It is not uncommon to hear about individuals with “side hustles” or secondary income sources. Almost half of working Americans have a gig outside their primary job with the average side hustle bringing in $1,100 a month. While many people are quick to jump on the opportunity to earn more money, just as many fail to properly prepare for their taxes, causing an ugly and unexpected situation on April 15th. Before starting a new side gig, you need to understand how an inflow of extra income affects your tax and financial situation.
Side hustle and self-employment income, like wages, are reported on your tax return. But unlike wages received from a company, self-employed and side income usually do not have taxes withheld. As you “hustle” more, you end up raising your tax liability, but there is no outside force withholding the tax for you. The result could be side hustlers having to make a conscious effort to save for Tax Day. With each dollar received from secondary income, your tax liability grows, and you can quickly find yourself owing on April 15th. Getting in the habit of saving 20-35% ofincome from your side gig can help you be prepared to pay a tax amount due on Tax Day.
If your side hustle brings in enough, you may meet the criteria to pay estimated taxes throughout the year. The IRS expects individuals to pay estimates if an individual is expected to owe over $1,000 on their return after considering income taxes withheld.
Individuals who receive a paycheck from a “day job” can fill out a new W-4 form to have more income tax withheld from their paycheck to cover the estimated payments. Those without this option can divide their expected total tax for the year into 4 equal payments and pay that amount quarterly.
Depending on how tricky your tax situation is, you may want to seek professional advice from a tax advisor or accountant. No matter if you seek help or do it yourself, it is important to make payments, since the IRS may penalize individuals who do not pay estimate payments on time.
As your side hustle grows, you will need to have a way to keep track of income and deductible expenses. The IRS may want proof of your expenses and income. An organized system of tracking income and possible deductions/write-offs can help you claim everything and ensure you are compliant by including all taxable income.
Take advantage of accounting programs and software, such as QuickBooks Online, that are designed to make the accounting easier for self-employed individuals easier that would make a side hustler’s move towards a business an easier transition. Depending on the amount of income coming in, you may want to consider hiring a firm to take care of the bookkeeping and accounting for your growing side hustle. If an outside source or accounting program is not in your budget, another easy way to stay organized is to have a separate business bank account to avoid confusing personal and business expenses.
The extra income from side hustles appeals to many, but the additional tax liability and financial hurdles of a side hustle can cause individuals to feel overwhelmed at times. If you know how side hustles affect your taxes, you can adequately prepare to take the necessary steps to avoid penalties and large, unexpected amount due. When confused about how your side gig is affecting your tax situation, be sure to reach out to a tax professional/advisor to ensure you are compliant and taking care of all the nitty-gritty details that come with having a successful side hustle. Follow the advice above and keep up the hustle!
|Hannah Husgen is an Analyst at Abacus CPAs, LLC in the Traditional Tax Department. She is highly dependable at providing comprehensive methods for monitoring activity. Others can count on her to plan thoroughly, coordinate details, and be pragmatic in the use of diagrams and schedules she creates.|