More than 44 million Americans are currently making money from other sources in addition to their full-time jobs. On the side, some are Lyft drivers, dog walkers, crafters, and tutors. Others are writers, artists, bakers, and social influencers.
Call it what you will – the side hustle, freelancing, the side gig, independent contracting – one thing is true: when you’re working your side gig, you’re your own boss. At least, that’s how it works in the eyes of the IRS. And when the IRS is calling the shots, you’ve got to follow their rules.
So, how does filing taxes go when you’ve got a side hustle? How much do you pay? And how do you pay it? And is it true that you don’t have to pay taxes in certain situations? Let’s start from the top.
Yes, you have to pay taxes on income you receive from a side gig.
There’s a funny misconception about the relationship between side gigs and taxes, and it’s been circulating for a while. Many side-giggers mistakenly think they don’t have to pay taxes on income they earn on the side, but this is a myth. Let’s clear this up: you must always report your earnings from a side gig, no matter how small the income. If your net income is greater than your standard deduction amount, you always have to report your income, from all sources, on your tax return.
In other words, if you’re a self-employed individual (even if that self-employment is in addition to a full-time job) you must report all gross income that totals $400 or more, or if your total income is greater than your standard deduction, you must report any income.
Not paying Uncle Sam what you owe can result in serious penalties and even jail time. However, it can be confusing to know what and how to pay the IRS when you’re an independent contractor. More on that in a minute.
You must pay self-employment taxes.
Before we get to the “how” of filing taxes as a side gigger, there’s something else you need to know. You not only need to pay income taxes, you must also pay self-employment (SE) taxes. What are SE taxes, you ask?
When you’re working for an employer, they take care of most of your tax responsibility by, of course, withholding it from your paycheck. Additionally, your employer is required to match your Social Security and Medicare tax responsibility (also called FICA tax). However, when you’re working for yourself, you’re the boss and the employee. This means that you need to pay federal income taxes and both the individual and employer portions of your FICA taxes.
In other words, when you’re self-employed, you must take care of all these tax obligations yourself. With that being said, once you include all SE tax you owe on your return, you can then deduct the employer’s portion, or half of all your SE tax, from your Form 1040 page one as an adjustment to arrive at your AGI.
If you need help determining how much to pay toward SE tax, let us know. We can help you crunch the numbers.
Ok, so how do I report it?
For the vast majority of independent contractors, income is reported on IRS Schedule C of Form 1040.
Your self-employment taxes will be reported on Schedule SE of Form 1040. The amounts reported on Schedule SE are, in most cases, taken from Schedule C of Form 1040. The amount of the SE tax computed on the Schedule SE is reported on the Form 1040.
There are, however, certain exceptions, including:
- Schedule E – For income earned from renting property (looking at you, AirBnB owners).
- Business Returns – For when you work with a partner and set up a partnership or if you chose to incorporate into an S-Corporation. In these cases, you will file your income on a business income tax return, generally a Form 1065 or Form 1120S. This can be a complicated process and, therefore, we strongly suggest that you consult with a knowledgeable tax advisor to help you make the right choice and make sure you aren’t paying more taxes than necessary.
When do I submit my payments to the IRS?
For most independent contractors, taking care of tax obligations is best done through estimated quarterly payments. It can be smart to do so in order to keep yourself from getting in trouble with the IRS.
But the problem with estimated quarterly payments is just that – they’re estimated. This is great for certain side gigs that offer a consistent income for long periods of time. The tricky part is when you’re working a side gig that involves an erratic, often unpredictable stream of supplemental income.
To avoid quarterly payments, some independent contractors will choose to adjust their withholdings from the paychecks they receive from their full-time employer, but managing your taxes this way can get confusing quickly (especially if you have to keep adjusting your withholdings due to unstable side gig income).
With all this being said, you should consult a CPA to figure out what will work best for your circumstances in order to avoid making a mistake that might cost you dearly. Generally speaking, if you do not pay correct quarterly SE taxes throughout the year, and if your total tax due when you file your taxes is greater than $1,000, you will likely be subject to IRS late estimated payment penalties and interest.
Are there any deductions I can take advantage of?
When consulting with your CPA about any income you earn in addition to your full-time job, the first thing they’ll tell you is to make sure you’re keeping diligent records of all your expenses. Any business expense considered to be “ordinary” and “necessary” may be claimed on Schedule C, depending on many different circumstances.
Now, determining what’s ordinary and necessary in addition to separating business expenses from personal expenses, is where the waters can get muddied. Again, it’s always wise to meet with a tax expert so they can walk you through the process to ensure you’re not claiming something you shouldn’t be.
Looking for tax planning services in DFW?
When it comes to money matters, the sooner you begin planning, the better. Our personal and business tax services are specially designed to take a proactive look at your financial situation with a simple overall goal: saving you money. When you schedule a specialized tax planning meeting with our financial experts, we will ensure you’re taking full advantage of every possible tax deduction opportunity available to you before it’s too late.