  5. Did you operate a lemon stand or paper route as a child? Having experience owning a business before can prove highly beneficial when taking on bigger and more complex ventures. The lessons learned from prior business ownership can help you better understand the importance of strategic planning, financial management, and effective communication with stakeholders. Additionally, you have gained valuable insights into building and maintaining successful relationships with clients, employees, and other partners in the business world. Overall, prior business ownership provides a wealth of knowledge and experience that can help you navigate the challenges of entrepreneurship with greater confidence and success.
  6. Do you have close relatives or friends who are business owners? Experienced business owners are typically happy to share their keys to success and the lessons learned from their mistakes.
  7. Have you worked for and been in close contact with the owner of a small business? If so, you may have witnessed their decision-making processes and experienced times when you disagreed with their decisions.
  8. Have you had management experience in any business? The responsibility of making decisions and guiding employees helps prepare you for owning and running your own business.
  9. Have you had various functional work experiences, such as accounting, finance, or marketing? In your own business, you will have the ultimate decision-making authority for every aspect. Having some experience in many different areas will help you be better prepared.
  10. Have you been frustrated by having your work-improvement suggestions rejected by those in management above you? Those who note inefficiencies and problems in the workplace are naturally inclined to want to run their own businesses and test their solutions.
  11. Are you a person of action rather than a dreamer? While the idea of owning a business appeals to many, it takes a great deal of hard work and determination to turn that dream into a reality. Unfortunately, only a small fraction of those who dream of business ownership are willing to put in the necessary effort and dedication to make it happen.
  12. Are you a risk taker? Starting a business is risky. It requires you to leave the comfort of a reliable, steady paycheck for the uncertain possibility of great success and satisfaction. But it also involves the possibility of failure.
  13. Do you enjoy working with other people? Owning your own business will force you to interact with many different groups of people, including employees, networking partners, lenders, business development leaders, and competitors.
  14. Are you able to delegate effectively? Running your own business will require you to let go of many tasks so that you can focus on the tasks that only you can do. You will have to train your employees and then trust them to do the tasks assigned without constantly looking over their shoulders.
  15. Do the employees you supervise in your current job respect you and work hard for you? It is important that your employees see you as the leader and take direction from you. This does not mean that you become a dictator. Listen to your employees and let them share their ideas. Ultimately, however, you will make the final decisions, and your employees have to respect that and follow your directives.
  16. Are you someone who can adapt to new situations easily and is comfortable with change? As soon as you start to feel relaxed, things will change. Change comes from many sources outside of your control, such as new competition, inflation, and new regulations. You must be flexible and adapt to changes you cannot control.

If you are seriously considering taking the plunge into business ownership, join me over the next few months as I continue to share what I learned as a business owner and a full-time small business consultant.

Why Do You Want to Own Your Own Business?

During my initial meeting with a new client, I generally ask about their motivation behind starting a business. In my experience of 17 years, I have come across various answers, ranging from “I have extensive knowledge about this industry and can perform better than my previous employers” to “My boss is reaping all the benefits of my hard work, and I feel it’s unjust.”

LivePlan conducted a survey in 2022 to explore why people start their own businesses. The survey results revealed the seven most common motivations behind entrepreneurship, shedding light on the factors driving individuals to take the leap into self-employment.

