These days, more and more American workers are doing, well, just a little more. They’re known as side hustles, and you’re probably reading this because you have one, too. Having a side hustle in addition to your full-time job can certainly add money to your bank account, but side hustle taxes can also add stress to your life when it’s time to give Uncle Same his slice of the pie. Whether you call yourself a side hustler, a gig worker, or a moonlighter, the government calls you an independent contractor and says that you have to pay taxes on the money you earn. Here’s a guide on how to do it.
What is a side hustle?
Do you race from your 9 – 5 job to start your 5 – 9 gig driving an Uber all around town? Or maybe you trade in your suit and tie every weekend for an apron and whip up baked goods to sell at the local market.
If anything of the sort applies to you, then you’re most likely one of the millions of Americans who have a side hustle. According to Bankrate, 39% of Americans have a side hustle, with an average additional monthly income of $810.
There’s no set definition of a side hustle, and it’s become the all-encompassing term for any income-producing activity you participate in outside of your regular employment. Here are some examples of common side hustles:
- Freelance content creator
- Virtual assistant
- Rideshare driver
- Food delivery
- Pet sitting
How to do taxes for a side hustle
Unlike your full-time job where your employer withholds taxes for you, managing the taxes for your side hustle is all on you. This means you’ll need to keep track of all income and expenses related to your side job. There are a few forms you should know about when you enter the gig economy.
Salaried employees receive an annual Form W-2 from their employer stating their wages, tax withholdings, and other financial information.
Independent contractors receive a Form 1099 from each non-employer recording the wages and income they earned over the duration of the year.
When tax time rolls around, you’ll take all of the 1099 forms you received from any parties who paid you and you’ll enter the total amount of money you made on a 1040 form. You’ll also be able to record any losses or expenses incurred that may reduce your taxable income and thus reduce your tax payment.
Do you have to pay taxes on a side job?
The answer is almost certainly yes. Generally speaking, the income from your side gig is considered taxable. However, it’s taxed at a different rate and subject to different rules and regulations than income from a standard W-2 job. It also matters how your side gig is classified, as there are important distinctions between being self-employed and having a second job.
For example, let’s say you work as a server on nights and weekends at a restaurant. You’re most likely considered a part-time employee of the restaurant and your wages will be recorded on a W-2 form.
On the other hand, imagine you run a consulting business on the side and take on the restaurant as a client. This is an example of self-employment and the income you receive from consulting is recorded on a 1099 form.
You can also understand the distinction between self-employment and a second job based on the forms you need to fill out when you begin work. As an independent contractor, you need to provide your client with a W-9 form containing your taxpayer information so they can send you a 1099 form. When you’re an employee, you complete a W-4 form so your employer can withhold the appropriate amount of taxes throughout the year and send you a W-2.
Side job tax rate
Independent contractors must pay taxes on their income just like all other earners. Some of these taxes are higher when you’re an independent contractor because you’re responsible for the full rate. In the W-2 world, employers and employees split these tax payments. However, independent contractors are subject to a self-employment tax that covers their portion as well as the portion that an employer would typically pay. As an independent contractor who makes over $400 per year, you’re required to pay a current self-employment tax rate of 15.3%. This tax contributes 12.4% and 2.9% to Social Security and Medicare, respectively.
How much can you make on a side gig before you have to pay taxes?
There’s a common misconception that you only have to pay taxes on side job income if it exceeds $400. In reality, you have to report all income for tax purposes, however, income over $400 is subject to the additional self-employment tax.
How to avoid paying taxes on side jobs
Now that you’re aware of side hustle taxes, you’re probably wondering what you can do to avoid paying them. Unfortunately, you can’t escape your tax responsibilities entirely, but the government does provide some breathing room in the form of deductions, also known as write-offs. Here are just a few of the many ways you can legally reduce your tax liability as an independent contractor.
