Why worry about side hustle taxes? Well, side jobs are one of the trendiest ways to earn extra income in today’s gig-friendly economy. If you’ve never heard of a side hustle, it’s basically a job outside your 9-to-5 that offers additional income on your own terms — think becoming a Lyft driver, doing some freelance writing work, or even walking dogs for busy pet owners.
It’s reported that more than 44 million Americans have a side hustle. Solopreneurs are turning to side hustles to help supplement their income, pay off student loans, or simply because they want to be more productive with their spare time.
Whatever the reason, if you have a side hustle, then you’ll need to be prepared when it comes time to file your taxes.
The IRS states that you have to file an income tax return if your net earnings from self-employment — including working for yourself part-time — were $400 or more (and, under certain conditions, you still might have to file a return if your earnings were less than $400).
Related: Calculating self-employment taxes
7 tax tips for your side hustle
To help you side hustlers better prepare for tax season, consider these seven tips:
- Report every dollar.
- Track how much you earned.
- Know the difference between a business and a hobby.
- Use your allowable tax deductions.
- Develop good recordkeeping habits.
- Separate your side hustle and personal finances.
- Be prepared for a higher tax bill.
Let’s dig in.
1. Report every dollar
Do you really need to report the extra $700 you earned last year writing blog articles for your sister’s bakery business? Yes — any income you earn throughout the year must be reported, unless it’s from one of the few nontaxable income sources.
If you decide not to report income earned from side work, you risk a failure-to-pay penalty in addition to owing the unpaid taxes plus interest. In other words, you should report every dollar you earn through your side hustle on your taxes.
2. Track how much you earned
It might seem obvious, but you need to know how much you earned from all your income sources. If, for instance, you did side work for multiple businesses, you will need to know how much you earned at each.
Any business that pays you more than $600 throughout the year will need to provide a 1099-K or 1099-MISC form by the end of January that shows the total income you received during the preceding calendar year.
Even if a business fails to send your 1099, you are liable for tracking your income from that work and must pay any taxes owed on that extra money.
Editor’s note: GoDaddy Online Bookkeeping can make tax time easier. Features include automated sales and expense tracking, easy profit and loss tracking, a pre-populated Schedule C, reports on quarterly estimated taxes due, and the ability to create, send and track customized invoices.
3. Know the difference between a business and a hobby
For tax purposes, the IRS requires people to separate business activities from hobbies. Not only do you report income from these activities separately, but you can’t use hobby expenses to offset other income on your return like you can business expenses — this is known as the “hobby loss rule.”
The IRS provides some insight into how you can distinguish between a business and a hobby.
When it comes to side hustle taxes, keep in mind that if you perform an activity regularly with the purpose of earning a profit, it’s likely considered a business.
4. Use your allowable tax deductions
You can actually lower your tax bill from your side hustle by deducting allowable expenses on your tax return. In fact, if you lost money while working on your side hustle, it can lower your personal income — assuming it’s not considered a hobby.
Knowing what expenses are tax deductible is a huge advantage when it comes time to file your taxes.
The key to whether you can claim a side hustle expense on your taxes is whether it is ordinary or necessary. An ordinary expense is anything that is considered common for others that operate within your industry. An expense is necessary if it’s required to do the work in question.
Below are some of the most common deductible expenses for side hustlers:
- Home office
- Personal insurance
- Office equipment and necessary tools
- Automobile expenses like insurance, mileage, depreciation (if required for your side gig)
- Tuition for extended learning
- Business-related expenses (software, marketing, professional services)
5. Develop good recordkeeping habits
Tax season is a stressful time for everyone — especially when you’re fumbling through old receipts and invoices. Keeping organized records is one of the best tax tips for your side hustle. It mitigates most of the common issues side hustlers face when filing their taxes.
It’s best to track your income and business expenses throughout the year instead of trying to reconcile debits and credits at the last minute.
Good recordkeeping is a habit formed from diligence, consistency and accountability. Try moving to an electronic system for tracking your records — it can be a more efficient and safer way to manage your side hustle financials.
6. Separate your side hustle and personal finances
There’s a common theme to these tax tips for your side hustle — it’s important for you to differentiate between your personal and business finances clearly. It’s a good idea for side hustlers to have a completely independent bank account and credit/debit cards for transactions related to their side gig.
A dedicated account for your side hustle can help you clearly see what expenses are business-related — making it easier to find your tax deductions.
Moreover, a separate business account can protect you in the event that you are ever audited by the IRS.
7. Be prepared for a higher tax bill
This one might seem obvious, be it needs to be said: If you are earning more money throughout the year, you’ll likely have to pay more taxes. This shouldn’t come as a surprise, but it’s something you need to be prepared for when you file your annual tax return. The additional income from your side hustle might affect your ability to earn specific tax credits or deductions, too.
A smart strategy is to put some of your side hustle income (30 to 40 percent) aside to cover any additional taxes you might have to pay.
Additionally, if you are earning a considerable income through your side work, it’s recommended that you pay estimated tax payments quarterly instead of waiting until you file your tax return. In fact, the IRS states that if you “expect to owe tax of $1,000 or more when your return is filed” then you should make quarterly estimated tax payments.
Get ready to file your side hustle taxes. Organize all your receipts and invoices, collect any 1099s from your clients, and start planning your tax strategies — keeping the tips above in mind.
A side hustle is a great way to earn extra income throughout the year, but it does come with additional tax responsibilities. Don’t neglect your side hustle taxes, and if you need additional help, contact a professional.
The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.