  1. To pursue their passion. Starting a business to pursue your passion is often cited as a top reason. Mark Twain reportedly said, “Find a job you love, and you will never have to work a day in your life.” If you can earn a livelihood by following your passion, then you will likely find your work fulfilling. However, there are a few things you should keep in mind:
    A. Your passion may be a better side hustle than a full-time business, particularly in the beginning.
    B. You may find less joy in doing the hobby or skill you loved when you have to do it to pay the bills.
  2. To create generational wealth. Creating generational wealth has become a popular term nowadays as people understand that successful business owners can pass down a thriving business to their children. However, it’s essential to keep in mind that this is a rare occurrence. Many children do not wish to follow in their parents’ footsteps, and only 20% of the time do children take over the family business. Furthermore, most family businesses rarely survive to the third or fourth generation due to the younger generations’ lack of preparation or passion.
  3. To support the community and help others. Supporting your community can be achieved by creating job opportunities and earning a significant profit, which then can be shared with those in need. Starting a business can be a great way to achieve this noble goal. However, success is crucial to fulfill this mission. Therefore, running your business according to best business practices is essential.
  4. To turn a side gig into a full-fledged business. This reason is similar to the first one, but it is different in that your side gig may not necessarily be your passion. Your side project may have started because you noticed a need that you could meet. For example, you may have realized that many houses in your neighborhood, including your own, desperately needed power washing. So, you bought a power washer and started washing houses for a fee when you weren’t working your regular job. Over time, your side hustle may grow to the point
    where you could do it full-time. Many of my clients are starting a side job with the goal of developing it into their full-time businesses.
  5. To challenge the status quo. Some of my clients are frustrated with their bosses who keep doing things “the same old way.” They have observed that certain tasks could be accomplished more efficiently, employees could be given more authority, and customer support policies could be improved. However, they do not feel there is an atmosphere at the workplace to challenge their bosses to change. As a result, they are considering starting their own businesses to put their ideas into practice.
  6. To achieve better family life balance and flexibility. In my area, many people travel long distances to work in either the nation’s capital or my state’s capital. They spend several hours commuting on highways, in addition to the time they put in at their jobs. However, they often believe that their quality of life would improve if they could work locally and have more control over their schedules. Whether this balance is achievable depends on the type of business they choose.
    A. Starting and growing a business requires a lot of hard work and dedication, and many business owners put in long hours to establish their businesses. For government contractors, consultants, marketers, and salespeople, networking and building professional relationships are especially important during the early stages of their businesses.
    B. Retail shops, restaurants, and hospitality businesses are typically busiest on weekends, evenings, and holidays. However, these businesses do offer owners the opportunity to take time off during the weekdays. This option can be a good choice if you would like to travel during the off-season or have a few days off mid-week.
  7. To be the boss. According to a recent survey, almost half of the participants (47%) expressed their desire to become entrepreneurs and be their own boss. For some people, the idea of being in charge of one’s own business also comes with a sense that other people respect you. However, it also entails the crucial responsibility of effectively managing and developing the enterprise.

While there are many compelling reasons to start a business, such as being your own boss, pursuing your passion, or achieving financial independence, these reasons alone are not enough to ensure success. To set yourself up for success, you will need to do your due diligence, develop a comprehensive business plan, and gain a deep understanding of your target market and industry trends. You must also be equipped with the necessary skills to manage business operations effectively and lead and motivate employees. Only with a combination of these factors can you increase your chances of building a thriving and sustainable business.

Six Questions to Ask Yourself Before Starting a Small Business

Are you one of the millions of Americans considering opening a business? Before taking the plunge into business ownership, ask yourself these questions and answer them as honestly as possible.

Am I comfortable taking risks? Risk is an inherent part of starting a business. If you’re considering leaving your current job to start your business, you’ll be giving up a steady income. There’s also the risk of depending on your business to provide for your family’s needs. If you’re uncomfortable with risk, starting a business may not be the right choice for you.

Do I have money to invest in starting a business? Financial planning is a crucial aspect of starting a business. We often meet with people who don’t have any cash to invest in starting a business and expect to be able to borrow 100% of the startup costs. This is not a realistic expectation. A lender will expect the business owner to have 10- 20% of the startup funding needed. If you don’t have the capital to invest but you really desire to start a business, consider options that require little or no investment. Such enterprises include consulting services or virtual services you can do from home using only your computer.

Do I have time to devote to running a business? All businesses require time to work both in and on the business. Many business owners tell us that they work 40 or more hours in their businesses each week and work another 10 – 20 hours on the business. Working on the business includes marketing and networking efforts to find customers, invoicing, bill paying, scheduling, and many other necessary tasks that do not generate revenue.

Am I comfortable making decisions? A business owner makes many important decisions every day. These decisions include which jobs you want to bid on, the proper price to charge for your services, how you will market your services, and whether you should hire (or fire) an employee. If you are hesitant to make these decisions, business ownership may not fit your personality.

