It’s the age of the gig economy. It’s not unusual for people to work multiple jobs and have a variety of income streams. Perhaps you spend most of your time working with an employer, but you’ve got a side hustle to generate more income.
There’s nothing wrong with working on a side hustle to augment your income or develop skills or connections for another career. However, your taxes must account for any income you earn through that work.
If you’re used to working full-time with an employer, you might not be familiar with any of the other tax requirements involved with freelance-based work. Even if it’s just a small amount of income, it will affect your taxes in one way or another, so it’s best to do your research and make sure you stay on top of any requirements.
Now, take the time to ponder what your gig work will mean for your general tax situation. This way, you can catch any issues before they develop. You want your side hustle to bring you more significant benefits, not extra headaches and fees.
Do I Have to File Taxes for my Side Hustle?
If you are earning money with a side hustle, that money is legal income and must be reported on your taxes. Any work you do apart from an employer is self-employment income, and it is your responsibility to keep track of it.
Thorough bookkeeping for freelancers is essential, as there’s no one else that is going to do it for you. Keep track of all your business transactions so that you can report your income as well as your expenses.
How is Filing Taxes for a Side Hustle Different Than a Traditional Job?
Not only do you have to file taxes for your freelance income, but there are some aspects of the process that may be more complicated than your taxes for a traditional job.
Paying Estimated Taxes
Under some circumstances, you may have to pay additional taxes on your self-employed wages ahead of time, and you can’t simply wait until tax season to pay any extra taxes you owe.
Income taxes are paid as you go throughout the fiscal year. Your employer usually handles this for you by withholding a portion of your wages. When doing freelance work, you must do the withholding yourself.
If you earn a significant amount of money with your side gig, you should use IRS form 1040-ES to calculate and pay estimated taxes for individuals. Failing to pay enough in taxes before the tax year is over can lead to financial penalties.
Another thing you’ll have to deal with differently with your side hustle is your self-employment tax obligations. As part of regular income withholding, an employer will generally pay Social Security and Medicare taxes on your behalf. They use your wages for half of the tax cost, and they cover the other half themselves.
When you are self-employed, you must pay the full extent of those taxes yourself, which adds up to a tax of 15.3% of your income. If you earn at least $400 in a year from your side hustle, then you’ll have to pay the self-employment tax on those wages.
How to Report Side Hustle Income on your Tax Return
There are several print and electronic filing options for small businesses and self-employed taxpayers. And that’s also the key to understanding how to report this income. As a self-employed taxpayer, you are the sole proprietor of your own small business, even if it’s a small business with very small operations and not a lot of revenue.
Therefore, your side hustle income will be reported as small business income. This puts it in a separate category than your income earned as an employee of another business. Some of your small business revenue will be added to your total taxable income for your return, but not all of it.
In addition to the standard IRS form 1040 for your personal tax return, you’ll need to fill out Schedule C, which shows the profit or loss incurred by your business. Filling out schedule SE will help you also to figure out your self-employment tax.
Can You Take Deductions on Side Hustle Income?
There’s some good news about your side hustle income as well. Because this is effectively income from a small business, you can claim various self-employed tax deductions for legitimate business expenses.
Unlike an employee, you may be responsible for the regular costs of running a business, and those costs need to be reported and counted against your revenue. Only once you’ve claimed these deductions and removed these expenses from your revenue can you calculate the actual income your side hustle is adding to your return.
Here are some of the many business expenses you can claim deductions for:
- Office rent and maintenance costs
- Rent, mortgage, and utilities associated with an established home office
- Professional fees for lawyers or accountants
- Continuing education costs
- Business travel
- Health insurance premiums
- Retirement savings contributions
- The employer’s portion of self-employment taxes
Let the Professionals Take Care of Your Taxes
As you can see, things can start to get complicated with multiple income streams. You didn’t get into your side hustle to create more problems for yourself, but now there are all of these new things to be concerned about!
Don’t let yourself get bogged down doing everything yourself with your income taxes this year. You’ve worked hard for your additional freelance income, and you don’t want to lose it, but you also don’t want to waste a lot of time learning complicated tax laws that are only going to change eventually anyway.
Bring on a tax professional from 1800-Accountant and save money with efficient tax preparation without having to spend all your time studying paperwork. After all, what’s the side hustle worth if you can’t keep and enjoy your earnings?