3 Things to Know When Filing Taxes for Your Side Hustle
Worked a side gig last year? Here's how to tackle your tax return.
- Side hustle income isn't always taxed upfront.
- If you had a side gig last year, you'll need to reconcile what you owe in taxes on your upcoming return.
Taking on a side hustle is a great way to improve your financial picture. The money you earn from that second gig could make it possible to pad your savings, work your way out of debt, or simply have more flexibility when it comes to higher-than-average bills. Unfortunately, that's something a lot of us are grappling with now thanks to rampant inflation).
But when it comes to filing taxes, working a side hustle could add a layer of complexity to the mix. If this year's tax return is your first to include side hustle earnings, here are some key points to keep in mind.
1. You must report all of your income
Usually, when you earn $600 or more on a freelance basis from the same client, that company will send you a 1099 form summarizing that income. But you may not get a 1099 in every situation. The absence of that form doesn't mean you're off the hook in terms of reporting your income to the IRS.
Failing to report income could have serious consequences, like penalties that cost you money. A good bet is to carefully look through your bank statements and make sure you're reporting every dollar you took in on the side.
2. You can deduct expenses you incurred to do your side work
If you incurred expenses in the course of working your side hustle, you're allowed to deduct them on your taxes -- provided you have receipts to back up your claims. Imagine you did work as a freelance photographer on the side in 2021. You may have spent money on equipment and driving back and forth to different places for photo shoots. Those are legitimate expenses you can deduct to minimize your tax liability for that gig.
3. You may or may not be penalized for an underpayment
If you earn a substantial amount of money from a side hustle that pays you on a freelance basis, it's a good idea to make estimated quarterly payments on your earnings during the year. If you don't, you could get stuck with a penalty for paying too little tax. If 2021 was your first year working a side hustle and you paid no tax on that extra money, you may have a penalty on your hands.
That said, you won't be penalized if you owe the IRS less than $1,000 in taxes as a result of your underpayment. So let's say that after accounting for your side hustle income and deductions, you owe the IRS $500 for 2021. You'll still need to pay that tax debt -- but you shouldn't be slapped with penalties since it's under that $1,000 threshold.
A side hustle could be a great source of added income that helps you more easily cover your bills and meet different financial goals. But it's important to understand how that gig might affect your taxes -- and take steps to minimize your liability come tax season.
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