Maybe you already have a side hustle and you’re wondering how to report side hustle income and how to handle cash tips.
Perhaps you have heard stories like this mom who makes $4000 a month on Poshmark and you want to get in on the action.
Here’s how to report side hustle income.
#1 How To Report Side Hustle Income: Understanding Your Tax Obligations
The first step in managing taxes for your side hustle is understanding your tax obligations. Contrary to popular belief, side hustle income is not exempt from taxation.
The IRS considers all income, including earnings from side gigs, as taxable. Whether you’re making a few bucks selling homemade candles or generating substantial income from freelance writing, you’re required to report it on your tax return.
#2 What Is a Side Hustle?
The IRS defines gig work as “certain activity you do to earn income, often through an app or website (digital platform), like:
- Drive a car for booked rides or deliveries
- Rent out property or part of it
- Run errands or complete tasks
- Sell goods online
- Rent equipment
- Provide creative or professional services
- Provide other temporary, on-demand or freelance work
Note: This list does not include all types of gig work.”
#3 Keep Accurate Records
Maintaining accurate records is crucial for managing your side hustle taxes efficiently. This includes keeping track of income, expenses, receipts, and any relevant documentation.
Whether you’re using accounting software, spreadsheets, or a simple pen and paper system, make sure your records are organized and up-to-date. This will not only simplify the tax filing process but also help you claim deductions and credits to minimize your tax liability.
#4 Determine Your Tax Filing Status
Your tax filing status depends on various factors, including your marital status, dependents, and income level. For most side hustlers, filing as a sole proprietor is the most common option.
As a sole proprietor, you report your business income and expenses on Schedule C of Form 1040. However, if your side hustle has grown into a full-fledged business with employees or significant revenue, you may need to consider other business structures like an LLC or S Corporation.
#5 Pay Estimated Taxes Quarterly
Unlike traditional employees who have taxes withheld from their paychecks, self-employed individuals are responsible for paying taxes on a quarterly basis.
This means you’ll need to estimate your tax liability each quarter and make quarterly payments to the IRS using Form 1040-ES. Failing to pay estimated taxes on time can result in penalties and interest charges, so it’s essential to stay on top of your quarterly tax payments.
#6 Maximize Deductions and Credits
One of the perks of running a side hustle is the ability to deduct business-related expenses from your taxable income. Common deductible expenses for side hustlers include equipment, supplies, home office expenses, mileage, advertising, and professional services. Additionally, you may be eligible for tax credits such as the Earned Income Tax Credit (EITC) or the Child and Dependent Care Credit (CDCC), which can help lower your tax bill.
#7 Seek Professional Help if Needed
Navigating the complexities of side hustle taxes can be daunting, especially if you’re unfamiliar with tax laws and regulations. If you’re unsure about any aspect of your tax situation or need assistance with tax planning and compliance, don’t hesitate to seek help from a qualified tax professional.
An accountant or tax advisor can provide personalized guidance tailored to your specific circumstances, helping you maximize tax savings and avoid costly mistakes.
What Now?
Having a side hustle can be exciting. It can also be stressful when you are confused about how to file your taxes.
You already took a big step by reading this article. Follow these seven steps to ensure accurate tax reporting, and always seek professional advice from a tax professional.
