How a Side Gig Affects Your Taxes
It seems like most people have a side hustle these days. If you’re part of the growing population of Americans who freelance, do independent contract work, participate in ride-sharing, or create products to sell, then there are a few things you need to know about how your side gig will affect your taxes.
- You may receive 1099s in the mail
Those who offer freelance services and independent contract work should receive Form 1099-MISC from clients who paid you more than $600. You will need these forms to help tally and report your side gig income. Even if a client doesn’t send you a 1099 (regardless of how much they paid you), you still need to report the money you earned.
- You might need to file a Schedule C
A Schedule C is where sole proprietors (the business classification of the majority of side hustlers) report their business income and expenses. You might be able to use the simpler Schedule C-EZ if you spent less than $5,000 in business expenses. If you must face completing a Schedule C, it’s not a bad idea to invest in advanced tax software or a professional tax preparer.
- Get ready to pay self-employment tax
Usually, an employee and their employer split the income tax bill, with each paying half. Self-employed people or those with consistent side-gig income must pay it all. That means a 12.4 percent Social Security tax and a 2.9 percent Medicare tax on net earnings plus any applicable state income tax.
- You could get a new tax deduction
You can deduct certain business expenses from your self-employment income, reducing the amount of your taxable income and lowering your tax bill. Due to recent tax law reform, you may qualify for a deduction of up to 20 percent of your side gig income.
Deductible expenses related to your side gig include:
- Business portion of your home
- Business mileage on your car
- Dues and subscriptions paid to business-related organizations
- Necessary tools and equipment
- Tuition for related education
- You’ll probably need to make estimated tax payments
Federal income and self-employment taxes are pay-as-you-go taxes that must be filed and paid quarterly. You make these payments in four installments due April 15, June 15, September 15, and finally January 15 of the next year. If a due date falls on a weekend or holiday, it moves to the next business day. You can also make more frequent payments or file your taxes early and include the last quarterly payment in your filing, as long as it’s before January 15.
If you qualify as owing quarterly estimated tax to the IRS, there are several ways to estimate what you will owe. You could use tax preparation software, like TurboTax, or use the worksheet that accompanies Form 1040-ES.
Estimated taxes can be paid electronically with a credit or debit card, a withdrawal from a bank account, or through the EFTPS (the Electronic Federal Tax Payment System). You can also pay by sending a check or money order to the IRS with the voucher found at the end of Form 1040-ES.