1 Important Thing to Know if You Made $600 or More From Your Side Hustle
- The money you earn from a side gig is income the IRS gets a piece of.
- Once you earn $600 or more from the same company, that company is subject to specific reporting requirements.
Work a side gig? Here's why $600 is an important number to keep in mind.
You may have different reasons for picking up a side hustle. Maybe you need money to pay off your credit cards. Or maybe you simply want to boost your savings account balance without having to cut back heavily on spending.
Some side hustles are easier than others to account for from a tax perspective. That's because in some cases, you may be put on a company's payroll and have taxes deducted from your paychecks regularly.
But some side hustles might pay you on a freelance basis. And that's where taxes get more complicated.
All side hustle earnings are taxable
If you do a side hustle where you're paid on a freelance basis, you won't have taxes withheld from your earnings. So, say you're a writer and you charge clients $50 an hour. If you do 10 hours of work for a given client who pays you on a freelance basis, you'll get a check for $500. But that $500 isn't all yours to keep. Rather, you'll owe a portion of it to the IRS, the same way the IRS is entitled to a chunk of your regular paycheck.
It's really important to keep good records of your earnings when you have a side hustle, no matter how much you make. That said, once you earn $600 or more from the same company, certain reporting rules kick in that may make filing your taxes easier.
Any time a company pays you $600 or more directly, it's supposed to send you a 1099 form summarizing your income for the year. Now this isn't to say every company that's supposed to send a 1099 form will do so. But technically, that requirement is there, so if there's a company you worked for last year that paid you $1,000 but you've yet to get a 1099, you should absolutely feel free to reach out and ask for that form.
But even if you don't end up getting that form, you still must report your earnings to the IRS. You should also know for every 1099 that gets issued, the IRS receives a copy. So if you get a 1099 form showing you earned $700 from a given company last year and you're inclined to pretend it doesn't exist, don't do that -- it's a good way to get your tax return audited.
Different rules for third-party payment platforms
Companies that pay you directly on a freelance basis are supposed to issue you a 1099 when your earnings reach $600. But the rules used to be different for third-party payment processors.
Prior to 2022, third-party payment processors only had to issue 1099 for freelancers whose annual payments totaled $20,000 across more than 200 separate transactions. But starting in 2022, the rules are different.
Now, third-party payment processors will be required to issue a 1099 at the $600 threshold, regardless of how many transactions occurred. The purpose of this change is not only to potentially avoid tax underpayments, but to also make it easier for the self-employed to report their earnings.
Although there are plenty of benefits to having a side hustle, that second gig could make your taxes more complicated. Ultimately, you shouldn't have to worry about the IRS penalizing you as long as you follow the basic rule of reporting all of your income and paying taxes on it, regardless of whether you have forms documenting it.
Alert: highest cash back card we've seen now has 0% intro APR until 2025
If you're using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR for 15 months, an insane cash back rate of up to 5%, and all somehow for no annual fee.
In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2023 The Ascent. All rights reserved.