Taxes Made Simple

Randy (graphic designer) asks:

I have a part-time graphic design business. I also have a part-time job (also doing graphic design) in order to help pay the bills while I get my business off and running.  How am I going to report the two different types of income and the expenses related to each?

Answer: 

Randy,

Your income and expenses relating to your business will be reported on Schedule C. Your net income from your business will be subject to income tax as well as Self-Employment tax (which is charged at approximately 15%).

Your regular wages/salary will show up directly on your Form 1040. You’ve probably already had money withheld from each of your payments that will go toward paying the taxes on the income.

So, as you can see, reporting the income isn’t going to be very complicated: Job income (reported to you on your W-2) goes on Form 1040 as wages/salary, and business income goes on Schedule C. It’s the expenses that are (potentially) going to be more complicated.

You will have to determine which of your expenses are related to your business, and which of your expenses are related to your job. For many expenses, this is going to be easy (business license = business related). But for others it might not be so simple. For example, your subscription to a trade publication about graphic design would seem to benefit both your business as well as your job. So where do you put the deduction?

Well, to the extent possible, you want to put as many expenses as you can on your Schedule C (that is, call them business expenses rather than job expenses). Business expenses will benefit you more than job-related expenses for two reasons:

1. Business deductions will reduce your self-employment income, thus saving you money on both your income tax and your Self-Employment tax.
2. Job-related deductions not only don’t save you money on your SE tax, they might not even save you money on your income tax. Reason: They count as itemized deductions. This means that they will only save you money to the extent that they, together with other itemized deductions (such as charitable contributions), exceed your standard deduction amount ($5,350 if single or $10,700 if married).

So while you won’t want to cheat and call something a business expense if it really isn’t, it definitely makes sense to try to get as many of your deductions on Schedule C as possible.

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