By Maurie Backman, The Motley Fool
Side hustles are all the rage these days, and they're instrumental in helping millions of Americans boost their savings, pay off debt, and have more money on hand for leisure, large purchases, or everyday bills. But one drawback to having a second income source is that it can make the process of filing taxes a bit more complicated. Here are a few things you need to know if you earn a side income on a freelance basis.
1. You must report all of your side income.
The IRS is, unfortunately, entitled to a piece of every dollar you earn, whether it comes from your main job or a client you work for on the side. And if you make the mistake of not reporting your side income, you could easily secure yourself a spot on the IRS's audit list.
Each company you work for on the side that pays you $600 or more in a single year should provide you with a 1099 form summarizing your earnings. But if you earned less than $600 from the same client or have a client that paid you more but for some reason does not send you a 1099, you'll still need to report that income, even if it means combing through your bank account statements to figure out what it amounts to.
2. You could owe money on your taxes if you didn't make estimated payments during the year.
If you're a salaried worker, you're probably used to having taxes taken out of your paychecks as you go. When you work a side gig on a freelance basis, it's up to you to pay a portion of your income to the IRS as you earn it. Specifically, you're supposed to make quarterly tax payments on that income in January, April, June, and September. If you earned a substantial amount of money on the side last year and haven't yet paid taxes on it, expect to owe the IRS its share this April. Whether you're subject to a penalty for underpaying your taxes will depend on a number of factors, such as how much tax you owe.
3. You might be entitled to a home office deduction.
If you do your side hustle from home and there's a dedicated space within your home where you perform that work, you might be entitled to claim a home office deduction when you file your taxes. For example, if you're a teacher who sells crafts on the side and you have a room in your home that you use as your work studio, you can take a deduction for that space.
There are two ways you can calculate a home office deduction. First, you can use the simplified method of giving yourself $5 per square foot of office space, up to a total of 300 square feet, or $1,500. Your other option is to add up your direct and indirect expenses associated with that office to determine your deduction. Direct expenses are those needed to perform your work; they might include computer paper and ink to print out invoices and packing slips. Indirect expenses are those associated with your home as a whole, like utilities, and they can be deducted on a proportionate basis. For example, if you have $15,000 in home expenses, and your home office (or studio, in this example) takes up 10% of your home, you get a $1,500 deduction.
4. You can deduct the cost of earning your side income.
Sometimes you have to spend a little money to bring in money. And if that's the case, the expenses you incur in the course of your side hustle are deductible on your tax return. For example, if you drive for a rideshare company on the side, you can deduct the cost of gas, car washes, and tolls. If you do web design work on the side, you can deduct the cost of buying new computer equipment. Just be sure to have receipts on hand so you can not only accurately total your expenses but also have a means of backing up your claims in case the IRS comes asking.
Having a side gig is a great way to buy yourself financial flexibility. Just be aware of the tax consequences -- both positive and negative -- that might ensue.
See more at The Motley Fool
