It’s not as difficult as you might think.
So, you’ve decided to support your regular employment income with a side hustle. Good for you!
You’ve joined the nearly 45% of Americans who work “on the side” for either extra spending money or to cover basic living expenses.
Most side hustlers spend 5-10 hours per week earning money outside of their primary employment, making some side hustles quite lucrative.
Do I Have to Report Income from My Side Gig?
If you net more than $400 a year at your side gig, you’ve got to report that income to the IRS, regardless of whether you receive a Form 1099. Good recordkeeping will keep you from paying more taxes than necessary and prevent you from paying penalties and interest.
What’s Net Income and How Do I Calculate It?
Determine your net income by deducting business-related expenses from your gross income.
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Keep accurate records of your gross income, the money you receive from selling goods or performing services. It’s best to keep this income in a separate checking account to have documentation of your earnings.
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Keep receipts and invoices of all the expenses related to your side gig. Deduct these expenses from your gross income to determine your net income.
Common side hustle deductions include:
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Business-related mileage
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Tools, equipment, and materials needed to do the job
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Digital and/or print marketing expenses
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Training and educational expenses for building the skills needed for your side hustle
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Preparatory expenses, such as creating a business plan or doing market research
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For home-based businesses, a portion of your mortgage, phone, internet and utility bills can all be calculated based on the size of your dedicated office space and amount of business usage
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Office equipment, such as furniture, printers, computers and more
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Dues and subscriptions paid for memberships to business associations
What Tax Forms Do I Need to File?
The tax forms you need to file depend on how much money you make, how you receive payments, and whether you required the services of nonemployees.
Form 1040-ES
You must file this form quarterly to pay estimated taxes if you’re operating as a sole proprietorship or single-member LLC and expect to owe at least $1,000 in taxes for the year. Form 1040-ES should be filed by April 15, June 15, September 15, and December 15 of each year. If you do not file Form 1040-ES by the due dates, you are subject to penalties and interest of up to 8%.
1099-K
This form is issued to you if you received payments of $600 or more from a payment app or online marketplace. Use this form to complete Schedule C when you file your taxes.
Form 1099-NEC
Use this form if you paid at least $600 to a nonemployee, such as a personal assistant or a lawyer, who rendered you business-related services. You may be issued this form to be used when completing Schedule C if you performed services for another individual or business.
Schedule C
Use this form to report your income and losses from your side hustle when you file your yearly tax return.
Schedule SE
Use this form to report the Social Security and Medicare taxes you paid throughout the year, as declared on your quarterly filings of Form 1040-ES, when you file your yearly tax return.
Remember to consider your state’s tax codes when preparing to file your taxes. Every state has its own rules and regulations regarding income earned via side hustles.
How Do I Calculate My Quarterly Estimated Taxes?
It’s actually fairly straightforward.
To calculate your federal income tax withholding, follow these steps:
Step 1: Calculate the net income from your side hustle for the quarter by subtracting your expenses from your gross income.
Self-employment tax is applied to 92.35% of your net income from side gigs, so …
Step 2: Multiply your net income by .9235.
Self-employed workers are taxed at 15.3%, so …
Step 3: Multiply your answer from Step 2 by .153.
The answer is the amount of estimated federal income tax you owe for the quarter.
Now, determine your social security tax, which is taxed 12.4%, so …
Step 4: Multiply your answer from Step 2 by .124.
The answer is the amount of estimated social security tax you owe for the quarter.
Then, determine your Medicare tax, which is taxed at 2.9%, so …
Step 5: Multiple your answer from Step 2 by .029.
The answer is the amount of estimated Medicare tax you owe for the quarter.
Step 6: Add your answers from Steps 3, 4, and 5 to determine your estimated taxes for the quarter.
Complete a Form 1040-ES and submit your payment by mail, by phone, online, or in the IRS2Go app.
Example: Angela is a copywriter working full-time at Company XYZ. She tends honeybees in her backyard to sell honey at her local farmers market, grossing about $3,000 this quarter.
Step 1: 3,000 gross income this quarter - 150 expenses this quarter = 2,850
Step 2: 2,500 x .9235 = 2,631.98 taxable side income per quarter
Step 3: 2,631.98 x .153 rate of federal income tax = 402.69 federal income tax withholding
Step 4: 2,631.98 x .124 rate of social security tax = 326.37 social security tax withholding
Step 5: 2,631.98 x .029 rate of Medicare tax = 76.33 Medicare tax withholding
Step 6: 402.69 + 326.37 + 76.33 = 805.39
Angela’s estimated taxes for this quarter = $805.39
Easy Estimating
The example above delineates each type of tax—federal income tax, social security tax, and Medicare tax—you should pay each quarter.
Form 1040-ES doesn’t require you to report each tax type separately. So, to make estimating easier, you can multiply your answer to Step 2 (your taxable side gig income) by .306 (total tax rate of 30.6%).
Angela’s Example: 2,631.98 x .306 = $805.39
You Must Report Income from Your Side Hustle.
Is your side gig worth it? Probably.
But you must report income from your side hustle to avoid penalties, interest, and otherl very unpleasant consequences.
If you enjoy the work you’re doing on the side and like the extra income, you should keep or start a side hustle.
For answers to your tax questions about a side gig, schedule an appointment with a knowledgeable tax professional at AMG Finance.
We’re here to help you with your taxes all year long.