Getting to work from home and getting to write it off as a deduction is a win-win. You’re able to deduct the expense of your home office as an independent contractor. It’s important to note that your home office doesn’t have to necessarily be an office with a desk and a chair. The only requirements for the space are that it’s used regularly and exclusively for your business and that it’s the principal place of your business. So, if you handle most of your woodworking side hustle from that little nook in your garage, you can deduct this space as a business-related expense. You can do this in several ways: Simplified option and regular method.
Simplified option: As the name implies, this one is pretty easy. You just take the square footage of the space in your home that’s dedicated to your business and multiple that number by $5. Note that there is a 300 square foot maximum.
Example: Your home office is 50 square feet, so your deduction amounts to $250.
Regular method: You may be eligible for a bigger deduction if you use this more complex way of calculating your home office tax benefit. You need to determine what percentage of your home is considered your work space. Then, figure out your actual expenses related to your home office (repairs, painting, etc.). Finally, you can deduct your home’s overall expenses (mortgage interest or rent, utilities, property insurance, taxes, depreciation, etc.) proportional to your home office.
Example: Your home is 2,000 square feet and your office is 200 square feet, or 10% of your home. Your qualified expenses related to your home total $30,000 for the year. In this case, you can write-off $300 for your home office.
Rideshare drivers, rejoice! If you use your vehicle for side hustle purposes, you can deduct some vehicle-related expenses from your taxes. Just like the home office deduction, you can calculate your business vehicle deduction using one of two methods: standard mileage rate or actual expenses.
Standard mileage rate method: This is the more straightforward method for deducting business vehicle costs. All you need to do is keep track of the miles you drive for business purposes and multiply that number by the standard mileage rate, which is currently 65.5 cents.
Example: 1,000 miles at 65.5 cents per mile is a $655 deduction for you.
Actual expenses method: This method is more complicated, but can net you a bigger deduction. You can deduct a range of operating expenses for your car, including gas, maintenance, and registration fees. You’ll add up all of the qualified expenses and calculate the percentage of time you personal vehicle for business duties.
Example: You spent $2,000 on car-related expenses and used your car for business 10% of the time. In this case, you’re eligible for a $200 deduction.
It’s important to note that while independent contractors driving for services such as Uber and Lyft stand to benefit the most, anyone who uses their personal car for business purposes can take advantage of these tax savings. If you’re traveling to meet a client or running to pick up supplies, keep track of those miles and write them off at tax time.
Remember that self-employment tax? Turns out it’s not all bad news because you can actually deduct half of that amount from your adjusted gross income. Instead of splitting the tax with your employer as you would in a W-2 job, this deduction effectively lets the government pick up 50% of the tab.
Example: You make $50,000 at your W-2 job, and $10,000 from your side hustle. You pay 15.3% on that $10,000, which comes out to $1,503. However, you can take half of that amount – $751 – and apply it as a credit to your W-2 income. Therefore, your taxable income is reduced from $50,000 to $49,249.
Education expense deduction
Knowledge is power, and for independent contractors, it’s also tax deductible. You can write off expenses you incur for your continuing education endeavors related to your side gig. The catch here is that the educational expense must be related to a business you are already running, not a new line of work you’re looking to get into in the future.
Example: You started a catering side hustle a few years ago and now you’re enrolled in a cooking class to advance your skills. The cost of this course is directly related to your preexisting business and is therefore tax deductible.
Estimated quarterly taxes
Pay-as-you-go is the way to go for side hustle taxes. Salaried employees have their taxes withheld by their employer throughout the year, and then file taxes annually by April 15th. Most independent contractors are required to pay estimated taxes on their side gig income every quarter, or four times per year. However, this rule doesn’t apply to you if you estimate that you won’t owe more than $1,000 in taxes within any given year.
Following this rule reduces the sting of having to make a big lump sum tax payment each year, and it also spares you from having to pay additional penalties and fees. Unless your side job is exempt because it’s seasonal or inconsistent, you’ll incur an additional 0.5% charge for missing a quarterly payment.
Tracking finances and expenses effectively
Time is money for independent contractors, so you need an easy and convenient way to manage all of your side hustle’s financial details. Neat can help you keep all of your side hustle’s finances organized and give you the confidence to know what you owe and pay your side hustle taxes on time, every time.