Maybe you’re driving for Uber or Lyft. Maybe you’re tutoring or babysitting. Maybe you’re freelancing for a former employer. If your side hustle is successful, you may need to pay taxes. And it’s not as simple as reporting your W-2 income and claiming the standard deduction.
“Side hustle income is considered ‘self-employed’ income by the IRS. There are a set of rules that are applied with self-employed income. Yet most ‘traditionally employed’ people may not be so well versed on them,” says Eileen Maki, a tax and accounting analyst at FitSmallBusiness.com.
These nine tips can help you stay on top of the tracking and taxes you need to manage for your side hustle.
1. Track your finances carefully
“Whether your side hustle is earning a few hundred dollars or a few thousand, it is vital that you keep track of your income and expenses in the event of an audit. There are several apps such as QuickBooks Online that offer beneficial features such as a virtual receipt bank and mileage tracking. Keep those receipts and track your miles or you may find yourself on the wrong side of an audit with the IRS,” says tax expert Jessica Smith, an enrolled agent at DuFord Law in San Diego.
2. Deduct your expenses
You’re probably spending money to grow your business, and you can likely deduct a lot of those costs — and knock a big chunk off your tax bill. Vincenzo Villamena, managing partner of the CPA firm Global Expat Advisors, says, “Supplies, equipment, phone (at least partially), and even home office are categories that you may look to partially or fully deduct.”
And pay attention to expenses you might not think are deductible. “For example, cable TV is usually not an allowable deduction, but if you are self-employed in the media and advertising industry the IRS allows you to write off your cable bill as an educational expense because it is required to keep up with current media trends,” says George Birrell, a CPA with Taxhub.
You can deduct travel expenses, if you’re careful. Nathan Wade, managing editor for WealthFit Money, says, “Because the IRS has a narrow definition of what qualifies as ‘business travel,’ it is important to carefully analyze how each expense included in your itinerary can be accounted for in your tax deductions. Everything from lodging expenses to dinner with a client or an investor can be eligible to qualify as a business travel deduction.”
3. Plan for your self-employment taxes
As your own boss, you’re responsible for the employee and employer portions of Social Security and Medicare, says Riley Adams, a CPA who runs the personal finance site Young and the Invested.
4. Begin paying your quarterly estimated taxes
If you anticipate showing a profit in 2020, start planning now. Villamena recommends setting aside 25 to 35% of your taxable income for quarterly tax payments. “When you develop a sense for the potential taxable income your business will earn over a year, you will want to avoid getting hit with underpayment penalties,” he says.
Chad Pavel, CPA, owner and founder of New York City-based Pinewood Consulting, LLC, says, “Many of our first-time entrepreneur clients come to us after they forgot to pay estimated taxes during the year and received surprises bills from the IRS or their home state. The penalties and interest from the IRS can climb into the ten of thousands quickly if you don’t properly plan.”
5. Don’t be afraid of the home office deduction
“You may have heard that the home office deduction is a huge audit red flag,” says Logan Allec, the CPA behind the personal finance blog Money Done Right. “While this may have been true in the past, it isn’t anymore.
The IRS understands that it’s 2020 and that working from home in a dedicated home office is extremely commonplace.”
To qualify, you need a space in your home dedicated to your side hustle. “If you didn’t have such a qualifying space in 2019 — you did your work from the kitchen table, your comfy bed, or a local coffee shop — consider dedicating a space or room in your house as an area that is only used for your side hustle. This way, you will be able to claim a home office deduction when doing your 2020 tax returns,” Allec says.
6. Report your income, even if your clients don’t
“Just because you didn’t receive a Form 1099 for some or all of your side hustle income doesn’t mean you don’t have to report it,” Allec says. “The IRS requires you to report all compensation for services on your tax return, whether it’s reported on a 1099 or not.”
7. Save for your retirement, and save on your taxes
You can reduce your tax bill by contributing to your retirement account. “I see so many people over 50 with under $10k in their retirement plan, it’s shocking,” Villamena says.
8. File for an extension if you need to
“Many side hustlers feel overwhelmed by the tax filing process,” Allec says. You can file for an extension until October 15. That extends the time to file but not the time to pay. You should estimate what you’ll owe and pay that amount by April 15, he says.
9. Look ahead and reassess your structure
You may have set up your side hustle as a sole proprietorship to start. As your business grows, it could make sense to restructure as an LLC or S Corp. A tax pro can help walk you through the pros and cons of the various options.