Do I have the expertise to do the work and run the business? We often encounter individuals lacking the skills to perform the tasks required to start their desired company. They plan to hire the appropriate individuals to complete the job. For instance, a non-chef may open a restaurant with the intention of employing a talented chef. This approach may prove successful until the hired chef departs for another position. Prospective business owners need to have some training and experience in the services they will offer so they can do the work themselves when necessary. They also need to be capable of recognizing when an employee is not doing the job properly or well.

Does my family support my decision? Running a business is hard work. It requires working long hours and committing family financial resources to succeed. You need the support of those in your immediate family. You should reconsider if those closest to you do not support your decision.

If you answered yes to these six questions, you may be ready to move forward with starting your own business. This series of blogs will give you more valuable information that you need to be well-prepared for success.

Did You Get a Large Tax Refund this Year?

In 2024, those who filed their taxes early received an average refund of $1,395. This amount is significant, but it’s $568 less than the average refund at this point last year. The IRS estimates that around 96 million taxpayers will receive a refund this year. Most of us hope for a refund each year, and a large refund can be exciting. It’s always nice to see an extra $1,395, or last year’s average of $1,963, in our bank account.

Many people use their tax refund to pay for a vacation or pay down credit card bills. While this is undoubtedly a good way to spend your refund, it’s important to remember that you have essentially given the IRS a large, interest-free loan. Consider reducing the amount withheld from your paycheck each month; you will have more money in your pocket. This is money that you have control over and can use to reduce interest payments or put into an interest-bearing account.

Let’s say you’re eligible for an average tax refund this year, which is $1,395. This amount is equal to about $116.25 per month. Now, suppose you spent around $1,000 on Christmas shopping last year and had to use your credit card to pay for it. If you have good credit, you might be charged an average interest rate of 16.25% on the balance you owe. But if your credit score is not great, your interest rate could be between 24% and 29%.

 To pay off your debt before next Christmas, let’s assume you’ve decided to set aside $100 every month. This chart shows how much interest you’ll have to pay each month, based on your balance and interest rate.

MonthBeginning BalancePaymentInterestPrincipalEnding Balance
January$1,000$100$13.54$86.46$913.54
February$913.54$100$12.37$87.63$825.91
March$825.91$100$11.18$88.82$737.09
April$737.09$100$ 9.98$90.02$647.07
May$647.07$100$8.76$91.24$555.83
June$555.83$100$7.53$92.47$463.36
July$463.36$100$6.27$93.73$369.63
August$369.63$100$5.01$94.99$274.64
September$274.64$100$3.72$96.28$178.36
October$178.36$100$2.42$97.58$80.78
November$80.78$80.78 $80.78$0
Total Interest  $80.78  
Paying off Christmas Debt Example 1

Paying off credit card debt can be a tough challenge for many people. For example, imagine if it took you almost a whole year to pay off your credit card debt; during that time, you ended up paying an extra $80.78 in interest charges. Unfortunately, this is a common problem that many Americans face. In fact, as of September 2023, around one-third of all Americans were still struggling to pay off the credit card debt they accumulated during the Christmas season of 2022.

Now, let’s look back to January 2023. You use the IRS tax calculator, and it reveals that you are having too many taxes withheld. You lower your withholding amount to match your expected tax liability, giving you an extra $116.25 each month. Add this to the $100 you had budgeted to pay off your $1,000 Christmas credit card debt. The table below shows the results.

MonthBeginning BalancePaymentInterestPrincipalEnding Balance
January$1,000$216.25$13.54$202.71$797.29
February$797.29$216.25$10.80$205.45$591.84
March$591.84$216.25$8.01$208.24$383.60
April$383.60$216.25$5.19$211.06172.54
May$172.54$172.54 $172.54$0
Total Interest  $37.54  
Paying off Christmas Example 2

This plan would enable you to pay off your Christmas debt in just five months instead of eleven months. By doing so, you would have saved $43.24 in interest. Moreover, you would have an additional $43.71 in May and an additional $216.25 in each of the next seven months. This would have given you a total of $1,556.99 that you could have utilized to pay for Christmas 2023, along with an additional $557.

