Yes. If you’re making a revenue of $600 or anything above this threshold from any sort of work, regardless of whether it’s a side job, part-time, or transitory, you will indeed be expected to file a tax return. It is necessary that you always pay taxes on your earnings from gig work.
If you work as a freelancer, then note that your boss will most definitely deduct taxes from your pay. Meanwhile, if you operate as a self-employed, you well be required to pay your taxes. You might consider your job to be a side hustle; however, the IRS does not uphold such terms or classification.
Note that you are either employed or self-employed according to the IRS. As an employee, your boss will deduct your tax payments from your paycheck. Then you receive the W-2 form, which includes the details needed to file your tax return.
In a broad sense, tax payments for your side hustle will consume a larger fraction of your income than tax payments deducted from your wage packet as a worker. This is because employers normally pay 50 percent of your Social Security and Medicare commitments.
If you work for yourself, you must bear the entire 12.4% Social Security tax on income, as well as a 2.9% Medicare tax across all income.
A W-2 form is used to document employees’ salaries, while a 1099 form is used to disclose self-employment revenue. If you earned over $600 for negotiated work with a company, that company must give you a 1099 form at the commencement of the next year. Enterprises must send these out by January 31st.
How Much Taxes Should You Pay on a Side Hustle?
Your side hustle taxes are determined based on your net earnings rather than your overall revenue for the year. As such, if you already have $30,000 in W-2 income and $10,000 in business revenue (after expenditures), only $10,000 is susceptible to self-employment tax.
In this case, that is $1,530 ($10,000 x 0.153). Unlike income taxes, which might be lowered via additional elements as well as individual write-offs, self-employment taxes can just be lowered via enterprise write-offs or tax credits. As a result, you shouldn’t even be shocked if you end up owing a little something beyond standard after starting your side hustle.
The majority of taxpaying citizens who work side jobs are subject to federal income tax caps with appropriate rates spanning from 12 to 22%. (Your median tax rate is your effective tax rate.) Add the 15.3% self-employment tax on top of all that, and you can bet that 30% of your revenue will disappear without a trace.
How Do You File Taxes for a Side Hustle?
Taxes can be complicated for individuals who hold numerous assignments. Regular monitoring of your earnings and actually reporting them are critical. Here are some steps to assist you in filing taxes for a side hustle.
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Keep Track of Your Earnings and Expenses
The percentage of the taxes you must pay for your side business is determined by your revenue as well as associated bills.
It would be simple to calculate how much you owe in side hustle taxation if you thoughtfully monitor those two. Regular monitoring of your costs and revenue could be as simple as drafting your earnings on a sheet of paper and stockpiling your invoices in a small box.
Set aside between 20 and 30% of your earnings for taxes
To be honest, the most conservative expectation of the amount to save is 20-30%. It should be noted that the majority of individuals who work side jobs fall into federal brackets for income taxes with applicable rates spanning from 12 to 22%.
Maybe that’s not the reality if you enhance your tax deductions. Nevertheless, when it pertains to taxes, it is sometimes preferable to be conservative. If you overpaid, you will claim a refund, however, if you shortchange, you may face underpayment consequences and charges.
Understand what you can deduct
Your net business revenue is taxed as self-employment earnings. That is your gross income minus your expenditures. It simply means that the most effective method for reducing taxes on your side-business is to reduce your business income.
Business write-offs are the most effective method for achieving this. A business write-off is simply a term for your work-related expenditures. Examples include the following:
- Vehicle expenses
- Your mobile phone bill
- Equipment and supplies
- Wi-Fi Expenses
- Expenses for the office
Pay your side hustle taxes in quarterly installments
Self-employed individuals are mandated to pay quarterly estimated tax payouts. You can stump up one-quarter of anything you end up owing each quarter. By doing that, you will end up not owing once you document your side hustle taxes the next year. Quarterly payments are required on the dates listed below:
- The first quarter is due on April 15th.
- The second quarter is due on July 15th.
- The third quarter is due on September 15th.
- The fourth quarter is due on January 15th.
If you end up making late payments or underpaying during the year, you might be required to pay interest every year.
Seek the advice of a tax professional
If you have not already guessed, having a side hustle will end up making your taxes a little more tricky than usual. And attempting to keep track of all the tax implications could be a little daunting.
Hence it is suggested that you collaborate with a trustworthy tax advisor whom you can turn to for recommendations and tax assistance. This expert can meet with you, respond to your tax inquiries, as well as assist you in comprehending how your side hustle will affect your tax liability.
Side hustling is an excellent way to pay off liabilities, develop new skills, start figuring out what you want to achieve from your professional life, and reap numerous other advantages. Although the advantages of side hustling appear enchanting, side hustle earnings are not.
You must pay income tax which includes Social Security and Medicare taxes. Aside from that, you must learn how to deal with taxation for your side business so you don’t have a tax tragedy.