I just started a very small personal business. I’m reading online that when I file taxes I can file a standard deduction? And that as a married couple it has to be about $25,000. Problem is I have literally no idea what this means. Does it mean I have to spend $25,000 in business expenses in a year? Please help!!! And please, really dumb this down for me 🙂
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Regardless of your employment status, the concept of the Standard Deduction is the same. Basically, it’s just a default amount of your income excluded from taxes if you choose not to itemize (list out) all of your tax-deductible expenses.
For most people’s situations, you’re typically better off with the Standard Deduction, which in 2021 is $12,550 for single/$25,100 joint. However, note that even with the standard deduction, certain expenses (such as some business expenses, mortgage interest deduction, etc) can still be applied.
If you’re using some sort of tax software it ideally should walk you through everything and let you know whether you should take the standard deduction or not. If you’re doing everything by paper, only way to know for sure which one is better is to fill out all of the associated forms for deductions and then see if the total amounts are above the standard deduction or not.
But again, in most cases the Standard Deduction is best. But also don’t take tax advice from Reddit, seek a professional.
Is your business incorporated? Then it files its own taxes while you take a salary from the business (your salary is an expense) and file your own taxes. Or are you running the business as yourself, just stuff you make and sell?
Standard deduction is you filing personally. Everybody gets the option of a standard deduction. This is increased if you are married filing jointly because two people are getting deductions. It makes filing taxes easy. If you want to itemize your expenses and deduct them (keeping all receipts), that may end up being more than the standard deduction. If that’s the case then you itemize instead of doing standard.
It’s not just your business you can itemize, it’s a bunch of stuff. Any tax software can walk you through it.
There are a number of things which are income tax except. Things such as medical expenses, state and local taxes, mortgage loan interests, charitable contributions, business expenses, etc. It is very hard to keep track of each of these items throughout the year. So to make it easier for regular people to file taxes you have the option to just say “I do not know” when asked to list all of the things that should be deducted from your income when calculating taxes. If you do this then the IRS just assumes your deductibles based on the table of standard deductions. So what they are saying as that you probably spent $25,000 on non-taxable expenses throughout the year.
I do not know much about US tax laws but I would be surprised if you are allowed to file a standard deduction when you run a personal business unless this is very small. And even if you can file a standard deduction it will probably be better to file itemized deduction as the business expenses gets over the standard deduction very fast.
From one small private practice owner to another, please consult with a tax professional. I did my own taxes for years but now pay an accountant do them. Self-employment income can get tricky, and based on your question, you are not experienced enough to be doing your own taxes. Depending on the size and scope of your practice, there are deductions that could push you beyond a standard deduction. And I’ll second the recommendation to form an LLC. Good luck with the private practice!
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