The gig economy pads the budgets of millions of Americans — but there are tax implications from taking a side job. Fortunately, you can reduce the taxes on your side jobs, depending on your situation.
For help figuring out how a side job will impact your taxes, consider working with a financial advisor.
Do You Have to Report Your Income From Side Jobs?
Federal tax law obligates you to report income from side jobs. Although taxes might automatically come out of your paycheck from your day job, your side hustle creates self-employment income. As a result, it’s up to you to report this income when filing taxes. Failure to do so can result in heavy financial penalties.
The only exception to this rule is if you’re under 65 and fulfill one of the following conditions:
You file your taxes single and make less than $12,550 this year.
You file jointly and make less than $25,100 or $26,450 this year if one spouse is over 65 and one is less than 65.
You file as head of household and make less than $18,800 this year.
You’re married filing separately and make less than $5 this year.
You file as a qualifying widow or widower and make less than $25,100 this year.
Generally, it’s a good idea to file taxes even if you fall under the income threshold for having to file. You might qualify for specific tax credits, such as the earned income tax credit, that can create a profitable refund from the government. Therefore, reporting income from side jobs is mandatory if you are above the income threshold for your filing type and likely financially beneficial if you are below it.
How Much Do You Have to Pay in Taxes with a Side Job?
Typically, you’ll pay self-employment taxes of 15.3%. In addition, you’ll pay income taxes per your tax bracket. Income taxes range from 10% to 37%, depending on your income level and filing status. Therefore, it’s recommended to designate at least 25% of your income for tax payments.
You’ll likely receive a 1099 form for your side job income (as opposed to the W-2 you’ll receive from your employer of your nine to five) by January 31. While a W-2 shows your income with taxes already deducted, a 1099 form shows how much money you made as an independent contractor.
Remember, you’ll receive one 1099 form per side hustle. For example, if you are an Uber driver and run an Airbnb, you’ll get a 1099 from each company detailing how much money you made from working with each. If you made less than $600 at one of your side hustles, you might not receive a 1099. In this case, you’ll still need to report the income if it’s over $400.
How to Pay Your Estimated Tax Bill
You’ll pay your estimated self-employment income tax bill quarterly. Therefore, you’ll owe taxes according to the following schedule:
You pay taxes on April 15 for income received from January 1 through March 31.
You pay taxes on June 15 for income received from April 1 through May 31.
You pay taxes on September 15 for income received from June 1 through August 31.
You pay taxes on January 15 for income received from September 1 through December 31.
To submit payment, you have several options:
Pay on the IRS’s website (irs.gov/payments) with a debit or credit card.
Business owners can pay over the phone and online after enrolling in the Electronic Federal Tax Payment Services.
Download the IRS2Go app and pay on your smartphone or tablet.
Mail a check or money order to your local IRS office.
In addition, after the tax year, you’ll file taxes as usual on April 15. You’ll use Form 1099-NEC from each of your side hustles. This form defines how much money you made as a non-employee of a company. For example, if you are an Instacart driver in 2022, you’ll receive Form 1099-NEC from the company by January 31, 2023, showing your income. Then, you have until April 15 to file taxes for 2022. The income from 1099-NEC will go into Form 1040 Schedule C when you file. Remember, you’ll perform quarterly filings and the year-end filing.
What Happens if You Don’t Pay Taxes on Your Side Job?
Not paying taxes on your side job will result in financial penalties from the IRS. Specifically, the IRS will charge the taxes due on the income plus the effective interest rate for that quarter. As a result, you’ll pay the taxes owed plus a percentage as a penalty. In addition, you might incur a 0.5% penalty for each month you didn’t pay your taxes.
That said, the IRS won’t penalize you if you make quarterly tax payments that are slightly off target. As long as you pay at least 90% of your taxes owed throughout the year, you won’t suffer financial penalties for unpaid taxes (provided that you make up the difference on your annual tax return).
How to Avoid Paying Taxes on Side Jobs
While you can’t completely avoid paying taxes on your side hustles, itemizing deductions when you file taxes can minimize your tax burden. For example, the following strategies can lower your taxes:
Ordinary and Necessary Expenses For Your Business
As a self-employed tax filer, some of your expenses are considered ordinary and necessary. Ordinary expenses are unavoidable costs for running your business. For example, the costs of office supplies and legally required insurance policies are tax-deductible.
On the other hand, necessary expenses are helpful but not vital to your work. For instance, you can deduct 50% of the costs for meals over which you discuss business. So, it’s crucial to keep every receipt for ordinary and necessary expenses to maximize this deduction.
Business Expenses
While W-2 employees have limited access to work-related deductions, self-employed workers have more latitude. For example, numerous side hustles require vehicle use. Therefore, you can usually deduct costs for fuel, repairs, registration fees and insurance.
In addition, you can deduct cell phone costs if you use your phone for work. For instance, if half your phone usage is business-related, you can deduct 50% of your monthly phone bill from your taxes.
Home Office Deduction
If you use your home to run your side hustle or small business, you can take advantage of the home office deduction. To do so, you must have a designated space you use exclusively and regularly for work. In addition, this space must be the primary spot where you run your business. Certain business types, such as storage, daycare and hospitality, don’t qualify for this deduction.
Track Your Expenses
Keeping detailed records is essential to maximizing your deductions. In addition, you’ll need to back up the figures on your taxes if the IRS audits you. Therefore, it’s recommended to log all business-related receipts, record expenses and create a system that allows you to organize this information. If you have a complex tax situation or need help maximizing your tax return, it’s helpful to work with a tax professional.
The Bottom Line
Side hustles can be lucrative, but they also impose taxes on earned income. Moreover, failure to pay these taxes quarterly can incur financial penalties from the IRS. However, by paying the correct amount of taxes on time and maximizing deductions for business-related expenses, you can lower your taxes from side jobs and pocket more of your hard-earned cash.
Tax Tips for Side Jobs
Working multiple jobs can make tracking expenses and filing at the right time challenging. A financial advisor can help you organize your finances and file taxes correctly. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Figuring out your taxes can be overwhelming. SmartAsset’s income tax calculators will help you calculate federal, state and local taxes.
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Source: https://finance.yahoo.com/news/much-pay-taxes-side-job-140002443.html