These days, it seems like everybody and their uncle has a “side hustle.”
From delivering for Uber Eats and Instacart to selling crafts on Etsy to teaching English online to renting out your front yard for dog parties on Sniffspot (yes, this is a real thing), there seems to be no end to the available part-time gig options for scoring some extra cash. And we know that many of you in Connecticut have joined in on those opportunities. A little side hustle can go a long way.
But with all of these extracurricular income activities, there is a hidden danger lurking on your tax return.
Rest assured…we can help you optimize this part of your tax strategy.
But first, a brief reminder…
There is just one week remaining before the deadline to file and pay your 2020 federal taxes.
That’s right, one more week. It’s crunch time New Haven County friends.
If you have ANY issues, we need to talk. Extensions are very common right now … but you should also know that extension of time to file is NOT the extension of time to pay. So, if you owe tax, we need to make sure you pay close to the right amount, regardless of whether we file a finalized return.
Let’s get you scheduled ASAP:
Now … about those side hustles.
The Tax Trap Side Hustlers Need to Know About
“Before you talk, listen. Before you react, think. Before you spend, earn. Before you criticize, wait. Before you pray, forgive. Before you quit, try.” – Ernest Hemingway
Earning some extra cash from a side hustle is something many are doing these days. Here are some tax implications we want you to know about so you can hold onto as much of it as you can.
In most situations, you’ll be earning this extra income as an independent contractor, rather than as an employee. As a point of clarification, you may hear the following terms bandied about in relation to the gig economy:
- Independent contractor
- Sole proprietor
- Schedule C business
- 1099 contractor
Here’s the important part: All of these terms mean the exact same thing.
In other words, if you’re delivering for DoorDash on the weekends, you’ve now become the self-employed owner of a Schedule C sole proprietorship business.
Now, let’s prepare you for what this means in terms of your new tax situation and responsibilities.
You’re Responsible for More Taxes
When you work a regular job as an employee, your employer pays half of the legally required Social Security and Medicare taxes, and you pay the other half.
But when you’re self-employed, you pay both halves.
It’s not exactly a tiny tax either. The self-employment tax rate is 15.3%, which is in addition to your income taxes. The good news is you only pay this 15.3% on the self-employment income — not the wages you earn from your day job.
Speaking of the income taxes, this extra income you’re making from the side hustle may end up pushing you into a higher tax bracket, further increasing your tax liability. However, we’re here to help you figure out how to navigate that.
You’re Responsible for More Frequent IRS Payments
In the United States, we have what is called a “pay-as-you-go” tax system. Basically, the government expects to receive their cut of your income on a pretty regular schedule and in a timely manner.
At your regular job, your employer takes care of this in a seamless fashion. You don’t even have to pay attention to the schedule of tax payments your employer makes.
But now that you’ve also got some self-employment income coming in from that side hustle, you do need to care. While there are exceptions, most self-employed individuals fall into a quarterly tax payment schedule. These tax payments, called estimated tax payments, are due on April 15, June 15, September 15, and January 15.
If you can somewhat closely predict what your gig economy income will be for the year, there is another option. Instead of paying these quarterly estimated tax payments directly, you can increase the tax withheld from your paychecks at your regular job to balance out what the IRS is getting paid throughout the year. This involves just a little bit of number crunching, which we’d be happy to help you with.
You’re Responsible for More Recordkeeping
Since you are now a business owner (thank you side hustle), you need to keep records like one. This is not only a legal requirement, but it’s also something that you’ll want to do for another reason: Claiming business deductions.
That’s right! Now that you’re a business owner, you’re going to have expenses you get to deduct on your shiny new Schedule C. We’ll want to see receipts for these expenses when we prepare your tax return. These deductions are subtracted from your business income, lowering the dollar amount that you have to pay tax on.
In addition to expense receipts, there are other important records you’ll need to keep, depending on the kind of side hustle work that you’re doing. For example, if you’re doing any sort of delivery driving with your vehicle, you’ll want to maintain a daily mileage log, which shows miles driven, date driven, and a description of the business purpose.
If you’re using a dedicated space in your home for running your new business, you’ll also want to keep records for another tax deduction related to the business use of your home. You’ll want to note the use of space, square footage numbers, and expenses for things like utilities, insurance, and rent in order to calculate this tax benefit.
The exact recordkeeping will depend on what you’re doing.
Again, we’d be happy to help you set this up to get you the maximum tax breaks allowed.
You’re Responsible for Filing More Tax Forms
In addition to the new Schedule C you’ll need to file for your new side hustle, there are a few other forms you might need to file. There’s the Schedule SE for Social Security and Medicare taxes. Perhaps a Form 8829 for that business use of your home. If you trade in an old car you used in the side hustle for a new car, there’s a Form 4797 in your future.
There will also be some additional state obligations lurking underneath the surface in addition to the federal requirements we’ve been discussing.
Side hustlers, are you prepared for all this? Of course you are! Why? Because you don’t have to do it all alone. You go do what you do best in your side hustle, and we’ll take care of the tax stuff for you. To get started, you know what to do:
To getting things done,
Emelia Mensa EA, CPA