Why You Need A Separate Tax Strategy For Your Side Hustle

The gig and side hustle economy has reshaped the labor market. Trends in employment all highlight a shift from the traditional one-to-two income household to workers juggling multiple streams of income to stay financially afloat in a challenging economy. 8.9 million Americans now hold multiple jobs, the highest ever since the U.S. Bureau of Labor Statistics started tracking this trend in 1994.  It’s no surprise that second jobs and side hustles have grown in popularity and in demand as a flexible way to make ends meet. Although the job market has changed and increased the ability to earn more money, tax obligations have not. All income still needs to be reported to the IRS each year during tax season.

Understanding taxes on its own can be overwhelming and opaque. When filing and reporting supplemental income, the math behind paying taxes from a side gig or freelance work can be even less transparent and more shocking.  

If you have a side hustle, don’t forget to manage your tax obligations this season. Avoid costly mistakes with strategies on how best to manage the tax liability on your additional income.

Income from side jobs like delivery driving, contract work, freelance gigs, and selling goods and services typically does not withhold federal or state income taxes. Gig workers are considered independent contractors, responsible for paying their own taxes, unlike employees, whose tax withholdings are automatically withdrawn out of each paycheck.

According to the IRS, if you make more than $600 from goods and services outside of a conventional W-2 job, it must be reported on your tax returns. Be on the lookout for a 1099-K or 1099-NEC form from any businesses or services you’ve received income from to report on your personal taxes. Once you’re ready to file your personal taxes, additional income should be reported along with your employment tax documents, where your estimated tax payment on your profits will be determined.

Make sure to consult a Certified Professional Accountant or tax preparer regarding your specific tax situation on how best to navigate filing your additional income this tax season.

Good recordkeeping is essential to a good tax strategy for your side hustle. Tracking out-of-pocket expenses and costs related to your side job will benefit you when filing during tax season.

Business losses and expenses help lower your taxable income and can be used as itemized deductions. Expenses incurred and equipment needed to carry out your side gig should be reported on your personal taxes to offset your tax liability. Ordinary and necessary business expenses can include home office or vehicle use by mileage, equipment and other costs associated with the job. Having a good record-keeping strategy for these expenses will help you be better prepared for filing your taxes.

A separate bank account for your side hustle keeps personal and business expenses separate and helps track costs to report these deductions in your tax filings. Keep physical and digital receipts of business-related expenses like supplies, home utility costs like your internet bill if your side job requires you to work from home and mileage and travel costs. Detailed records of your out-of-pocket costs related to your side job will make filing your personal taxes more efficient and lowers what you’ll potentially owe to the IRS.  

If you are expecting a sizable revenue stream with your side gig, consider paying your taxes in advance throughout the year to avoid a large bill to the IRS during tax season. When making quarterly payments to the IRS, you are manually withholding earned wages to proactively pay taxes on that income. This strategy is on a case-by-case basis, depending on whether your earnings are significant or only a few extra bucks. Quarterly tax payments help lower your liability when filing your personal taxes, as it spreads your payments over time throughout the year vs. a lump sum.

Take control of your own tax liability and set aside some of your earnings to be prepared for any estimated tax payments you may have to make come tax season. Utilize a high-yield savings account and stash away a percentage of what you make from your side gig.

If you are a contractor, self-employed, or have a side job, the general recommendation is to save around 25-30% of your income to cover your tax liability, according to the national tax services company Jackson Hewitt. This percentage is in line with what would normally come out of your paycheck for federal and state taxes and helps cover future tax payments. Every tax situation is different, however, and in some cases, saving less or more for your estimated tax bill may be ideal. A good rule of thumb is to set aside some of your income made from your side hustle, no matter how small, as taxes will always be owed on the total amount every tax season.