Does your side hustle bring in cash?

Whether it’s a rideshare service, freelance writing, home-based childcare, or handmade goods, side hustles can be a great way to get a financial boost.

But this gig-style work does have tax implications that can quickly turn a lucrative side hustle into a nightmare.

To protect your livelihood, we’ve highlighted the key things to expect when it comes to freelancers and their taxes.

1. All Income Needs to be Reported

According to the IRS, any income that is earned must be reported regardless of the total. Despite this rule, many workers tend to leave out small amounts, thinking they don’t matter, especially since 1099-K forms are not typically issued for them.

But, every payment is the responsibility of the filer to claim. To help with filing, platforms like PayPal and eBay are usually able to send a 1099-K form outlining payments made throughout the year. However, these are not guaranteed for every user so be sure to calculate earnings regularly and track them as they come.

2. Prepare for Self-Employment Tax

Most people working a side hustle are surprised to learn that they need to pay self-employment tax on top of what they earn.

Since Social Security and Medicare taxes are not included in freelance or gig pay, the IRS expects these amounts to be made after the payment is received, which means that gig workers should be setting aside some of their earnings to pay it. The amount that is taxed is currently at 15.3%, which can be a devastating amount to have to pay back if you were unaware.

3. Consider Deductions

Certain expenses related to a side hustle could be claimed as a deductible. For example, people working for a rideshare or delivery company, using their own car, will be able to deduct gas, insurance, and mileage used to make the business trips.

For freelancers claiming deductibles, it is important to document each one carefully by saving and categorizing it in case a copy is requested as proof. Freelancers should also consider the type of deductible (standard or itemized) to see which will get them more money back.

4. Prepare for A 1099-K or 1099-NEC Form

Freelancers and gig workers have specific tax forms that need to be filled out. Anyone that received over $600 directly from a client (check, direct deposit, cash, etc.) needs to have them issue a 1099-NEC form for the work.

However, for payments made through third-party payment apps (like PayPal or Cash App) a different form is needed to summarize the work, which is known as a 1099-K.

5. Speak With a Professional

Ultimately, taxes can quickly get overwhelming, especially for those that juggle multiple jobs and income streams. That’s why it’s best to speak with a professional that can assess your situation and inform you of all your tax obligations. That way you can maximize your return without the worry of an unexpected bill.

If you’re a freelance worker that needs help navigating tax requirements, connect with us at A.P. Accounting & Tax Services for a personalized assessment.

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