It is not possible to change your withholdings for 2023 after the fact. However, you can make changes right now. Assuming you began 2024 with $1,000 in debt from holiday spending and budgeted $100 to reduce it, and your accountant filed your taxes on time, you have received a refund of $1,395 this week. You can use $647 of this amount to clear your debt balance (as indicated in the first table above). As a result, you will have $648 left from your refund. Additionally, you can modify your withholding now to receive an extra $116.25 monthly for the remainder of the year.

If you add the $100 you have budgeted every month to put towards your debt and the $116.25 you have available, you will have an extra $216.25 per month. By saving this amount for eight months, in addition to the $648 lump sum, you will have a total of $2,378 by the end of 2024. It’s important to note that you won’t receive a large tax refund in 2025, but you’ll have the money available throughout the year. You can use this money to pay off debt, fund a nice vacation, or cover Christmas 2024 expenses without incurring new debt.

This plan assumes that you will maintain your current spending levels for regular and Christmas expenses. On the other hand, if you are likely to fritter away the extra money and not save it for your Christmas spending, then you will be better off to maintain your current level of withholdings.

For more tips on managing money wisely, please see my other blogs. My Bible study, Honoring God with Your Money, is an excellent resource.

If You Have to File Late, Avoid Penalties and Interest

April 15 is just a few days away. If you won’t be able to mail and postmark your taxes by April 15, you may need to file for an extension. You can request an extension if you need extra time to file your tax return. However, it’s important to note that an extension only gives you more time to file your return; it does NOT mean you have an extension to pay.

All taxes that you owe must be paid by the original deadline. Otherwise, you may be charged a late fee along with an interest. If you fail to file your return on time, you will be penalized with a Failure to File penalty unless you apply for an extension.

Failure to Pay Penalty

A Failure to Pay penalty is assessed on the balance of taxes owed after April 15. The penalty for unpaid taxes incurs a monthly fee of 0.5%, with a maximum penalty of 25% of the unpaid taxes, regardless of whether you filed an extension.

Failure to File Penalty

A Failure to File penalty is assessed based on how late you file and the amount of taxes owed on the due date. This fee is assessed if you do not file your tax return AND you do not request an extension. This penalty is calculated at 5% of the unpaid balance per month and maxes out at 25%.

Both of these penalties may be assessed for the same months. However, the combined penalties will be at most 5% of the taxes owed per month.

In addition to these penalties, the IRS charges interest on past-due amounts. This interest is charged on the taxes owed, the penalty, and the accumulated interest. The more you owe, the higher the interest will be. Interest begins on the day the tax is late and continues until the tax, along with interest and penalties, is paid in full.

To avoid getting in trouble and paying penalties:

  1. File your tax return on time and pay any tax owed by the due date.
  2. If you cannot file your taxes by the deadline, you can avoid a Failure to File penalty by requesting an extension.
    a. The extension must be filed by the due date.
    b. The extension gives you to October 15 to file.
    c. File form 4868 or use IRS Free File to apply for an extension.
    d. You need to enter an estimation of your 2023 tax liability and the amount of
    payments you made in 2023 through withholdings and estimated tax payments.
    e. Include payment for the balance to avoid late penalties and interest. If you cannot pay the balance in full, pay as much as possible.
    f. Estimating high and overpaying is much better than subjecting yourself to late penalties and interest.
    g. It is much better to estimate high and overpay than subject yourself to late penalties and interest.
  3. If you are unable to pay the balance when you file the extension, you should pay as much as you can and apply for a payment plan that will allow you to pay the remaining balance over time.
    a. Apply for a short-term plan if you can pay your taxes owed within 180 days.
    b. Apply for a long-term plan to make monthly payments over some time greater than 6 months.
    c. Set-up fees are applied to long-term plans; this fee is significantly lower if payments will be made by direct deposit.
    d. If payments are made by credit card, a fee will be charged.
    e. You may be able to apply for a payment plan online, depending on how much you owe. Online setup requires a computer using a supported browser and a cell phone that receives text messages.
    f. If you cannot apply online, you will need to complete Form 9465, Installment
    Agreement Request.
    g. For more information on applying for an IRS payment plans, go to
    https://www.irs.gov/payments/online-payment-agreement-application

If you cannot pay your taxes on time, you must establish a payment plan with the IRS. If you do not follow these steps, the IRS can levy your salary, bank accounts, or property. You do not want to get into that situation.

