Side hustles are jobs or activities you perform alongside your regular job to produce extra income. They might be something you enjoy, like knitting and painting, or something you do out of necessity, like dog walking or house sitting.
Whether you do it out of enjoyment or necessity, it’s essential to be aware of the financial implications. If you’re about to take on extra work to earn a side income, take note of the following information:
You Must File a Tax Return
You’re likely aware that you must file your tax return online or with the help of a tax agent to report your primary income, but did you know you must also file a tax return for your side hustle?
Even if your side gig is your only form of income and you might not end up with any tax liability, the government still wants to know about your earnings. While you generally only need to file a tax return as an employee if you’re under 65 and earning more than $12,550, you must file one if your net earnings from self-employment were as little as $400.
You Have to File a Different Tax Form
Most earners are used to filing 1040 forms as salary or wage earners, but you’ll require a different form when filing taxes for your side income. While every learner is different, you might need to file a Schedule C Form SE to report your self-employment taxes. However, remember that you might also be required to file Form 1040-ES, which outlines your obligation to pay quarterly taxes.
You’re Technically Self-Employed
You might like to call yourself a crafter, a painter, or a hustler, but in the eyes of the law, you’re a self-employed earner. If what you make on the side is over $400 per year, you’ll essentially be in the same category as someone with multiple employees. Unfortunately, this can mean you’ll be required to pay tax on your earnings, even if you’re currently backpacking through Europe or exploring Mexico.
You Need to Track Your Expenses
When you’re only doing a side hustle for fun, it might not make much sense to keep track of your spending. You might buy materials regardless of whether you plan to sell what you create, so what’s the harm in throwing your receipts straight in the bin?
When the end of the financial year rolls around, and you have to declare your income, however, you’ll see why keeping track of your expenses is so important. Anything related to your side hustle, such as your cellphone bill, internet bill, utilities, and travel costs, might be deductible. Being able to offset these deductions against your income can sometimes mean you pay less in taxes.
Different Rules Apply for Third-Party Platforms
Before 2022, companies that paid people for freelancing jobs only had to issue them with a 1099 Form when they earned $20,000 across 200-plus transactions. However, that all changed in 2022.
Now, companies that work with freelancers must issue the form when they reach $600, regardless of the number of transactions. This change was implemented to reduce the risk of tax underpayments while making it easier for self-employed people to report their earnings.
Who knew side hustles could be so complicated? Whether you’re a freelance writer, a dog walker, or a professional houseplant waterer, you might be required to file a tax return as a self-employed earner. So, now is the right time to discuss your earnings with a tax professional.