You took on a side job this year. Maybe it’s driving for Uber after your day job ends or selling cosmetics at home parties on the weekend. You might even be successful in this part-time gig, earning tens of thousands of dollars.
But did you know that you could face a big hit come tax time because of your side hustle?
You are required by the government to track and potentially pay taxes on all the money you earn during the year, including the dollars you generate from a side job. If you haven’t taken this into account, you might feel the pain when filing your income taxes this April.
If this surprises you, don’t feel bad. You’re not alone.
“Most people with side jobs are not aware of the tax implications,” said Robert Wheeler, a certified public accountant in Santa Monica, California. “They are not aware that they have to pay self-employment tax.”
Here’s what often happens, Wheeler said. His client will take on a side gig for the first time and make decent money. Then, when it’s time to pay yearly income taxes, this client owes a big check to the IRS because the federal government doesn’t take out taxes on self-employment income throughout the year as it does for the money they earn when they are working for someone else.
Because such clients aren’t aware that they must pay taxes on their self-employment income, they’re usually unprepared to write that big check to the government.
“They didn’t save any money for taxes,” Wheeler said. “They spent it all.”
What You Need to Pay
When you earn money from an employer, your regular paychecks will be reduced by taxes taken out for programs such as Social Security and Medicare. When you earn self-employment income, you receive your entire payment, with no taxes removed.
You are responsible, though, for paying what is known as the self-employment tax when you file your income taxes. In 2018, this tax rate is 15.3 percent for all the income you earn up to $128,400 in self-employment income. For any self-employment income you earn past this mark, you’ll pay an additional 2.9 percent tax.
If you earned $50,000 from a side gig in 2017, you’d have to pay $7,500 in federal income tax. That’s a big chunk of change if you haven’t prepared for it.
You might think you can fudge your self-employment income numbers. Don’t. Every employer who pays you more than $600 during the year will report this income to the IRS and send you a 1099-MISC form that reports exactly how much they paid you during the year. Because of that, it’s easy for the IRS to find out about how much you earned in side income each year.
You should track and report income even from employers who didn’t have to send you 1099 forms. Yes, these employers won’t report your earnings to the IRS. But hiding this money is tax fraud. If the IRS does discover you underreported your income, you could face serious financial penalties.
Susan Aki-Sanford, a small business and tax professional based in Toluca Lake, California, lives in what she calls “the land of the side hustle,” the Los Angeles area. Here, she works with film directors who also work as baristas, Uber drivers who are also DJs and actors who wait tables.
The extra income that comes with a side hustle is alluring, she says. But it doesn’t come free. You might consider your photography side job a hobby, but if you earn money from it– even if you don’t earn more than you spend on equipment – you must report it to the IRS.
“If your accountant tells you that you don’t need to report any type of income, then you need to get another accountant,” Aki-Sanford said. “All income is reportable, even hobby income and side hustles.”
Of course, reporting money to the IRS isn’t the same as paying taxes on it. You can also deduct legitimate expenses associated with running a business. These expenses could eliminate your profit, but even in these cases, you need to report the income.
“All income is reportable, and the penalties can be enormous or at least exasperating if you withhold reporting income,” Aki-Sanford said. “If the IRS sees that you haven’t claimed income, that is the agency’s first indication that there may be some degree of fraud – no matter how small – and you can get pulled into a full-blown audit due to it.”
Thomas Williams, a tax accountant who operates Kissimmee, Florida-based Your Small Biz Accountant, said that many people think if they don’t receive a 1099 from a company, they can get away with not reporting that income. But Williams warns against it.
“The IRS requires you to report all the income that you make on your side hustle, even if it’s a dollar,” he said.
You might think that the IRS won’t find your hidden income. Williams said that the agency is good at sniffing out fraud. You might be audited, for instance, and the IRS could ask you to produce copies of your bank statements and receipts for the expenses claimed on your tax return.
“If you are depositing more than you’re reporting or if your lifestyle does not align with the figures you are attesting to on your tax forms, the IRS may determine that you are hiding income,” Williams said.
The best advice for anyone running a side hustle? Work with a tax professional or accountant who can help you determine how to report your extra income.
What questions do you have about taxes and side hustles? Let us know in the comments below!
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