Thinking About Doing Your Own Taxes?

Hiring a tax accountant can be expensive, so you may consider doing your own taxes. But before making that decision, you should carefully evaluate (1) whether you are capable of doing them yourself and (2) if so, how to proceed.

You might feel comfortable doing your taxes if:

  • Your taxes are relatively simple
  • All income is reported on W-2s and/or 1099s
  • Most things have stayed the same since last year, such as marriage status, jobs, etc.
  • You will take the standard deduction.
  • Your taxes are a bit more complicated, but you are willing to take the time to read the IRS instructions.
  • You have self-employment income as a single owner and feel confident to complete the Schedule C form.

You might be better off hiring an accountant IF:

  • You have multiple sources of income.
  • You worked numerous jobs or worked in various states.
  • You sold a home, investments, or a business
  • You have investment properties
  • You have investments in foreign companies.
  • You own a company with business with partners.
  • You want to be sure to maximize all your deductions and get the most significant tax refund possible.

Options for Preparing Your Taxes:

  1. IRS Fillable Forms. You can complete your taxes and file them online; however, no guidance is provided, and you must perform some calculations yourself.  
  2. Tax Software—These five options were ranked as the top 5 online tax software providers by Forbes. You should compare options to determine which one is best for your particular situation.
    • TurboTax
    • H&R Block
  3. TaxSlayer
  4. CashApp
  5. Jackson-Hewitt Online

If you have not completed your taxes yet, it’s time to get to work. Tax returns are due on April 15. Check back next week for tips on minimizing penalties and interest if you are not able to complete and file your return on time.

Filing a Final Tax Return

Losing a loved one to death is one of the most challenging circumstances in life. The IRS will require the deceased person’s representative to file a final tax return to add insult to injury.

My father passed away early in the year, and I had not completed his tax return for the previous year. I had to file it for him. A year after his passing, I had to file a final return for him as he had received social security and retirement benefits in his last year of life. These were emotional experiences for me. If you are in this position this year, you have my sincerest sympathy, and I hope this information makes the experience less stressful for you.The return must be filed by your loved one’s surviving spouse or representative.

If you are the one filing, follow these steps.

  1. Gather all tax documents for your loved one as you would prepare your tax return.
  2. All income received up to death must be included on the final tax return. If the deceased person was elderly, their income likely included: (1) retirement benefits, (2) social security, (3) IRA distributions, (4) Interest and dividends, and (5) investment Income
  3. If they were younger and still working, they will receive a W-2 or 1099 from those they worked for in the final year of life.
  4. If filing electronically, you must check the box “Taxpayer Died Before Filing.”  If filing a paper return, write “Deceased” along with the taxpayer’s name and date of death across the top of the return. You do not need to include a death certificate or other proof of death.
  5. If the deceased person was married, the surviving spouse can file Married Filing Jointly or Married Filing Separately for the year of death.
  6. All credits and deductions for the deceased person were eligible for still apply.
  7. The appointed representative must sign the return for the deceased individual. The spouse must also sign the return if the person has a surviving spouse. If no representative was appointed and the person did not have a surviving spouse, the person handling the estate should sign the return as a personal representative.
  8. A personal representative should complete Form 1310, Statement of Person Claiming Refund Due for a Deceased Taxpayer. A court-appointed representative can skip Form 1310 but should include a copy of the court order showing their appointment.
  9. If the deceased person is due a refund, the representative must agree to distribute the refund to the person’s heirs in accordance with their will. If the deceased person has a tax liability, the personal representative must pay it from the estate asset.

You can use the IRS’s Interactive Tax Assistant (ITA) to help you determine how to file for your specific situation:  https://www.irs.gov/help/ita/how-do-i-file-a-deceased-persons-tax-return

If you have not yet filed your tax return, check back next week for tips on filing your return yourself.

Gig Workers & Taxes: Filing a Schedule C

Are you among the 73 million Americans who work in the gig economy? If you drive for Uber, deliver meals for DoorDash, shop for others through Instacart, design websites on Fiverr, pet sit for friends and neighbors for a fee, take on side jobs through Upwork, or engage in any other type of side hustle work, then you are part of the gig economy. If you are one of these workers, you may wonder (1) if you have to claim these earnings and (2) how you claim these earnings.

