Had a Side Hustle in 2022? CPAs Advise To Take These Steps Now for Easy Tax Filing
More than 90% of Americans had one or more side hustles in 2022 in order to help make ends meet, as GOBankingRates previously reported. That figure also translates into millions of gig workers that will now need to take new steps when filing their 2022 taxes.
See: 7 Steps To Take Now To Make Tax Filing Easier Next Year
Read: 3 Things You Must Do When Your Savings Reach $50,000
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“If you picked up a side hustle, it’s important to keep track of all of your income. You will usually get a 1099 Form from the company you are working for as your side hustle and you have to file it. Make sure you track how much you’re making,” Richard Lavina, CPA and CEO of TaxFyle, told GOBankingRates as his recommended first step in getting tax info sorted.
“That’s the big difference between someone who’s been an employee for the majority of their career who is now just doing a side hustle,” he added. “You have to be responsible for getting those taxes paid.”
Several other tax experts also weighed in with their tax prep secrets.
Gather documents to report all of your income: While this may sound intuitive, it’s important to know that freelancers are responsible for reporting all earnings every year. “It’s not always easy for people to do if they do not receive a 1099 tax form and they have income from multiple sources,” said Eric Bronnenkant, CPA/CFP and head of tax at Betterment. “The IRS expects taxpayers to report all of their income regardless of whether a tax form is received.”
Lisa Wood — CPA, MTax, and director of tax with Buckingham Advisors — added that clients that paid at least $600 throughout the year will send a 1099 Form by the end of January. As well, she advised: “Compare your records of income to the form to ensure the amounts were property reported… If there are any discrepancies in reported amounts, contact your client and request a corrected form.”
Know what deductions you can take: “Freelancers are allowed to deduct expenses that are ‘ordinary and necessary’ to their business,” said Jody Padar, head of tax strategy at April. Padar said “ordinary” refers to a common expense in a specific type of business while necessary is an expense appropriate for the trade.
“If audited by the IRS, this will be a major element taxpayers must prove in order to claim these deductions, so before you make any business purchases and before you claim it as a deduction on your tax return — make sure that expense is ‘ordinary and necessary’ to your business.”
Collect receipts for business expenses: Wood said that now is a good time to collect and organize all your receipts for any business expenses that you paid in 2022. It’s very important to keep backup documentation of your purchases “in case of an audit,” she suggested.
Padar added: “As a freelancer, business expenses are essential for the operation of a business. However, from the IRS perspective, keeping a record of these expenses is essential. The IRS requires individuals to retain copies of their receipts for at least three years from the date their tax returns are filed. So as you prepare to file your taxes ensure that you have and retain a copy of the expenses you claim.”
Choose the right tax form: Levon Galstyan, CPA at Oak View Law Group, specified there are different IRS forms to consider when filing taxes for a side gig. “Use Form 1040 Schedule SE to compute your quarterly freelancing taxes; Form 1040 Schedule C to determine the business’s net income while also listing its revenues and outlays; and Form 1040 Schedule C-SE is a self-employment tax reporting option in addition to Schedule C-EZ,” he said. Working with a qualified CPA can also help you to report all income and claim the right deductions.
Set some money aside: If you have not been paying quarterly taxes over the course of 2022, you will owe the IRS come April — so now’s a good time to start allocating some money for this expense. Per Dmytro Kondratiev, CEO and legal board advisor at LLC.Services, “Self-employment taxes can be a bit more complicated than regular income taxes, so it’s a good idea to set aside some money each month to cover your tax bill. This will help you avoid any surprises when it comes time to file.”
Research state tax guidelines for side gigs: It’s not just the IRS you’ll need to report to, but also the state as well. According to Kondratiev, “Different states have different tax laws, and if you earn income from a side business in a state other than the one you live in, you may have to pay taxes in that state as well. Be sure to familiarize yourself with the tax laws of any state where you earn income to avoid unexpected tax bills.”
Tax Tips for Side Gig / Side Hustle Workers Moving Forward
Many of the above experts also provided tips for those looking to work side gigs in the future.
Invest in good record-keeping software: “This is a good time to investigate software to automate your record-keeping if you are not already using it. There are several programs that are easy to use and can be synchronized to your bank accounts. This can save you time and helps you avoid mistakes,” said Wood.
Adjust quarterly taxes for next year: If you do end up owing for 2022, you can better prepare for next year’s quarterly payments by planning ahead with better estimates. “If you have a balance due on your tax return, adjust your quarterly estimated tax payments for 2023,” advised Wood.
Consider establishing an official business: Kondratiev said: “If you make a significant amount of money from your side business, you may want to consider creating a separate business entity, such as a corporation or LLC. This will provide you with additional legal protection and may give you tax advantages.”
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