Don’t forget the taxman!
From supplementing their current income to replacing the lost income because of layoffs, the pandemic, or other reasons, many people have started side hustling over the past two years to help make ends meet.
If you currently have a side hustle, don’t forget about the tax implications of earning extra money. Here are several ideas to help you stay on top of your side hustle’s taxes:
- All income must be reported. Income from side hustles can come from a variety of sources. If you work for a company, expect to receive a 1099-NEC or 1099-MISC if you are an independent contractor or a W-2 if you’re an employee. Regardless of where the money comes from, you need to record it on your tax return.
- Keep good records and save receipts. Being organized and having good records will do two things: ensure accurate tax reporting and provide backup in the event of an audit. Log each receipt of income and each expense. Save copies of receipts in an organized fashion for easy access. Multiple programs and apps help with this, but a simple spreadsheet may be all you need.
- Make estimated payments. You will owe additional taxes if you run a profitable side business. In addition to income tax, you might owe self-employment tax as well. Federal quarterly estimated tax payments will be required if you owe more than $1,000 in taxes for 2022. Even if you think you will owe less than that, it’s a good idea to set a percentage of your income aside for taxes to avoid a surprise when you file your 2022 return.
- Don’t fall into the hobby trap. You won’t be allowed to deduct any expenses if the IRS determines that your side hustle is a hobby instead of a business. To ensure your side hustle is deemed a business by the IRS, you should show a profit during at least three of the previous five years.
- Get professional tax help. Other tax factors can arise from side income, such as business entity selection, sales taxes, state taxes, etc. Please call to schedule a time to work through your situation and determine the best course of action for your side hustle.