Many individuals who work in the gig economy also have a conventional job that provides them with a steady salary or wages. They obtain a W-2 form from their employer and must file a tax return. They may overlook the smaller amounts earned from their side jobs, but this would be a mistake.

Gig workers are considered independent contractors or freelancers by those who hire them rather than employees. As such, they do not receive W-2s at the end of the year. No taxes are withheld from their income, and the companies they work for do not pay a portion of their required Medicare and Social Security contributions.

The IRS considers earnings from side hustles or freelance work as self-employment income. For this income, you will file a Schedule C, Profit or Loss from Business. This form will be part of your income tax return, and the Net Profit or Loss will transfer to your 1040.

Each employer you worked for as an independent contractor should provide you with a 1099-NEC form. If you have earnings of $400 or more reported on these forms, you must file a Schedule C. This form requires you to sum up your total income and write it in Line 1. You can add up your income on Schedule C if you have worked multiple freelance jobs.

In Part II, you will need to list all the legitimate expenses for your business. This is crucial to ensure that you pay the correct amount of taxes and do not overpay.

  • Your expenses may include the costs incurred while driving your car to transport passengers or make deliveries. You should keep track of the miles you have driven and use the standard mileage rate of 65.5 cents per mile set by the IRS. You can enter the total miles driven on Page 2, Part IV, and then multiply the total mileage by .655 to get the exact value, which you can then enter on Line 9.
  • Advertising and marketing expenses, such as creating business cards, fliers, a magnetic sign for your vehicle, or a website, are entered on Line 8.  
  • Contract labor comes from hiring someone to assist you with jobs. If you are a freelance web designer, you might subcontract the creation of a logo for your client to a graphic designer or artist. If you had those expenses, enter the total on Line 11.
  • Insurance for your business is entered on Line 15. Typical insurance charges are surcharges added to your vehicle insurance due to making deliveries; errors and omissions insurance if you provide a professional service such as tax preparation; property insurance to cover a loss of tools or equipment for fire or theft; and general liability insurance.
  • Commissions and fees paid to Fiverr, Uber, Upwork, or another job matching service are entered on Line 10.
  • Payment processing fees. If you use PayPal, Venmo, or another service to process payments, you are paying them a percentage of the charges for their service. If your clients pay by credit card, then your credit card provider will deduct a service fee. These fees are counted as Other Expenses entered on Line 27a. You can detail these expenses in Section V. 
  • Cellphone and internet service charges are deductible if used primarily for business. These expenses are typically included on Line 27a and in Section V.
  • Supplies used to operate your business are deductible. Office supplies are standard for most companies. A food delivery driver might also invest in insulated bags to keep food warm or cold, a pet sitter might purchase pet treats and toys, and a handyman would buy tools and hardware. Keep track of these and deduct them from Line 22 on your Schedule C form.

When you have entered all your expenses, total them on Line 28. Subtract the total from your income to determine your Tentative Profit. For most independent contractors, tentative profit is the same as Net Profit. However, those working from a home office may elect to deduct some home office expenses, lowering your taxable profit but requiring additional work.

Cost of Goods Sold is calculated in Section III, but as gig economy workers do not commonly incur it, we will not include it in this post.

Your Net Profit on Line 31 should be transferred to Line 3 of your 1040 and also to Line 2 of your Schedule SE. Schedule SE is used to calculate your self-employment tax. Your tax software or your tax preparer will do this automatically. Your role is to accurately track your income and deductible expenses from your side hustles so that your tax liability will be accurate.

Check back next week for another Tuesday tax tip.

Do I Have to File a Tax Return this Year?

If you are currently retired and living on a small, fixed income or barely making enough money to support your family, you might wonder whether you need to file a tax return this year. The answer is most likely “Yes.”

In 1789, Benjamin Franklin famously said, “In this world, nothing can be said to be certain, except death and taxes.” That has not changed much. Filing a tax return is a requirement of life for nearly every American.

