While there are many benefits that come from having a side hustle, like receiving an extra income stream and flexibility in choosing work hours, it’s equally as important to know about the financial obligations associated with these roles.
From increasing your tax withholding to understanding your state’s tax laws, here’s the financial fine print to pay attention to when deciding to work a side gig where you earn money.
You’re Required To Pay Taxes on Your Earnings
Whether it’s cash, crypto or barter income, all money earned from side gigs is considered taxable income in the eyes of the IRS and the state. Mark Steber, chief tax information officer at Jackson Hewitt, said this is true even if the employer doesn’t report its own 1099-NEC or 1099-K to the IRS. Taxpayers that earn money from their side gigs are required to pay tax on those earnings.
What happens if you don’t pay taxes? Steber said not only would this be incorrect under the law, but failure to report income can also hurt your business in the long term due to the lack of an earnings history, or history of profitable activity. It is a much better approach, and ultimately the right thing to do, to pay taxes and build an earnings history.
You Should Increase Your Withholdings
Individuals with a side gig income may either increase their withholdings from their full-time job or make quarterly estimated payments.
This ensures your taxes are always paid in a timely manner and keeps some of the sticker shock of filing during tax season at bay.
Tax Laws Are Changing for Third-Party Platforms
“One thing that everyone, especially those with side gigs, should be aware of that’s new this year are changes to the income reporting rules and in particular those related to the 1099-K form,” said Steber.
Among the changes to be mindful of this year are new reporting obligations that have been set for electronic payment platforms, including Venmo, Zelle, PayPal, Apple Pay and others. These platforms must furnish an information statement to people who get money during the year via these platforms, which includes getting paid for services.
“Any taxpayer that earns more than $600 this year will get a statement from the platform and it will also be reported to the IRS directly from these platforms,” said Steber. “Keeping good records of these payments on third-party apps will be important, as will waiting to file your tax return until you receive your 1099-K statement forms from these payment platforms.”
Anyone who is self-employed and unsure of how they will file their taxes moving forward is always welcome to work with a tax professional. Steber recommends tax pros with experience in working with taxpayers that have self-employment income so you get the most out of your side hustle.
Stay Up To Date on Tax Laws That Apply to Your Side Gig
When Jackie Knowles, owner of Glasswork Pixie LLC, started her side gig as a glass artist creating home décor and jewelry pieces, she didn’t expect to become an accountant specializing in country and state tax laws.
While individuals with e-commerce side gigs can easily sell their products across various states and countries, Knowles said they may not realize that each individual location comes with its own complex rules for collecting and reporting tax to its respective authorities.
These rules are also updated on an annual basis. Knowles uses the example that some states require e-commerce sellers to start collecting and reporting tax when they reach a certain sales threshold. Other states may base it on sale volume. If you reach one of these thresholds, Knowles said you will need to dive into tax rates by ZIP code — which can take hours to understand and designate correctly.
The same types of regulations and requirements apply to each country sold to as well. Take the time to learn about your state, or country’s, e-commerce sales tax threshold and stay up to date with any changes in laws. Similar to Steber’s suggestion for working with a tax professional, Knowles recommends any side gig worker with excess funds, especially those in e-commerce, hire an accountant from the start.
You Need To Protect Your Intellectual Property
If you run a side gig where you own an e-commerce business or one where you have pieces of unique intellectual property, like a logo or business name, you’ll need to register a trademark for this IP at the federal level.
Registering a trademark gives your intellectual property legal protection. This type of protection keeps your mark from being plagiarized by competing businesses and also shows the world that your mark is unique.
Before filing to register a trademark, it’s a good idea to conduct a name search with the United States Patent and Trademark Office (USPTO). Search in their trademark database to ensure there are no existing or pending trademark applications for the mark you plan to register. If your mark is available, you may start filling out an application to register the trademark and pay the registration fee.
You Might Be Eligible for Tax Deductions
This is less of a challenge in having a side gig and more of a potential benefit for those with self-employment income. If you keep track of all expenses you make while earning income from a side gig, or side gigs, Steber said you can take business-related tax deductions on your tax return.
What can you deduct? Some options include purchases for a home office, supplies, auto mileage, depreciation on side gig business-related assets and other work expenses. Keep your receipts handy and track your expenses as early as the start of the year to ensure you don’t miss out on any possible deductions.
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