Tax Information For Starting A Side Hustle

Hello, readers! Welcome back to the Hoods Tax & Accounting blog! If this is your first time here, welcome! We’re delighted to be able to share up-to-date information about taxes, bookkeeping, and accounting. Our blog is also dedicated to educating you about tax-advantaged savings accounts, tax provisions, programs, and more! We aim to provide you with the tools needed to meet your short and long-term goals. Our seasoned professionals are experts on the tax code, eligible deductions, and QuickBooks—all necessary fundamentals for saving you money! The Hoods Family has been around since 1988 and our comprehensive accounting and tax planning services are among the best in the Lowcountry. If you’re in need of tax preparation, accounting, QuickBooks training, or business consulting services, do not hesitate to schedule an initial consultation! We are officially in tax season, and Tax Day is fast approaching. We recommend preparing early to maximize your savings and refund. We do offer contactless services using a combination of over-the-phone consultations and digital drop-offs, for safety and convenience. You can read more about our hours and submit a request for a meeting using our website!

Although tax season is over, we are still available to help with any questions or concerns you may have. Before we get into today’s topic, we would like to make you aware that we are offering tax planning appointments to assist with questions about withholding, small business tax, retirement and investment accounts, sale or purchase of rental properties, or other estates, and more! Reach out to us to set up an appointment with one of our knowledgeable tax professionals. 

In our last post, we discussed everything you need to know about starting a side hustle. A side hustle is essentially a side job that brings in extra income beyond one’s regular job or occupation and main source of income. Besides earning supplemental income, a side hustle is a great way to tap into your creativity, try new things, and cultivate new business relationships. If you’re interested in learning about how to start a side hustle, we encourage you to check out our last blog post!

Today, we’ll be expanding on side hustles and discussing tax information that you should be aware of if you are starting, or have already started, a side hustle. There is a common misconception that side hustles, such as freelancing or making and selling goods and services from your home, are not taxable income. However, this is not the case. The truth is that all side hustle earnings are taxable. If you are interested in learning more about tax information pertaining to side hustles, you’re in the right place! Let’s get started.

Many people take on side hustles to earn supplemental income, whether it be for paying bills, savings, paying off debt, or simply treating themselves to something nice. However, if you are not careful or you do not keep track of your income, it could land you in some trouble. Just as the Internal Revenue Service (IRS) is entitled to a portion of your regular paycheck from your day job, they are also entitled to a portion of your supplemental earnings. With a traditional day job, your employer is in charge of taking taxes out of your paycheck. However, when you work for yourself, AKA running a side hustle, you are responsible for your own taxes. In order to avoid a tax nightmare, here are some steps you should take and things you should be aware of.

Keep Accurate Records

This is one of the most important parts of tax preparation and accounting. Good record keeping can go a long way. This will save you time and, potentially, money. This starts with expense tracking– Keep receipts, documents, and other records that show how much money you are earning and spending. This will help you distinguish between your personal expenses and business expenses. Additionally, keeping these adequate records in an easily accessible place will help you determine how much you may be able to claim in business-related deductions when tax season comes around. For example, if you are making and selling crafts on a website like Etsy, keep records of how much you spent on art supplies. Even if the amounts are small, it can add up later, and you may be able to deduct these expenses from your taxes. If you don’t want to keep physical receipts from your purchases, consider writing them down in a notebook, taking photos of them on your phone, or using your Notes app on your phone or computer.

Besides seeing how much money you have coming in and out, these records will help you determine how much you may owe in taxes. According to the tax code, once you make $600 or more from the same company, the business is required to send you a 1099 form. A 1099 form is used to report income other than wages, salaries, or tips. For example, one of our previous blogs discussed third-party reporting: A recent change in tax code requires mobile payment apps to report commercial transactions totaling more than $600 per year to the IRS. This includes services such as Venmo, Cash App, and Paypal, as well as e-commerce websites such as eBay. If you receive $600 or more, these services are required to send you a 1099-K form to report these earnings to the IRS. It is important to note that for every 1099 that gets issued, the IRS also receives a copy– So it’s best not to pretend you didn’t receive one!

Make Quarterly Payments 

If you are self-employed, you are generally required to file an annual tax return and pay estimated tax quarterly. What exactly constitutes being self-employed? By definition, a self-employed person refers to any person who earns their living from an “independent pursuit of economic activity”. According to the IRS, you are considered self-employed if:

• You carry on a trade or business as a sole proprietor or an independent contractor
  
• You are a member of a partnership that carries on a trade or business
  
• You are otherwise in business for yourself (including part-time business or gig workers– gig workers earn income through on-demand work)
  

Generally, self-employed people must pay self-employment (SE) tax as well as income tax. SE tax is a Social Security and Medicare tax primarily for those who work for themselves. Since an employer is not withholding taxes from your paycheck, you’ll need to pay these estimated taxes quarterly. In order to determine if you will be subject to both SE tax and income tax, you must determine your net profit or net loss from your business. This can be done by subtracting your business expenses from your business income. If your net earnings from self-employment were $400 or more, you’ll need to file an income tax return. To calculate your estimated taxes, you can use Form 1040 ES from the IRS. If it is determined that you are expected to pay estimated quarterly taxes and you fail to do so, you will be subject to a penalty. Making quarterly estimated tax payments throughout the year can help you avoid problems when tax season arrives. The IRS refers to this as “pay as you go, so you won’t owe”. Here is the general quarterly payment schedule:

• Quarter 1: January 1 to March 31 – Payment due by April 15
  
• Quarter 2: April 1 to May 31 – Payment due by June 15
  
• Quarter 3: June 1 to August 31 – Payment due by September 15
  
• Quarter 4: September 1 to December 31 – Payment due by January 15 of the following year
  

When starting a side hustle for supplemental income, the idea of the tax burden may feel overwhelming. However, as long as you understand what you are expected to report and file with the IRS, and as long as you keep adequate records of your income, you should be able to avoid any issues. We hope you found this article helpful, and if you feel that you want your side hustle to turn into something bigger, we encourage you to reach out to us for business consulting! Here at Hoods Tax & Accounting, our tax professionals are always eager to give our clients as much help as possible when it comes to their finances. If you have any questions regarding your taxes, or if you need help with tax planning, contact us! Hoods Tax & Accounting offers a variety of services including small business consulting, QuickBooks training, tax preparation, accounting, payroll, and more! Visit our website for more information, as well as helpful links to resources you may find useful. Thank you for reading and we hope to see you back next time to keep learning about various tax and accounting topics!