You are required to file a tax return if:

  1. Your gross income was greater than the applicable standard deduction for your filing status.
  2. You had self-employment income of $400 or more.
  3. You owe taxes.

Keep in mind that gross income is not just income earned from working a job. It includes social security and retirement income, IRA distributions, interest and dividends, capital gains, and any other sources of income you might have.

Let’s look at the example of a 90-year-old widow whose social security and retirement benefits total $23,400 annually. Additionally, she received $157 in interest on her savings and a dividend of $384 from stocks. Therefore, her gross income is $23,941. This amount exceeds her standard deduction of $15,700. Consequently, she must file a tax return for the year. It is likely that she had taxes withheld on these incomes and that she is entitled to a refund. If so, filing is not only required, but it is beneficial.

Even if you are not required to file a tax return, you will want to file if (1) you are due a refund on taxes withheld or (2) if you are entitled to claim a tax credit. The most common tax credits are:

  • Earned income tax credit
  • Child tax credit
  • American Opportunity Tax Credit
  • Credit for Federal Tax on Fuels
  • Premium Tax Credit
  • Health Coverage Tax Credit
  • Credits for Sick and Family Leave
  • Child and Dependent Care Credit

If you are still unsure whether you have to file a tax return, you can use the IRS’s Interactive Tax Assistance (ITA). It has an Interview Tool to help you figure it out. The interview is estimated to take 12 minutes to complete. Remember that the tool is only as good as the answers you provide. Access the interview tool here: https://www.irs.gov/help/ita/do-i-need-to-file-a-tax-return

Free Tax Filing Options

Did you know you may be eligible to file your taxes for free? Several free filing options are available, depending on your age, state of residency, and income. You can find a free tax filing option if your Adjusted Gross Income (AGI) is $79,000 or less.

In order to move forward, you will need to determine your AGI for 2023. This information will help us explore the best options available and make informed decisions. Let’s take a moment to calculate your AGI so we can confidently move ahead.

Step 1:  Calculate your total income by adding up all sources of income you receive. Typical forms of income may include:

  • Wages
  • Retirement income
    • IRA distributions
    • Dividends
  • Capital gains
  • business profits
  • interest earned
  • Investment income 
  • Social security
  • Tips
  • Rental income
  • Dependent care benefits
  • Employer-provided adoption benefits
  • Medicaid waiver payments

    Step 2:  Sum up the adjustments made to your income. These adjustments may include: 
  • Half of the self-employment taxes you paid
  • Self-employment health insurance premiums
  • Applicable donations to IRAs
  • Student loan interest
  • Unreimbursed educator expenses

Your AGI is your total income minus your total adjustments.

IRS File Free

The IRS has collaborated with several tax software providers to offer free access to those who meet the requirements. Each provider has its own set of criteria for eligibility. Please visit the provider’s website to determine if their free service is available in your state. Below is a list of the IRS’s trusted partners and a link to their websites.

1040 NOWAGI < $68,000Any agehttps://www.1040now.net
Drake$17k<AGI<$68kAny agehttps://www.1040.com/
EzTaxReturnAGI < $79,000Any agehttps://www.eztaxreturn.com/
FileYourTaxes$8.5k<AGI<$79k< 65https://www.fileyourtaxes.com/
On-Line TaxesAGI < $45,000Any agehttps://www.olt.com
Tax ActAGI < $79,00020 – 54https://www.taxact.com/
Tax HawkAGI < $45,000Any agehttps://www.taxhawk.com
Tax SlayerAGI < $44,000Any agehttps://www.taxslayer.com/
Comparison Free Tax Filing Options

The IRS has a tool to help you determine which of these trusted partners is right for you: https://apps.irs.gov/app/freeFile/general/

  1. Go to IRS.gov
  2. Click “File your taxes for free.”
  3. Select “Explore Free Guided Tax Software”
  4. If you are a first-time free tax filer, select “Find Your Trusted Partner(s)” to find the right preparer for your situation. Or you may browse all the IRS-trusted partners.
  5. Once you use IRS File Free, you will receive an email from the company you used with a link to file for free next year.

Check back next Tuesday for another tax tip to help you decide whether to itemize your deduction or take the standard deduction.