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Are you a full time employee who also has a “Side Hustle” (Small Business, Part Time)? Are you in the Gig Economy? If you fit into either of those, you are a self-employed individual for that income.
If you do, there are important tax issues that you need to be aware of and plan for.
If you receive income from a Side Hustle, it’s generally taxable even if you don’t receive a Form 1099-MISC, Miscellaneous Income, 1099-NEC, Form 1099-K, Payment Card and Third Party Network Transactions, Form W-2, Wage and Tax Statement, or some other income statement. This is true even if you are paid in cash. On the other hand, depending upon the circumstances, some or all of your business expenses may be deductible, subject to the normal tax limitations and rules.
I encourage everyone with a Side Hustle, or is in the Gig Economy, to understand the potential tax issues affecting them.
The following tax issues may apply to those with a Side Hustle:
Issues for Individuals Performing Services
Taxpayers with a Side Hustle need to keep several tax components in mind throughout the year, not just when it comes time to file the tax return.
Important areas include these:
Filing Requirements
If you received a payment during the calendar year as a self-employed individual, 99% of the time you will need to file a Schedule C, Profit or Loss From Business and include that on your form 1040.
Employee or Independent Contractor
If you are providing services and are not certain whether you are an employee or independent contractor, you should call me to discuss. Just because someone wants to pay you as a subcontractor, doesn’t mean you are one. There are very specific rules governing this distinction. Business owners save a lot of money if they pay you as a subcontractor, so they will tend to NOT classify you as an employee.
Tax Payments: Those with a Side Hustble May Need to Make Estimated Payments
You may make estimated tax payments to pay tax on income that isn’t subject to withholding (such as income from self-employment and rental activities). You may also make estimated tax payments to avoid penalties if the amount of income tax withholding from your salary, pension or other income is not enough to cover your tax for the year.
Taxes are pay-as-you-go, and making estimated tax payments is HOW you pay-as-you-go. Taxpayers use estimated tax payments to pay both income tax and self-employment tax (Social Security and Medicare). If you don’t pay enough tax, through either withholding or estimated tax, or a combination of both, you may have to pay a penalty. The payment of estimated tax for the income for the first quarter of the calendar year (that is, January through March) is due on April 15. Payments for subsequent quarters are due on June 15, September 15 and January 15. If you don’t pay enough by these dates you may be charged a penalty even if you’re due a refund when you file your tax return.
If you also work as an employee, you can often avoid needing to make estimated tax payments by having more tax withheld from your paycheck. This may be a particularly attractive option if, for example, your Side Hustle activity is merely a side job or part-time business. To do this, fill out a new Form W-4 and give it to your employer. The Withholding Calculator is a helpful resource.
If you do have a Side Hustle, then your tax situation has become more complicated and you should consider hiring a CPA to help you calculate your projected tax liability as well as to give you direction on bookkeeping and accounting.
Self-Employment Taxes
Self-employed workers are taxed differently from employees. Self-employed individuals (e.g., independent contractors) must pay self-employment tax. Self-employment tax consists of Social Security and Medicare taxes, and with no employer-matching of these taxes, self-employed individuals pay the full amount of Social Security and Medicare taxes themselves. However, don’t confuse it with income tax or estimated taxes. Self-Employment tax is 15.3% of your NET Side Hustle income, on top of your ordinary income tax you pay.
Depreciation
Depreciation is an income tax deduction for wear and tear and deterioration of property with a life longer than a year. It’s an annual allowance that lets you recover, over time, the cost or other basis of certain property you own. The kinds of property you can depreciate include machinery, equipment, buildings, vehicles and furniture. You can’t claim depreciation on property held for personal purposes. If you use property, such as a car, for both business or investment and personal purposes, you can depreciate only the business or investment use of that property. Other special rules and limits often apply, especially if you are an employee rather than an independent contractor. In some instances, you may qualify for one of the simplified options, such as the standard mileage rate for business use of a car or the simplified method for claiming the home office deduction.
Business Expenses
The tax code allows you to deduct certain costs of doing business from gross income. Generally, you cannot deduct personal, living or family expenses. You can deduct the business part only, such as supplies, cell phones, auto expenses, food and drinks for passengers, car washes, parking fees, tolls, roadside assistance plans, taxes, and incentives associated with certain electric and hybrid vehicles.
It’s important to keep good records. Choose a recordkeeping system suited to your business that clearly shows your income and expenses. The business you’re in affects the type of records you need to keep for federal tax purposes. Your recordkeeping system should include a summary of your business transactions. Your records must also show your gross income, as well as your deductions and credits. Federal law sets statutes of limitations that can affect how long you need to keep tax records.
Issues for the Companies Providing YOU Services
Do YOU pay anyone more than $600.00 in one calendar year for services? If so, you may need to give them a form 1099-MISC at year end to report that.
Even if it is part time, a Side Hustle is a business which brings much complexity to your tax situation than being an employee.
We are here to help you every step of the way to make sure you stay compliant with the tax laws, and to minimize your tax liabilities by educating you on what deductions you can take.
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Please reach out to me without hesitation with any tax, business or accounting question, and to schedule a consultation.
Tax Laws are complex.
It is very easy to make mistakes that can incur penalties.
Do you have a Tax, Accounting or Business Question?
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Remember,
“If We Aren’t Working For You, Then You Aren’t Working At Your Best”
Chris Whalen, CPA
(732) 673-0510
81 Oak Hill Road
Red Bank, NJ 07701
www.chriswhalencpa.com
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