Side Hustles and Taxes
Uncle Sam just isn't fair... here we are trying to pay down some old debt (or god forbid picking up a little extra money for a weekend getaway) with some income from a side-hustle, and here comes the government to rain on our parade. Unfortunately, with a big side hustle (or even a little one) comes a big tax liability. So, what are the tax implications of the side hustle? Buckle up, and let's dive in.
First, let's make sure we're all on the same page about what a side hustle actually is (because let's be real, it's not exactly your day job). A side hustle is any way that you generate income outside of your regular job. This can include everything from weekend tutoring to driving for a car sharing service to selling products on Etsy. (Check out some of our other articles for ideas).
Second, congratulations on making extra money! However, before you go crazy buying a new wardrobe, let`s talk about taxes. According to a study by Bankrate, roughly 43% percent of Americans now have some sort of side hustle. (No wonder tax season is so stressful!) Here are some important tax implications you should be aware of when bringing in that extra dough:
1. You MUST Report Your Side Hustle Income
Yes... unfortunately any money you earn through your side hustle is tax-subject. The IRS requires you to report all income over $1000 COMBINED with the income from your day job (so pretty much anything).
2. You May Have to Pay Estimated Taxes
What does that even mean? If you're earning more than a certain amount through your side hustle, you may have to pay quarterly or monthly estimated taxes. Basically, anything that's not subject to federal witholding (won't appear on a W2) is subject to estimated tax. This can include income earned from your side hustle, among other types of income not discussed here.
This can be confusing, but it's not the end of the world. There's an extremely confusing and long-winded article here by our frineds at the IRS, or you can check NerdWallet for one written in plain language.
3. You Can Deduct Business Expenses
See? It's not all bad!
If you`re running a legitimate business with income and expenses, you can probably deduct some of those expenses at tax time. (Translation: track all income and expenses folks!) Think of business expenses as anything you need in order to make your business function. Computer equipment? Cellphone bill? Office space in your house? Gas and/or mileage on your car? Raw materials? Food? All business expenses.
A couple key things to remember here:
- Depending on what state you live in, you may need a s-corp or llc business license to write off your expenses.
- Don't get too greedy. If you have a home office for your side hustle, don't write off your entire rent/mortage. Estimate the square footage you're using and write that off instead. The IRS likes that sort of thing.
4. You May Be Subject to Self-Employment Taxes
Back to the bad stuff...
Like estimated taxes, if you make over a certain amount you may be responsible for paying self-employment tax. These are things typically covered by your day job employer... things like Social Security and Medicare taxes. (Who knew having a side hustle could lead to so many tax forms?)
The good news here is, if you're making enough on the side to be eligable to pay these taxes, you're probably already well on your way to making your side hustle your main source of income.
5. Don't Forget About Your State and Local Taxes
It's important to remember that state and local taxes vary from place to place, but still exist. Some states have specific tax requirements, so be sure to do your research.
Basically, a side hustle is a great way to earn some extra cash, but it`s important to understand the tax implications that come with it. As business tycoon Warren Buffet said:
"If you don't find a way to make money while you sleep, you will work until you die."
(Let's just hope we can do it without being buried in paperwork come tax time.)
Here are some tips for staying on top of your side hustle taxes:
1. Keep meticulous records.
Track all income and expenses related to your side hustle throughout the year. (This includes things like mileage and office supplies!)
2. Estimate your taxes regularly.
Don't wait until the end of the year to see how much you owe. Estimate your taxes quarterly so you're not hit with a big bill come tax season.
3. Know your deductions.
Be aware of what business expenses you can deduct come tax season. (Just don't try to deduct that fancy latte you bought on the way to deliver your product.)
4. If you get confused, get help.
If you're feeling overwhelmed or have questions, don't be afraid to seek out professional help. (It's better to be safe than sorry when it comes to taxes.)
Lastly, freelancing can be a great way to have a second stream of income, But it's important to understand the tax implications that come with the extra money. Track your income and expenses, calculate your taxes regularly, know your deductions, and get professional help when you need it. Maybe we can afford that weekend getaway after all.
Key Takeaways
- A side hustle is any income you generate outside of your regular job.
- You have to report all income, even if it's just a few bucks.
- Keep track of all receipts and expenses related to your side hustle.
- Estimate your taxes regularly so you're not hit with a big bill come tax season.
- Seek out professional help if needed.