Do you have to pay taxes for your side hustle?
In addition to salary-based jobs, a side hustle is a common supplementary income source for many. The unfortunate COVID-19 pandemic has forced many to take up side jobs. Since individuals with a side job pay taxes on their main jobs, paying on their side job may seem unnecessary. If you have a side hustle, you must pay tax for income from it added to the non-negotiable tax payment on salary-based jobs.
What counts as a side hustle?
You may regard your job as a side hustle, but the IRS doesn't have that category. With the IRS, you are either an employed or self-employed individual. As an employed individual, your tax payments will most likely be made from the source by your employer. Then you get the W-2 form that contains the information required to file your income tax return. Simple and easy you may say. However, when it's a self-employed tax filing and payment, it's not automatically done from the source by anyone. You need to take on the responsibility of noting your tax dues. You are both the employee and employer when it comes to a side hustle. Therefore, as you stay confident that your salary is well taxed, you must work hard to ensure the income from your side hustle is fully taxed to avoid penalties.
What is taxable?
You, like others, may want to know if all parts of the side hustle are taxable or just a certain amount of income. The simple and clear answer is that all the earnings are subject to tax.
In times past, the general belief is that only an income worth $600 can be taxed. This confusion arises because the IRS mandates the use of a W-2 form that has the information you need to file your income tax return for the income of $600 and more. This however doesn't mean income below $600 and up to $100 are not to be taxed. According to the IRS, you must pay taxes on your income even when below $600.
Tax Payments and Deductions
Due to the side hustle, an individual must file and pay two separate taxes. First is the income tax and then the self-employment tax, SE. On the SE, you can itemize business-related expenses to get deductions and reduce the taxable amount.
Uber, for example, requires the use of a vehicle for mixed uses. One moment a driver is on a personal errand and other times is using the vehicle to make money. In such a scenario, an individual must carefully separate personal expenses from that of the business.
This can be especially difficult since such a business is a side hustle and personal can easily mix with business. However, a person must separate this to avoid errors. Do this by keeping track of the time and distance used in a business. Record keeping aids accuracy in this regard to avoid underreporting since much of the reported or filed 1040s by self-employed individuals can't be verified by any third party.
Since the IRS relies on the honesty of taxpayers you must endeavor to be accurate. And this is really important as the IRS can carry out audits if they have suspicions that filed tax returns are less than what it should be.
W-2s and Side Jobs
If you work as an employee and also have a side hustle, you are required to pay tax on both income streams. While your employer may make tax payments for you and hand you a W-2 form to file, you must take the initiative to file and make tax payments yourself on your side hustle as it is considered self-employment.
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