Understanding Side Hustle Tax Implications

Many people are turning to side hustles to make some extra cash to cover a bill or even to supplement or ultimately replace their main income. But, if you’re considering this route, it’s all too easy to forget about the tax implications that can have a significant impact. In this article, we will take a closer look at this topic to help you make an informed decision. 

What is a Side Hustle?

In the last decade, we have seen the rise of the “gig economy” which at this point is a source of income for millions of people. The lack of easy access to traditional work and/or the need to earn extra money has turned side hustles into a part or even full-time job for many people. The first thing to understand about a side hustle is that gig workers are independent contractors. The company that you’re working with is not going to withhold any of the money that you’re earning for tax purposes. Many people are caught out by this simple fact, they get some extra money in their pocket, spend it and then have a bad experience during tax season. The IRS is always watching, most gig platforms supply earnings records for each contractor to the IRS at the conclusion of each tax year. This is not a cash in hand business, there are records and you will be expected to pay a tax bill. 

4 Tips to Manage Side Hustle Taxes

Side gigs are a great way to earn money, but there are tax implications to navigate and we’ve compiled a list of four great tips to help you manage the tax burden efficiently:

• Keep Good Records: It’s tempting to leave the record keeping to your gig platform of choices, but this is a bad idea. Aside from the fact that you may ultimately be working with multiple gig platforms at the same time there is a real incentive to keep accurate records. At the very least keep a copy of monthly earnings and save it as a pdf and print a copy. Keep these records safe and bear in mind that there will be tax deductions for certain expenses. So, keep all your receipts for anything related to your side hustle business, including: stationary, fuel, repair bills and more. 

• Deduct Operating Expenses: Take advantage of the tax write offs that you’re entitled to, such as: home office supplies, printer paper, tools, ink cartridges, cell phone costs, internet costs and other items that you rely on to run your side hustle business. To do this you need to make deductions that are a legitimate write off and keep the receipts.

• Seminars, Classes, Courses and Subscriptions: Any costs that are associated with professional development to improve your business skills and prospects can be deductibles. This can include signing up for a course related to your business, attending a business-related conference or paying for a subscription service. This includes membership dues, registration fees, buying books, magazines and more. 

• Business Meals and Travel Expenses: Most people are unaware that they can deduct 50% from the cost of a meal if it’s business-related. This could include a bite to eat with customers, clients and vendors that are directly related to your gig work. You can even deduct 100% of travel expenses to cover taxis, car rentals, hotels, Uber and airfares that are directly related to running your business.

Maintain a Separate Side Gig Bank Account

When you start a side gig, open up a brand new savings account which you can use to transfer money from earnings to cover the tax bill. The tax rate could vary from 10% to 24% or it could be even higher depending on your specific tax bracket. Make sure that you check which tax bracket you’re in based on what you expect to make and save an appropriate amount. In an extreme example for a newbie, let’s say you’re lucky enough to fall into the 35% tax bracket, in this scenario, you should be putting aside $35 for tax out of every $100 you’re making. Overestimating is always preferable to the alternative when tax season arrives and you can always use that saved cash elsewhere if you don’t need it for tax purposes.

Pay Estimated Quarterly Taxes

Self-employed independent contractors typically pay their taxes every quarter. This is where the estimated savings mentioned in the example above will prove to be a wise choice. Use the 1040-ES tax form to estimate a quarterly tax payment if you're expecting to earn more than $1,000 in a given tax quarter. Quarterly tax payments must be made by the 15th of April, July, September and January. The payments can be made online which simplifies the process and once you’ve made a payment it’s easier to understand the process. 

FAQs

Which IRS Tax Form Do I Need to File?

For a side hustle, you’re probably going to need a Schedule C (Profit or Loss from Business) to report any earnings or losses. If you’ve made over $400, you will need to file the Schedule SE (Self-Employment Tax) to cover Social Security and Medicare obligations. The income from forms 1099-NEC or 1099-K with the side hustle income on the Schedule C and you should be covered.

What About Multiple W-2 Forms?

Avoid paying too much in Social Security taxes, there’s a maximum amount payable each year and if you’re working with a single employer they will stop withholding the taxes when you reach that point. To put this into perspective, the maximum Social Security earnings are currently $160,200 per year and the maximum taxes are $9,932.40. If you’ve paid too much, it’s important to contact the employer and request an overpayment refund. Any excess Social Security taxes can be claimed when you’re filing a tax return. 

In Conclusion

If you’re experiencing difficulty with your tax status and how your new side hustle may complicate your finances, it’s a great idea to consult an accountant or financial advisor. They will be able to help you minimize the amount of tax you pay and ensure that you’re taking full advantage of the deductions that you’re entitled to.