Side hustles are a popular way to make extra money, pay down debt, and boost savings. According to a 2023 Bankrate survey, 39% of Americans have a side hustle, earning around $810 a month on average from their gigs.
But many people don’t report their side gig income on their taxes. They often believe that extra income isn’t taxable, but that’s a costly mistake. The Internal Revenue Service is very clear: you must file a tax return and report earnings from self-employment of $400 or more, even if it’s from gig work, a side hustle app, or a temporary job.
If you don’t report your income as the IRS requires, there can be serious repercussions. Learn how to pay taxes on side hustle income to file your tax return properly and avoid hefty penalties.
Examples of Side Hustles
Before we dive into the tax implications of side hustles, here are some popular side hustles worth considering if you’re looking to boost your monthly earnings. These side hustle ideas can help you pay off debt, build an emergency fund, and achieve other financial goals.
- Delivering food or groceries
- Driving for a rideshare service
- Doing household chores or landscaping
- Selling goods online
- Freelance writing, graphic design, and more
Do I Have to Pay Taxes on My Side Hustle?
Many people wonder, “Do you have to pay taxes on a side hustle?” The answer is a resounding yes. Whether you sell crafts on Etsy, deliver groceries for Shipt, or walk dogs through Rover, any income of $400 must be reported on your tax return, and you must pay federal and state income taxes on your earnings.
Side hustle taxes may seem unnecessary when you’re just starting out or aren’t making much money. However, the penalties for not reporting your income and paying the appropriate taxes can be steep.
When you earn money through a third-party company like Uber or DoorDash, you will likely receive a 1099 form that lists the income you earned from the platform during the tax year. The platform also reports that information to the IRS, and it’s your responsibility to pay the necessary taxes.
Even if you do not receive a 1099 form, you must still report and pay taxes on your earnings. For example, if you do freelance work for a client on your own or have a cash-based business, you may not receive a 1099, but you still have to report the income that you made.
How to Calculate Estimated Taxes for Your Side Hustle
The IRS requires you to pay taxes as you earn or receive income yearly. For most people, taxes are deducted from their paychecks. But that’s not the case with side gigs or self-employment; you’re responsible for paying taxes on your own.
If you have a full-time job, you can adjust your W-4 withholding to pay more taxes from your paycheck to cover your side gig income. Or, you can pay estimated taxes every quarter. If you don’t adjust your withholding or make estimated tax payments — or if you make payments late — the IRS will charge you penalties.
Individuals generally have to make estimated tax payments if they expect to owe $1,000 or more when they file their tax returns. You can use the Form 1040-ES (Estimated Tax for Individuals) worksheet to determine if you must pay estimated taxes.
Preparing for Side Hustle Taxes
Now that you understand the importance of paying side gig taxes, the following tips can help you prepare.
1. Keep a Separate Bank Account For Your Side Hustle
Even if you only earn a small amount of money from your side hustle, opening a separate bank account can be a smart decision. It makes tracking your income and business expenses easier and prevents mixing up your expenses with business charges.
2. Record Your Payments
Your side hustle is a business, even if you only do it occasionally. As such, you should treat it like a business and maintain accurate and detailed records. Programs like QuickBooks, Wave, or FreshBooks can help.
Come up with a system for organizing and tracking the following information:
- Receipts
- Client invoices and payments
- Bank statements
- Insurance information
- State or county permit and licensing details
3. Set Aside Money For Your Side Hustle Taxes
It’s a good rule of thumb to set aside 20% to 35% of your side hustle income for taxes. But if you’re unsure exactly how much you’ll need, allocate a higher percentage.
4. Research Deductions
If you have a side hustle, you may be eligible for valuable tax deductions that reduce your taxable income. For example:
- Business mileage: If you use a car for your side gig, you can deduct the cost of business use. Most people opt for the standard mileage rate to determine the deduction.
- Home office: If you have a home office that you exclusively use for your side hustle, you may be able to qualify for the home office deduction. With the simplified option, you can deduct $5 per square foot of the portion of the home used for business, up to a maximum of 300 square feet.
- Advertising/marketing expenses: If you incur advertising or marketing costs for your business, you can deduct those from your taxes as well.
- Professional membership expenses: Necessary or required professional membership expenses may also be tax-deductible.
- Tuition/professional development fees: Likewise, you may be able to deduct tuition or professional development fees directly related to your side gig.
- Supplies and tools: You can deduct the cost of tools, supplies, and other expenses from your business income. View IRS Publication 535 for more information on allowable business expenses.
5. Consult a Tax Professional
Whether you’re relatively new to side hustles or have been working for years, handling self-employment and taxes can be overwhelming. An experienced tax professional can be invaluable, preventing you from filing incorrectly or underpaying your taxes.
One way to find a tax professional near you is through the IRS’ database of credentialed federal tax preparers.
Final Considerations
Now that you know how to pay taxes on a side hustle, you can plan for the upcoming tax deadlines. Keeping good records and setting aside a portion of all incoming earnings can help you avoid surprises or unexpected penalties.
If you need help, consider meeting with a financial advisor or tax professional. They can help you get your finances and business accounts in order. For questions about which kind of checking or savings account will help you manage your side hustle income and related expenses, visit your local SouthEast Bank branch! We’d be happy to help you find the best fit for your needs and goals.
