Conduct an online search of the phrase “side hustle” and you will find websites with countless ideas on how you can make some quick money. Many apps exist nowadays to enable you with opportunities and a network to earn additional income on the side of your 9-to-5. Side gigs or freelancing ideas range from carpet cleaning to podcasting to dog walking and even delivering food. But what a lot of these sites fail to inform you, is the tax implications that come from the additional earnings.
Here are six tips to help you stay on top of your side hustle taxes:
When reviewing your activity, the first determination made by the IRS is whether the arrangement is a business or a hobby. There are several factors the IRS uses, but the big one is: does the activity make a profit or intend to make a profit? The IRS will presume the activity is a business if a profit is made during at least three of the last five years. Once business versus hobby is determined, differing tax rules will apply. In short, expenses paid for operating a business are tax deductible. Hobby expenses are not.
Income from side hustles can come from a variety of sources. Regardless of where the money comes from or how much it is, it needs to be reported on your taxes. If you are working for a company, you will get a 1099 (if you are paid more than $600) or a W-2.
“You must report all income, even if no 1099 is issued to you. Remember that Al Capone was sentenced for tax evasion even though he was likely guilty of dozens of other more serious crimes. Income is taxable, even if the source of it is illegal activity.” – Julie Strohlein, CPA
Being organized and having good records will do two things: ensure accurate tax reporting and provide backup in the event of an audit. Log each receipt of income and each expense. Save copies of receipts in an organized fashion for easy access. There are multiple programs and apps to help with this, but a simple spreadsheet may be all that you need.
“Be sure to set up a checking account and credit card that’s separate from your personal accounts. This is particularly helpful in an audit situation.”– Rich Middleton, CPA
“If you have a large volume of transactions, you may want to consider using bookkeeping software like Xero. There are apps that allow you to simply snap a photo of a receipt on your phone in order to record it in your books.” – Julie Strohlein, CPA
If you are running a profitable side business you will owe additional taxes. In addition to income tax, you might owe self-employment tax as well. Federal quarterly estimated tax payments are required if you will owe more than $1,000 in taxes for the year. Even if you think you will owe less than that, it’s a good idea to set a percentage of your income aside to avoid a surprise when you file.
“Self-employment tax is a huge, unpleasant surprise to many people. When you are an employee, the company pays half of the social security and medicare taxes. The half that the employee has to pay is taken out as withholding, so it is paid gradually. When someone owes self-employment tax, they are paying both the employer and employee share, and they are paying it at the end on the tax return.” – Julie Strohlein, CPA
“Take advantage of the various retirement plans that can shelter your income and set aside money for the future.” – Rich Middleton, CPA
There are many other tax factors that can arise from side income such as business entity selection, sales tax, state taxes and more. Call to set up a time to work through your situation and determine the best course of action moving forward. Knowing you have someone to help with your tax obligations will free you to focus on your extra income generating activity.
Creating a “side hustle” can be fun, rewarding and bring in additional income to help with expenses or add funds for other activities. Just make sure you understand how the income will be taxed to avoid an unwanted surprise.
As always, should you have any questions or concerns regarding your situation please feel free to call.
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