Tax Planning For The Side Business

Stanton is starting a small welding business on the side. How much of his income should he be putting aside for income taxes?

QUESTION: Stanton in Dallas is starting a small welding business on the side. How much of his income should he be putting aside for income taxes? Dave explains to Stanton why his side business income should be separate.

ANSWER: The first thing I want you to do is open a separate checking account for your business only. Don't use it for anything but business. I want you to put all the welding income you get from your side business as a deposit into that account. Never make the deposit directly to your personal account. The second thing I want you to do is pay all your welding expenses with that new checking account.

If you put your income in there and you take your expenses out of there, what's left in that account by definition is your profit. In a very real sense, your checkbook register almost becomes a very simplified and primitive profit and loss statement. You can tell if you're making money in your business if there's money in that account.

If you get ready to pull money out of that account and take it home, then here's what we're going to do. We're going to take a fourth of whatever you want to take home and set that aside in a separate savings account. Then get with your tax professional and file your quarterly estimates on your new income, and you'll have to pay taxes quarterly on the income you've earned during that three-month period. You'll have the money to pay your taxes because you've set aside a fourth into that savings account.

When you file your taxes at the end of the year, you're going to file a Schedule C to go with your 1040. That's where you do your sole proprietorship taxation.