How to Declare Side Project Income on your Tax Return

Shane Labs February 25, 2014 2

It’s that time of year – tax season! For most people it’s pretty straightforward, but for us sidestrappers who have income from their side projects in 2013, it can get confusing figuring out how to do your taxes.

DISCLAIMER: I am not a tax professional and am not giving out legal advice. What follows is my personal experience, and I am not suggesting you follow exactly. Let it only serve as an example, as you should always consult a professional yourself.

Make more than $600? Doesn’t matter.

It’s a common misconception that you only have to declare income if you made more than $600 in the year. This is false. Income is income. The $600 limit has to do with whether a company is required to issue you a 1099 declaring your income to the government. You are legally responsible to declare any amount of income you’ve made from your side projects, regardless of the amount.

But I’m not a real business.

Answer this question: Did you create your side projects because you wanted to make money? If so, you’re a business in the eyes of the IRS. Doesn’t matter if you have a legal entity or not. You don’t have to be a formal company in order to be in business. If you tried to make money, you have a home business (most likely of the “sole-proprietor” type). Since you’re reading this blog, I’m going to assume you wanted to make money.

If you do have a formal business entity established, such as a corporation, partnership, or LLC, stop reading now. I have no idea how to declare income in your case – consult your CPA or lawyer.

Okay, so you’ve accepted the fact that you need to declare your side project income. What do you do? I followed 3 steps.

Step 1: List all your income

Think of every source that gave you money this year, and total up the dollar amount for each. Go through your bank statements and double check you’re not missing any income. Here’s a few common sources that may help jog your memory:

  • Google AdSense earnings
  • Affiliate revenue (CJ, ClickBank, Amazon, etc)
  • Other advertising earnings (any private deals?)
  • Product sales (ebook, software, site memberships, etc)
  • Any freelancing or consulting gigs
  • Contest winnings or value of gifts received
  • Any other 1099-MISC’s you received

Step 2: Total all your expenses

What did you spend money on? You’ll be able to deduct all of your expenditures and only pay taxes on your profit. This is where you can really lower your tax bill – think hard! Go through your credit card statement and see if there’s anything you left out.

  • Web hosting
  • Domain name registrations fees
  • Graphic design, programmer, or sysadmin fees
  • Advertising (Adwords, Facebook ads, Twitter ads, payouts to affiliates)
  • Software purchased (downloaded or recurring web-app costs)
  • Themes, templates (wordpress, etc)
  • Conference tickets and travel expenses
  • Promotional items (business cards, fliers, etc)
  • Website memberships (private forums, groups)
  • App purchases
  • Legal fees
  • Educational materials (any business or programming books)
  • Hardware (new laptop or server?)

I know some people that declare their home office as an expense, but that’s a tricky situation and I don’t recommend it since you most likely use your home office for other purposes besides your side projects. Plus I’ve heard it raises some red flags and makes you more likely to get audited. No thanks.

Step 3: Fill out the paperwork

I use TurboTax to do my taxes. But if you’re declaring side project income, you can’t just use the Free, Deluxe, or even the Premier editions. You have to bite the bullet and pay for the Home & Business version. Right now it’s $75 (plus state), which sounds expensive (although if you go through this link it’s only $60) – but if you compare it to the cost of a CPA going through all your documents, it’s super cheap.

TurboxTax will ask you to fill out a few details about your business. You can just put your home address, and it’ll guide you through selecting the appropriate business category.

Then it’ll ask you to list our your income. If you received any 1099’s (Google just sent out their AdSense 1099’s a couple weeks ago, you should have received it by now) here’s where you can input them. Otherwise list all the items you came up with in step one.

TurboTax-Income

Listing income other than 1099’s received in TurboTax

Next comes your expenses…simple enough:

TurboTax-Expenses

TurboTax will guide you through finding other expenses for your business

That’s it – you’re done with your business portion. Finish your return by continuing with what you’ve done every other year – your personal income from your main job, and your deductions. Review everything and submit that bad boy! Always be sure to print out hard copies of everything (not only your final documents but your proof of income and expenses too) and keep them for at least 3 years (the maximum time in the past that the IRS can audit you).

If you’re not using TurboTax

If you’re not using tax software, it looks like it’s still pretty simple. TurboTax just added a Schedule C-EZ for me (Schedule C if your expenses are greater than $5,000 – Instructions for Schedule C), and then added the net profit to line 12 of my 1040.

Taxes Form 1040

Declaring your side project income on form 1040, line 12

Schedule C-EZ

Itemizing income and expenses on Schedule C-EZ

Prepare for next year

Now that you know what goes into it, make it easier for next year! Keep a running log of all your income and expenses so you don’t have to sift through everything again 12 months from now.

If you ended up owing more than $1,000, you may have to pay penalties for not withholding enough throughout the year. There’s nothing you can do about that this year, but to avoid this penalty next year you can prepay your taxes quarterly.

Take a deep breath. Congrats, you’re done for a full year 🙂

Did you get a refund?

REMINDER: I am not a tax professional and am not giving out legal advice. What followed is my personal experience, and I am not suggesting you follow exactly. Let it only serve as an example, as you should always consult a professional yourself.

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2 Comments »

  1. Oscar Finch December 16, 2014 at 7:16 am - Reply

    Good article man. This was very useful to me. Thanks!

    • Shane Labs December 16, 2014 at 9:32 am - Reply

      Good! Happy to help!

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