Millions of Americans earn extra income from a side hustle or an employment opportunity outside of a full-time job, which is growing yearly. From launching a new business to performing odd jobs for extra income, chances are that when it comes to side hustles or extra gigs. Therefore, you’ll have some additional income tax planning in the future.
The tax professionals at Waters Hardy can help with all aspects of this unique and evolving tax situation. Based in Dallas, our professional experts offer tax preparation services, and tax planning services for individuals throughout the country.
However, if you are new to the schematics and details of side hustle earnings and taxes, here are the fundamentals you need to know before the April 15, 2024, deadline rolls around.
How to Do Tax Planning When You Have a Side Hustle
First, if you believe you’ll make a net profit of $400 or more from your side hustle, you will have to pay taxes on your income, according to the IRS.
In addition, if you receive payments totaling $600 or more, you’ll likely receive a Form 1099-NEC for non-employee compensation. If these payments are received through a third-party payment provider, like PayPal, you’ll likely also receive a 1099-K.
Taking note of all of these tax forms is important. These forms are being sent to you for your annual taxes. They are also being sent to the IRS from the entity or person who paid you for your work. As such, it’s essential that you make sure all this income matches before you can start to consider deductions and credits on your total earned income.
How to Set Aside Money and Get a Sense of How Much You’ll Owe
Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make quarterly and estimated tax payments if they expect to owe taxes of $1,000 or more when their annual return is filed. If you do not pay these taxes every quarter, you may have to pay a hefty fine and any taxes owed on your 2023 tax return.
As such, it’s a good idea to set aside roughly 25%-30% of your income for your taxes. It is best to do so in a separate savings account that you can access at the end of the year or when you file your 2023 tax return. As of mid-2023, high-yield savings accounts are earning between 3% and 5% in interest, which puts a little extra money in your pocket. Your savings can help ensure you have enough to cover any year-end taxes that are owed.
The Difference Between a Hobby and a Business
When it comes to side hustles, one of the biggest questions for new tax filers is whether their earned income qualifies as income from a hobby or a business. Both situations are taxable. However, individuals who operate a business are generally eligible for more tax deductions year after year.
The IRS has a guide that outlines the distinctions between a hobby and a business.
Let’s explore the differences below.
- A taxpayer maintains complete and accurate books and records and carries out all activities in a businesslike manner.
- The intention is to make the venture profitable.
- A taxpayer depends on income from the activity for their livelihood.
- Any losses are incurred during the startup phase of the business or are due to circumstances beyond the taxpayer’s control.
- A taxpayer was successful in making a profit from similar activities in the past.
- The taxpayer can expect to make a future profit.
It’s not unusual in our modern gig economy era for a venture to start out as a hobby and morph into a business as the endeavor grows and becomes more profitable.
Your tax professional partner will be able to help you determine where your side hustle fits in terms of income. Additionally, they can help you minimize your taxes, regardless of your precise situation.
Ways to Save Money on Taxes from Your Side Hustle
The good news is that there are several ways that taxpayers can save money when it comes to income earned from a side hustle or a fully-fledged business.
Though every individual’s situation is unique, here are a few common options for taxpayers who want to save money when it’s time to file.
Open a solo 401(k) retirement plan
- If you are a freelancer, gig economy worker, or otherwise self-employed, you can take deductions made on contributions to a 401(k)-retirement plan. (These deductions are expected to grow, too, thanks to upcoming changes in tax laws.)
Consider if you’re eligible for a home office expense
- Individuals who receive a W-2 from their employer generally can’t take a home office expense. However, a home office deduction is worth investigating if you are self-employed or a contractor filing a 1099 form. Just remember that you must use your home office exclusively for work and not other activities.
Keep track of everything you spend on your side hustle
- From office supplies to advertising to travel to and from your side gig, there is a far-reaching range of deductions that you may be eligible for. Your tax planning advisor can help you filter through what you can deduct, but that process starts with well-kept records.
Make Sure You Have an Exceptional Tax Preparation Partner at Your Side
At Waters Hardy, we’ve seen all types of unique tax situations and are adept at ensuring that your taxes are minimized year after year. From hobbies that grow into businesses to individuals expanding their income with different side hustles and extra gigs, we have the experience required to navigate these ever-changing areas of tax law.
Tax Planning and Preparation for All Side Hustle Earnings
Let’s discuss your current ventures and how you want them to grow in profit and size over time. With Waters Hardy at your side, you can rest assured that you have a knowledgeable and powerful partner. Our professional tax experts can handle the tax-related details of launching a successful side hustle.