Side hustles have become a financial lifeline for many, with platforms like Etsy, DoorDash, Uber, and Upwork providing opportunities to earn extra income. However, the excitement of supplemental income can quickly sour if tax obligations are overlooked. With the IRS paying increased attention to side hustle income, it’s crucial for freelancers and gig workers to know their responsibilities. Let’s explore what this means for you—and how to approach it like a pro.
Side Hustle Income is Always Taxable
No matter how small the earnings, side hustle income is taxable. The IRS categorizes this income as self-employment, subjecting you to both income tax and self-employment tax (15.3%, covering Social Security and Medicare).
Janelle Cammenga, a policy analyst at the Tax Foundation, emphasizes, “A common misconception is that side hustle income below $600 doesn’t need to be reported, but this is false. The $600 threshold only determines whether the payer must send you a 1099 form. All income, regardless of amount, must be reported to the IRS.”
Even if you don’t receive a 1099-NEC, the IRS expects you to keep track of and report all earnings. Failure to do so could result in penalties, especially as the IRS improves its technology for tracking digital transactions.
Unlock Tax Savings Through Deductions
Navigating the tax implications of side hustles is essential for maximizing earnings and ensuring compliance with IRS regulations. Understanding how to report income, manage self-employment taxes, and leverage deductions can significantly impact your financial outcomes.
Income from side jobs, whether freelancing, gig work, or selling products, is taxable and must be reported to the IRS. Even if you don't receive a Form 1099, you're obligated to report all earnings.
Side hustlers are considered self-employed, making them responsible for self-employment taxes, which cover Social Security and Medicare contributions. The self-employment tax rate is 15.3%, comprising 12.4% for Social Security and 2.9% for Medicare. For 2024, the first $168,600 of your combined wages, tips, and net earnings is subject to the Social Security portion of self-employment tax.
One of the perks of being self-employed is the ability to claim deductions. Eligible expenses can offset your taxable income and significantly reduce your tax bill. Here are some common deductions side hustlers can take advantage of:
- Home Office Deduction: If you use a portion of your home exclusively for business, you can deduct related expenses. The IRS offers a simplified option of $5 per square foot, up to 300 square feet.
- Mileage and Vehicle Expenses: You can deduct business-related vehicle expenses using the standard mileage rate or actual expenses. For 2024, the standard mileage rate is 65.5 cents per mile.
- Supplies and Equipment: Expenses for items directly related to your business, such as a new laptop for freelance work, are deductible.
- Marketing and Advertising: Costs for promoting your side hustle, including social media ads and website hosting fees, are deductible.
Meticulous record-keeping is crucial. Lisa Greene-Lewis, CPA at TurboTax, advises, "Keep digital copies of receipts and use apps to track expenses in real-time."
Self-employed individuals may need to make quarterly estimated tax payments if they expect to owe $1,000 or more in taxes. The IRS provides Form 1040-ES to help calculate these payments.
Quarterly Taxes: Don’t Get Caught Off Guard
Unlike traditional employees whose taxes are withheld by employers, side hustlers are responsible for paying taxes directly to the IRS. If you expect to owe more than $1,000 in taxes for the year, you’re required to make quarterly payments.
To calculate quarterly payments, use IRS Form 1040-ES or consult a tax professional. The SmartAsset Tax Team advises setting aside at least 25-30% of your income for taxes to ensure you’re not short when payments are due. Missing these deadlines can result in penalties that eat into your hard-earned income. Here are some tips to set yourself up for success:
1. Separate Personal and Business Finances
Opening a dedicated bank account for your side hustle can make it easier to track income and expenses. CPA Jeff Rose, founder of Good Financial Cents, recommends this step, stating, “A separate account not only simplifies your bookkeeping but also demonstrates professionalism in the event of an audit.”
2. Automate Savings for Taxes
Apps like QuickBooks Self-Employed or Hurdlr can help you estimate and set aside taxes automatically, minimizing the risk of falling short during tax season.
3. Stay Educated on Tax Law Changes
Tax policies for gig workers are evolving. For instance, the American Rescue Plan Act lowered the 1099-K reporting threshold from $20,000 to $600 for transactions processed through apps like PayPal and Venmo. “Staying informed ensures you avoid surprises and seize opportunities for savings,” advises Kimberly Palmer, a personal finance expert at NerdWallet.
4. Consult with Professionals
Whether it’s a CPA or a tax preparation service, professional advice can save time and money. Tools like TurboTax and H&R Block even offer packages specifically designed for gig workers.
Conclusion
Taxes may feel like a daunting aspect of your side hustle, but understanding the basics can help you maximize earnings and minimize stress. From tracking expenses to paying quarterly taxes, proactive planning is your best tool for success. As the gig economy grows, staying informed about your tax obligations ensures you keep more of what you earn—and stay on the right side of the IRS.
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