Tax Rules for Your Side Hustle

Shiloh Johnson
By Shiloh Johnson

Many people start a side hustle looking to earn some extra cash outside of their 9 to 5. Earning more can be a wonderful way to supplement income, but can lead to some tax complications if you’re not careful. As a W-2 employee, your taxes are directly taken out of your paycheck and submitted to the state and federal government. Then, you submit a tax return to “true up” those prepayments on April 15. But if you’re a side hustler earning substantial money, the IRS wants their cut and doesn’t want to wait. If you wait until tax time to deal with your side hustle taxes, you could be hit with an underpayment penalty and large tax bill. 

Side hustling and taxes 

If your side hustle’s main purpose is to make a profit and is continuous, the IRS considers you self-employed. Even if you don’t make a ton of money, according to the IRS you’re running a business and need to be taxed on that income. As a “business” you’re required to pay all of the taxes, including the Self-Employment Tax (which is already 15.3%), as you’re considered the employer and employee. That amount covers Social Security and Medicare taxes. When you work a 9 to 5, your employer pays half of that and you cover the rest. 

As a full-time employee, your taxes are being withheld as you earn your money. When you work a side hustle, instead of taxes being withheld, the IRS wants you to withhold your taxes yourself and pay them as you earn. 

Generally speaking, when you are side hustling, you’re receiving 1099 income as a contractor, which is paid without consideration for tax. It’s up to you to put aside money to meet your tax obligation. A solid benchmark is saving 30 percent of your income for taxes. I know that probably seems like a lot, but as a contractor, you are required to pay and you will want to avoid an annoying tax bill.

Making quarterly tax payments 

If you think you’ll owe more than $1,000 in taxes on your side hustle, you’ll want to start paying quarterly taxes (every three months). Side hustlers and self-employed folks make tax payments on the income they earned at the end of each quarter. To pay quarterly taxes, you will need to submit an estimated payment voucher along with your form of payment. At the end of the tax year you will include those payments on your Schedule C  that is filed along with your 1040 tax return. When you earn more than $600 with a client, you should receive a 1099 form from that client that sums up all payments made during the prior year. This form is due to the service provider and the federal government by January 31 of each year. 

Earned less than $600? Sorry, but you’re still going to have to report it even if no 1099 was received.

The good news is that if you are considered self-employed, you can also take advantage of business deductions of certain expenses. So if you’re an Uber driver you may be able to claim some mileage and lower your taxable income. Lowering your taxable income can help reduce your tax bill. NOTE: On top of paying quarterly taxes to the federal government, you might need to pay quarterly state taxes as well. Check with your state of residence to confirm.

Here’s a breakdown of payment deadlines:

  • For income earned from January 1 to March 31, you’ll make estimated quarterly tax payment by April 15. 
  • Income earned from April 1 to May 31 is paid by June 15. 
  • Income earned from June 1 to August 31 is paid by September 15. 
  • Income earned from September 1 to December 31 is paid by January 15th of the next year. 

Bottom line

Making quarterly payments can ensure you’re in good standing with the IRS and avoid any tax surprises. Whether you have to make quarterly payments or not, you’ll have to pay taxes on your side hustle income. 

Shiloh Johnson
By Shiloh Johnson
Shiloh Johnson is a long-time CPA and founder of ComplYant, a technology platform offering business owners and entrepreneurs a simple way to manage tax rules and requirements.

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