How to Handle Taxes For Your Side Hustle

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How to Handle Taxes For Your Side Hustle

You might think you’ll get a refund and then add your side income and see that number dwindle down, because you need to pay taxes on that money. How your side income will affect your taxes depends on how much you’re withholding from your 9 to 5 job. If you have questions or concerns, you can talk about that with a tax professional who can help. Start with keeping good records, making estimated tax payments to limit your tax balance when you file, and always filing an accurate return at the end of the year. Instead of having taxes automatically withheld (like employees do), self-employed people have to send in tax payments four times a year (called estimated tax payments). The IRS requires you to pay taxes as you earn or receive income throughout the year.

What if you lie about your income?

Here's the deal: Loan application fraud is a serious crime that carries hefty penalties. If you are convicted of the crime, you can face up to $1 million in fines and thirty (30) years of jail time. There are many examples of people who have been convicted of loan application fraud.

Buying software and tools can seem expensive at the beginning of your side hustle, but if they make it easier to manage your finances or tasks, they’re probably a worthwhile investment. They may also qualify as a business expense that you can write off to lower your tax bill even more. If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR for 15 months, an insane cash back rate of up to 5%, and all somehow for no annual fee. Any time a company pays you $600 or more directly, it’s supposed to send you a 1099 form summarizing your income for the year.

Is the state still triggered onto the additional 7 weeks of benefits during “high times of unemployment?”

You will receive Form 1099-K if you earn more than $20,000 in gross delivery earnings (delivery fees and customer tips) and complete more than 200 trips. If you do not report all income, you may run into problems with the IRS in the future. The IRS sometimes audits taxpayers based on tax returns from the past three tax years (or six years if you have underreported your income). An audit means that the IRS will review your financial records to make sure that income is reported correctly and that it matches what you’ve submitted on your tax return.

How To Keep Your Side Hustle From Messing Up Your Taxes

A second job might make you ineligible for the Earned Income Credit this year, even if you could claim it last year, because qualifying for it depends a great deal on your income. Kevin is an attorney and the blogger behind Financial Panther, a blog about personal finance, travel hacking, and side hustling using the gig economy. He paid off $87,000 worth of student loans in just 2.5 years by choosing not to live like a big shot lawyer. Just earning an extra $300 per month in side hustle income and throwing it all into an HSA yields over $300,000 in a 30 year period!

How will side hustling affect your taxes?

Rather, you’ll owe a portion of it to the IRS, the same way the IRS is entitled to a chunk of your regular paycheck. Side hustlers will generally want to set aside at least 35% of their profits for taxes. If you’re not a super-high income earner the 35% rate may seem astronomical to you. Bobby Hoyt is a former band director who paid off $40,000 of student loan debt in 18 months on his teaching salary and then left his job to run Millennial Money Man full-time. He helps other Millennials earn more through side hustles, save more through budgeting tools and apps, and pay off debt. If you’ve earned $600 or more from your side hustle, you are required to report that as income and pay taxes on it.

If you’re one of the millions of gig economy workers, such as a freelancer or contractor, you may have received payments totaling $600 or more from any one of your side jobs during the tax year. If so, the individual or company that paid you generally must supply you with Form 1099-NEC for nonemployee compensation. If you receive payments through online payment services such as PayPal, you might also receive a form 1099-K. Payers will also send these forms to the IRS to report your income.

What are quarterly self-employment taxes?

Business expenses reduce your taxable income, lowering your tax bill. As a gig economy worker, you become eligible to deduct certain expenses from your self-employment income, which you can’t do as a W-2 employee. The main self-employed retirement plans include a SEP-IRA, a Solo 401(k), and a SIMPLE IRA. Contributing money to these accounts allows you to defer paying federal Income tax on the amount you contribute to the plan (up to certain limits). Most years self-employed people are required to make estimated tax payments once per quarter.

But the rules used to be different for third-party payment processors. As a side hustler, it’s important to figure out how to handle taxes for your side hustle so you don’t end up with a tax nightmare on the night before the tax deadline. Thankfully, handling taxes for your side hustle doesn’t need to take a lot of time or hassle. While the benefits of side hustling seem magical, side hustle income isn’t magical to the IRS. You’ll still need to pay taxes on this income, including “both sides” of Social Security and Medicare taxes.

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