Side gigs used to be temporary hustles used by the few and far between, but now they are a permanent part of the American economy. The problem when it comes to filing taxes, however, is that side hustles don’t always feel like “real jobs,” with an employer who issues a W-2 at the end of the year and withholds taxes. In some cases, those working side gigs may not feel as if they even owe taxes on their earnings, as they are just from spare-time work. But the truth is that the IRS views gig workers as sole proprietors running their own business. With that in mind, here are some things many Americans don’t — but should — know about side hustles and taxes.
Side Gig Income Is Taxable
Side gig income may feel like something you do in your spare time for some extra cash, but it’s actual taxable income. Now, if your side gig is your only income, you may not ultimately end up with any tax liability, thanks to credits and deductions. But you’ll most likely have to file a tax return at the very least. While the minimum income required for singles to file a tax return is $12,950 if under age 65, with gig income, you’ll likely have to file a return after net earnings of just $400.
Side Gig Income Is Likely Self-Employment Income
Part of the reason the gig income filing requirement is so low is that — unless you’re working an extra job as a W-2 employee — side hustle income is generally considered self-employment income, which has a $400 net income filing requirement. From a tax perspective, this puts you in the same category as a sole proprietor with 100 employees. The unfortunate side consequence of this classification is that you’ll owe twice as much Social Security tax as if you were an employee. As a worker, you are responsible for a 7.65% tax that covers Social Security and Medicare. But since you’re considered both an employer and an employee as a side gig worker, you’re responsible for both halves of the Social Security and Medicare taxes, which amounts to 15.3%.
You Can Take More Deductions To Offset Your Side Hustle Income
For every rain cloud, there’s a silver lining, and this applies to your classification as a self-employed worker as well. By working for yourself, the IRS allows you to claim a boatload of additional tax deductions, from office supplies and insurance payments to utility costs and even a portion of your rent or mortgage, if you use your home or another building as your office. There are some gray areas when it comes to self-employed tax deductions, and they are often scrutinized more closely by the IRS, so you’ll want to talk with a seasoned tax professional before you file taxes on your gig income.
You Should Keep All Your Receipts, Just Like Any Other Taxpayer
Depending on how you view your side hustle, you may not think that keeping receipts for expenses like your cellphone bill, travel costs and even restaurant tabs is important. But if you incur these costs in the course of earning your side hustle income, they may be deductible. For example, if you buy a new computer and use it occasionally as a freelance editor, you may be able to write off part of that expense. If you sell arts and crafts out of your garage, you can likely deduct the cost of your materials and perhaps even part of your electricity bill. Talk with your tax advisor about which receipts might be directly applicable to your side gig business.
Forms You’ll Need To File for Your Side Hustle Income
As a gig worker, you might have to file tax forms that you’re not used to using as a W-2 wage or salary earner. In addition to Form 1040, to which all your income and deductions flow, you’ll need to file a Schedule C for your side gig business. You’ll also need to file Form SE to report your self-employment taxes. You might also have to file Form 1040-ES to report and pay your estimated taxes every quarter since you won’t have an employer withholding those for you. Again, circumstances can vary from gig to gig, so you’ll likely want to speak with a tax professional or at the very least use tax software to help ensure you file your taxes correctly.
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