Side Hustle Taxes: 9 Things You Should Know
A lot of people wonder about how to pay taxes as a result of doing side hustle work, or what some call "gig economy work." It might seem hard to understand at first, but don't worry. Today, we're going to talk about it in a way that's super easy to understand.
In this blog post, I’m going to go over 9 things you should know about the world of side hustle taxes. It might seem confusing, but I’ll break it down in an easy to understand way.
Let's start with what the gig economy is. Have you ever taken a ride in an Uber or had food delivered by DoorDash? Well, the people driving or delivering are part of the gig economy. They're like their own mini-businesses, picking up jobs here and there. In fact, it's not just limited to ride-sharing or food delivery. The gig economy includes individuals with a side hustle, freelancers, independent contractors, and anyone else who earns income outside of traditional employment.
Now, here's where it gets a little tricky. When you have a regular job, your employer takes out some of your money for taxes before you get your paycheck. This is known as withholding. But in the gig economy, you get all of the money up front.
Here's the catch - you still have to pay taxes.
Just because you're not an employee doesn't mean you can escape taxes. If you're self-employed and you expect to owe $1,000 or more when you file your return, you usually have to make estimated tax payments throughout the year to the IRS. This amount you have to pay also figures in self-employment tax, which is Social Security and Medicare.
So how do you handle this?
Think of taxes like the chores you need to do at home. If you do a little bit every day, it's easy to keep up. But if you wait until the end of the week, you've got a big mess to clean up. It's the same with taxes. If you save a little bit of your earnings for taxes every time you get paid for your gig work, it won't be a big problem when tax time comes.
When you earn money in the gig economy or for a side hustle, it's important to understand that you're essentially operating as a small business, even if it's just you. This means that you're responsible for paying your own taxes on the income you earn. You’re also responsible for keeping track of your small business finances. Meaning you need a system to track money coming in and money going out.
By the way, I have a side hustle spreadsheet that you can download for free to keep track of your income and expenses. Just click the link in the description.
Moving on, here are some key things you should know about side hustle taxes:
1. Side hustle taxes are generally taxed as a sole proprietor, which means you report the income and expenses of your side hustle on your personal tax return. On form Schedule C, profit or loss from business. This also applies if you’re an LLC with only yourself as the only member.
2. Taxable Income: In general, all income you earn from gig work is taxable. This includes both cash payments and non-cash payments like goods, services, or even for bartering. It’s very important to keep your own records of your taxable income. Don’t be that person that relies on 1099 tax documents at the end of the year. You could be grossly overpaying on your taxes if you do.
3. Self-Employment Taxes: When you work a traditional job, your employer automatically deducts taxes from your paycheck and pays a portion of your Social Security and Medicare taxes. When you're self-employed with a side hustle, you're responsible for paying these taxes yourself. This is known as the self-employment tax, and is an additional 15.3% on top of your regular income taxes.
4. Quarterly Estimated Taxes: Unlike traditional jobs where taxes are automatically taken out of each paycheck. In the gig economy, you're usually paid the full amount without taxes being withheld. This means you may need to make estimated tax payments to the IRS throughout the year to avoid a big tax bill and potential penalties at the end of the year. This is done by using form 1040-ES, and you can also pay this online at irs.gov/payments.
5. Tax Deductions: There are also certain business expenses you may be able to deduct from your taxes to reduce your taxable income. For example, if you use your car for work in the gig economy, you may be able to deduct things like gas, maintenance, or depreciation. Generally expenses that you incur for your small business are tax deductible as long as the expense is ordinary and necessary, for your type of business.
6. Track Your Expenses: Just like a business, you have costs or expenses when you work a side hustle. These might include things like materials, supplies, or even the cost of using your home as your office. By keeping careful track of these expenses, you can deduct them from your income when you file your taxes, which reduces the amount of tax you owe.
It’s important to keep track of your expenses. If you don’t, I promise you. You’re leaving money on the table.
So, how do you track your expenses? You’ll need to setup a system like QuickBooks or you can use my free Spreadsheet.
7. Form 1099-NEC or 1099-K: If you receive $600 or more from a company or payment platform in the gig economy, they should send you a Form 1099-NEC or 1099-K. This form reports the amount of money you made during the year. You'll use this information to fill out your tax return.
Like I mentioned earlier, these forms may be incorrect, so don’t rely on them 100%. They’re informational, but the IRS gets a copy so you’ll want to make sure your reporting what they say or explaining why there is a difference.
8. Keep Good Records: It's important to keep track of all the money you earn from your side hustle, even if you don't get a 1099 form or make less than $600. The IRS requires you to report all income, not just what's on your 1099 forms. Good record keeping makes this easier and can also help you catch any mistakes on the forms you receive.
9. Get Professional Help: Taxes for side hustles can get complicated, especially if you're new to it. Don't hesitate to get help from a tax professional if you need it. They can guide you through the process and help you take advantage of all the tax breaks you're entitled to.
Understanding gig economy and side hustle taxes can be a bit tricky at first, but there are many resources available to help you learn how to handle them properly.
I've created a comprehensive course all about filing taxes for your side hustle. It covers everything from understanding your tax bracket, making estimated tax payments, to finding tax deductions you might not be aware of. And everything else I’ve discussed in this video.
You can check it out on my website, click here. I promise, it's a game-changer! The link is in the description as well.
That's pretty much it, friends! If you're working in the gig economy, remember to save some money for taxes from each paycheck. Just like doing your chores every day, it keeps the tax burden from getting too big!
Thanks for reading, and see you in the next blog post!