It seems everyone is looking for a little extra cash these days, particularly with the price of gas going up just a tick.
One common option people are turning toward is the side hustle, taking underutilized skills or time outside of their day job and generating some extra cash.
Having some extra cash is great, but at some point, you get around to the question: do I have to pay taxes on my side hustle money?
Survey Says – Yes, its taxable. That is the IRS default position on most income. As an example and not an idea endorsed here, the IRS maintains that even income derived from illegal activities is still subject reporting and income tax. The number one story told to all accountants in every fraud course, is that it was the accountants who took down Al Capone for tax evasion on his illegally earned income, not the actual racketeering or murder.
So 3 things we are going go over today:
Income and Expense Tracking
Self-Employment Tax
Tax Form Reporting
I will sell you the whole seat, but all you will need is the edge.
Income and Expense Tracking. Reporting income from a side hustle is different than dealing with income you may receive from a job where you are employee. You will need to have a method for keeping up with payments you receive from you customers, even if it as simple as a piece of paper. Sometimes, it is easy and done digitally, like for Uber drivers, but at the end of the day you are responsible for reporting all of your income. If your side hustle is service related and you collect $600 or more from a single customer, that customer is required to send you a form 1099-NEC (Non-Employment Compensation). This will aid in helping you, but it will still be your responsibility.
On the flip side, you need a method to keep track of your expenses. Possible options could be as simple as paper or Excel, or there are numerous, easy to use accounting software packages to help you. (If you sell an accounting software and would like to sponsor this post, I am accepting sponsorships.) Keeping track of your expenses is extremely important as they will help minimize your tax burden. Have you ever heard the term “write off”? This is what that is.
Self-Employment Tax. Income from side hustles falls into a different category of income than employment income. Side hustle income that we are talking about here is generally going to be considered self-employment income. Rather than being employed by a company that hires you as an employee, you are working for yourself. All businesses large and small are required to pay taxes based on the wages paid to their employees. These taxes go to fund Social Security and Medicare programs and are equal to 15% of your wages, up to various limits. I’m not going to bore you with limit discussions here but they exist. When you are an employee, this 15% tax is shared by you and the company you work for. The piece you pay directly is withheld from your paycheck and then company pays their other half to the IRS . When you are self-employed, you have to pay both side of the tax, out of the gross income you have collected from your customers. We could go into a discussion about how you really pay both sides of the tax as employee as well, via a reduced gross salary to account for your true cost of employment by the company but that is a soapbox for another day. Long story, but the self-employment tax can feel like a big bite of your earnings. The good news is that is it calculated on you net income (gross income minus expense) rather than your gross income. This is where those expenses come in handy we mentioned earlier.
Reporting. If you haven’t set up an organized company (See here for more on that), you will need to file a Schedule C with your income tax return. The Schedule C reports both your gross income and expenses while calculating your net taxable income. You will pay both income tax and self-employment tax based on the net income from your Schedule C. When you get paid from a company as employee, you most often have your all of your taxes withheld, both income and employment, before you ever even get paid. With Side hustle money, nothing has been withheld. This will unfortunately make your end of the year tax bill higher. A good rule of thumb in order to make sure you have some money set aside to pay your taxes at the year-end is to save about 25% of your gross income, until you have a good idea how much tax you have to pay.
Side hustles are great way to earn some additional cash, especially with companies like Uber, Door Dash, and other gig economy based apps in the marketplace. Even sites like Etsy are helping people use their skills to create fun unique items and bring them to a bigger market. Being prepared to deal with potential issues, like taxes, before they become a problem, will make that extra cash even better, rather than it becoming a big headache come filing season. Until next time:
