Recently, MarketWatch reported that 51 percent of Americans have worked a side hustle in the past year, with the percentage being much higher (72 percent) for younger, Gen Z Americans. For more than half of us, it’s a direct way to make ends meet. Since so many of us depend directly on income from side gigs, our allowances shouldn’t lead to unexpected consequences come tax season. Whether you have a fully realized business or simply expect to receive a 1099, tax advice can help you avoid issues down the road. Here’s a quick guide to side-gig taxes for those earning more this year.
Do you pay taxes on side hustles?
Yes, you’ll need to report and pay taxes on any income, including your side-gig income. If you’re wondering if you have a hobby versus a small business, it often depends on income. For those who expect to get a 1099, you should expect to file for all income that’s $600 or more. If you’re self-employed, you’ll need to pay taxes for any net earnings above $400.
How are side hustles taxed?
All of the income you make during the year will need to be taxed, no matter if it’s Uber Eats, AirBnB, or your Etsy store. Independent contractors and freelancers may choose to bill in several different ways, from considering themselves fully self-employed to just including the 1099-NEC earnings as a part of their normal return.
Important Side-Gig Tax Forms:
Here are a few of the various IRS forms that side-hustlers should know:
- 1099-NEC: The non-employee compensation form is the most common for the average side-hustler!
- 1099-MISC: This form includes everything from prizes to rents to attorney payments.
- 1099-K: If you get paid through payment apps like Paypal, Venmo, and Zelle, you’ll get a 1099-K.
- W-2: All wage employees get a W-2 from their employers, even part-timers.
- Schedule SE: This form is a part of your 1040 tax return, and reflects your self-employment income. You’ll want to become familiar!
- Schedule C: If you’re the sole proprietor of a business, you’ll want to report your income or loss on this form.
- Schedule E: If you receive rental expenses for your vacation property or your home for more than fourteen days, you will need to report it.
Which expenses should I track for my side gig?
Whether you’re entirely self-employed, whether you are filing your business separately, or whether you just plan to take the standard deduction, you will likely want to keep good records of your expenses regardless.
- Vehicle Use: Mileage, tolls, and parking needs to be carefully tracked for business use.
- Dues and Subscriptions: If you use a point-of-sale software, a project management tool, or video editing software for your side-gig, keep those monthly fees in mind.
- Tools and Equipment: Keep receipts for anything clearly connected to your business, whether that’s jewelry-making tools or a point-of-sale system.
- Marketing and Advertising: If you operate a website, share business cards, or use social media paid promotion for your side-gig, you want to keep your receipts.
- Home Office: If you’re entirely self-employed, for instance, you might qualify for the home office deduction, though rules for that have changed in recent years.
- Vacation Rental Expenses: If you rent out your own home as a rental, you will need to clearly divide expenses between personal and business use.
- Education: Keep your receipts for certifications, online courses, books, webinars, and anything else you use toward your side-gig.
What are some practical examples of taxes on side gigs?
Hear are some example scenarios in which side-hustles get taxed:
Vacation Renters
For those who earn income from renting a vacation home through an app like AirBnB or VRBO, a few situations may apply. The application will often be able to provide an earnings summary, but most of the income and expense tracking will be on the responsibility of the home owner. Note that, if you only rent out your own home for less than 14 days per year, the Augusta Rule may apply.
Delivery Drivers
Someone that earns money with Doordash, GrubHub, UberEats, or some other type of delivery service will likely receive their 1099-NEC (and/or 1099-K) through that service but it’s more often on the drivers to track their mileage.
Crafters
Note that not all side-gigs will need to be taxed if they’re entirely not profitable. You’ll need to determine if you have a hobby or a business to find out how or whether it should be taxed. But if you make a fair amount of money in your Etsy store, for example, you may want to track business expenses and income separately.
Freelancers
Workers who use platforms like Fivver or Upwork will likely get and need to report via a 1099-NEC. It will be up to them to track subscriptions, education costs, and software expenses and see if it’s worth deducting those separately.
If you’re at the stage where your side-gig has gotten successful enough to be a consistently large income, you may want to change your tax strategy this year. Connect with us if you’re interested in working with an accountant in Atlanta with some expertise.
