The best way to handle taxes for your side hustle is to prepare for them.
Spoiler Alert….yes, you need to report all income over $600. (check the irs website as it may change from the time I’ve written this post)
A side hustle is a great way to earn extra income to achieve your financial goals. It can expedite debt reduction, buying a home, paying for a wedding, increasing your savings, or investing in your retirement.
However, be aware that some side hustles jobs do not deduct taxes from your paycheck. Therefore, leaving it up to you to properly prepare for tax day.
Before you get that first payment from your side hustle job, make sure you have a tax savings plan.
Do you pay taxes on all side hustles?
If you earn money, you will pay taxes. How much you pay depends on how much you earn.
How do I know if I need to save for side hustle taxes?
Are you an employee or an independent contractor? Employees have taxes withheld from their paychecks. Independent contractors do not. Most companies such as Uber, Doordash, Postmates, Grubhub, Twitch, and affiliated marketing companies, consider you an independent contractor and therefore do not deduct taxes from your income.
If you are unsure, check your pay stub or earnings statement. Look at the deductions section. Is money deducted for taxes?
If there is no money deducted for taxes, it is up to you to pay them.
What if you have your own business, such as consulting, tutoring, coaching, or landscaping? In this case, you receive payments from clients and not a company. You must keep track of your earnings and report them on your tax return.
Again, put a percentage of that pay aside for your tax liability.
How much money should you save to handle taxes on side hustle earnings?
Saving anywhere between 20%-35% of your side hustle income is a decent amount. Therefore, put aside $20-$35 for every $100 you earn.
Keep in mind that this percentage depends on your situation and how much income you end up earning. If you are not sure, ask your tax advisor to help you estimate.
My husband earns an irregular income. Similar to most side hustles, he is on the hook for paying his taxes. We save anywhere between 40-50% of his pay for taxes.
There are some years that the savings cover all of it and other years where our tax liability was lower than expected. We saved more than we needed to. When this happens, we have the extra money in our savings to apply toward other financial goals.
Reporting side hustle income
Each year Independent contractors are issued 1099 statements from all companies they received payments from for the year. The information on these forms determines tax liability. Because you are a diligent saver, you should have no problem making your payment.
How do you handle taxes if you are earning a lot from your side hustle?
Side hustle money can add up fast, especially if you are a hustler. If this is you, I suggest speaking with your tax advisor for the best course of action. Your advisor might suggest paying quarterly estimated income taxes or adjusting your deductions with your primary employer.
Reporting expenses for your side hustle
As an independent contractor, you are allowed to deduct business related expenses to reduce your tax liability. Keep track of your miles driven for business purposes as well as all receipts for business expenses. Your tax advisor will need this information when preparing your tax documents.
Final words on how to handle taxes on your side hustle
Don’t let income taxes steer you away from working that side hustle. As long as you put money aside to cover your tax liability, you will be okay. Be aware and prepare.
If you have any comments or questions, please let me know. I am happy to help.
Stay balanced,
Jill