Filing Taxes From a Side HustleNovember 24, 2021
Do you have a side hustle or are you thinking about starting one? You are not alone. According to a recent survey, 34% of Americans currently have a side hustle and another 24% plan to start one this year.
It’s no surprise that so many people want another source of income since making money outside your regular day job allows you to meet financial goals more quickly. But keep in mind, it’s important to not forget about filing taxes for side business income.
The IRS requires taxes to be filed for any earned income. In this blog, we’ll explore how to save and prepare for side hustle taxes and give tips on how you can reduce your taxable income.
Side hustle taxes may seem unnecessary if you’ve just started your business and aren’t making much money. There can, however, be serious repercussions if you don’t prepare for them ahead of time.
If your side hustle sales run through a third-party company, for example, Etsy or eBay, you will likely receive a 1099-K form if you meet certain requirements. If you’re a freelancer, you may receive a 1099 form from the companies you contract with for work. This form is reported to the IRS, and it is your responsibility to pay taxes on the income.
Even if you do not receive a 1099 form, you’re still required to report and pay taxes on your earnings. Since taxes are not withheld from your side hustle income automatically, here are a few things to consider:
- How much should you save? When you’re running your own side business, it’s wise to set aside 20 to 35% of your income for side hustle taxes. If you aren’t sure how much you’ll need, consider saving conservatively.
- When should you pay? In most instances, you must pay quarterly estimated tax payments. Estimated tax payments are due four times a year, although you can choose to pay more frequently. Estimated taxes are required if you think you will owe more than $1,000 in taxes.
- Why pay side hustle taxes? If you don’t adequately prepare for side hustle taxes, you may face penalties and fines for underpaying. Planning ahead can save you time and effort when the time comes to pay taxes.
Saving for Side Hustle Taxes
Now that you know the importance of preparing to pay side gig taxes, here are a few tips to help you streamline the saving process:
- Maintain financial records: Keep accurate and detailed records of your income and expenses. This will help you to estimate how much you owe and properly apply deductions.
- Consistently set aside funds: Each time you receive income, save a percentage in a separate account for taxes.
- Break up your payments: If paying taxes as a lump sum each quarter seems intimidating, instead, make monthly payments to spread out the expense over time.
Preparing to file taxes for side business income
You know that preparing for side gig taxes is important. But what steps can you take to ensure you’re ready for tax season? Here’s what you need to know:
Know Your Tax Deadlines
Take note of quarterly tax deadlines. Here are the important dates to keep in mind, according to the IRS. Keep in mind that you can pay more frequently than these four dates, but paying less frequently could result in late fees.
|Income Received||Taxes Due|
|January 1 – March 31||April 15|
|April 1 – May 31||June 15|
|June 1 – August 31||September 15|
|September 1 – December 31||January 15 of the next year|
In April, when you file your W-2 income taxes, you will have the opportunity to calculate how much you’ve paid in side gig taxes. Once the IRS has determined the accuracy of your payments, you will either be charged for outstanding funds owed, or be issued a refund.
Record Your Payments
You can pay your estimated quarterly taxes several different ways, with one of the most common being electronically. For a full list of payment options, visit the IRS’s payment page. Be sure to keep records of the estimated payments you made, so you can continue to track your income and expenses accurately.
If you qualify for certain deductions, you can reduce your taxable income amount and save money. Deductions can include work costs like home office and vehicle expenses, among other things. Take the time to thoroughly research which deductions you may be eligible for to save the maximum on your side hustle taxes.
Preparing for side hustle taxes may take time, but proper planning will simplify the payment process in the long run. With practice, you’ll be estimating and paying your taxes like a pro.