Everything You Need To Know About Paying Taxes on Your Side Gig
Ever since the pandemic, side hustles have become more widespread. As more Americans began working from home — and others simply lost their jobs — side gigs provided both needed extra income and a way for those spending more time at home to turn their hobbies into income-producing activities.
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Regardless of the reason you may be working a side gig, it may not feel like a “real job” to you — and you may not even view the money you make as “job income.” Unfortunately, the IRS sees it differently. In fact, depending on your situation and how you are paid, you may have to file a tax return as a self-employed person — and pay a self-employment tax that you never had to before.
Here are the most important things you need to know about paying taxes on your side hustle.
Your Side Gig Income Is Likely Taxable
The IRS considers payment for work to be taxable, whether you’re working part time, on a temporary basis or at a side job. If you pick up additional work with your employer, it should withhold income tax from your paycheck. If you work on your own as an independent contractor, your work is considered self-employment. In that case, you’ll have to file a federal income tax return if your income exceeds $400.
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You May Have To Pay Both Halves of Your Social Security Taxes
Sometimes, a side gig might not seem like “work.” But, even if you’re the neighborhood dog walker or sell household items out of your garage, if you get paid to do it, the IRS views you as self-employed. While in one sense this offers a tremendous level of freedom, it can also be problematic from a tax perspective.
As a self-employed individual, you are considered both an employer and an employee. This means that you are responsible for both halves of your Social Security and Medicare taxes.
As an employee, your employer would pay half of the 15.30% tax, or 7.65%. But if you work for yourself, you’ll have to pay the full 15.30%, consisting of 12.4% Social Security taxes and 2.9% Medicare taxes.
Your Taxes Likely Will Get More Complicated
Many workers who pick up side gigs find that they now need an accountant to help them with their taxes. Although you can certainly still do your own taxes, there will be aspects of the filing process that will be new to you and that you shouldn’t overlook.
For example, you’ll now need to file a tax return that reports both your W2 and your 1099 income, and you may need to file self-employment tax forms like Schedule C. While reporting your side gig income may actually end up being quite simple, at least the first time you file taxes as a self-employed individual, you might want to consult with an expert to be sure you don’t overlook anything.
You Still Owe Tax Even If You Don’t Get a 1099
If you perform regular contract work for a client, you should receive a 1099 from them outlining the payments they made to you during the year. However, even if you fail to receive any official documentation of your income, you’re still obligated to pay tax on it.
There are a multitude of reasons you may not receive a 1099. If you work with another small business, for example, it may consider the money it pays you to be a private transaction for services rendered and not something that requires the issuance of a 1099. Other businesses may willfully attempt to pay you “under the table,” while others may not understand the regulations requiring the issuance of a 1099.
Whatever the reason, income is income, and if it’s for products or services rendered, the IRS generally considers it taxable, even if a 1099 isn’t issued.
You May Have Access to Additional Deductions
One of the biggest advantages of working a side gig is that, as a self-employed individual, you have access to a greater range of tax deductions.
For example, you might be able to take a deduction for some of your vehicle expenses if you drive to see clients, along with educational expenses related to your side gig or even your health insurance, if you aren’t covered at your primary job.
But you should always speak with a tax expert about what you may and may not be able to take as a tax deduction for your side gig.
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