Summer often brings opportunities for people to take on side gigs, whether it’s freelancing, working in the gig economy, or earning extra income through a part-time job. While these side hustles can be a great way to boost your income, they also come with specific tax obligations that you need to be aware of. Understanding the tax implications of your side gigs is essential to avoid penalties and ensure you’re making the most of available deductions. In this blog, we’ll explore the key tax considerations for summer side gigs, including estimated taxes, self-employment tax, deductible expenses, and how to properly report your income.
1. Understanding Side Gig Income and Its Taxability
All income you earn from your side gigs is taxable, whether you’re driving for a rideshare company, freelancing as a graphic designer, or selling handmade crafts online. The IRS considers this income as self-employment income, which means you’re responsible for reporting it on your tax return.
What Counts as Side Gig Income?
Payments from clients for freelance work
Income from gig economy platforms like Uber, Lyft, or Airbnb
Sales from online marketplaces like Etsy or eBay
Tips received for services provided
Any other income earned from side activities or hobbies that generate profit
1099 Forms and Other Income Reporting:
If you earn more than $600 from a single client or platform, you should receive a Form 1099-NEC (Nonemployee Compensation) or 1099-K (Payment Card and Third Party Network Transactions). However, even if you don’t receive a 1099, you’re still required to report all income.
Keep in mind that income is taxable regardless of whether it’s reported on a 1099 or not. Failing to report all your side gig income can lead to penalties and interest.
Pro Tip: Keep detailed records of all your side gig earnings, including payments received through cash, checks, or electronic transfers. Use accounting software or a simple spreadsheet to track your income throughout the year.
2. Estimated Taxes: Avoiding Underpayment Penalties
One of the biggest differences between a side gig and traditional employment is that taxes aren’t automatically withheld from your side gig income. This means you’re responsible for paying estimated taxes throughout the year to avoid underpayment penalties.
What Are Estimated Taxes?
Estimated taxes are quarterly payments made to the IRS to cover your tax liability on income that isn’t subject to withholding. This includes income from side gigs, self-employment, investments, and more.
Estimated taxes cover not only your income tax but also self-employment tax (more on that below).
When Are Estimated Taxes Due?
Estimated tax payments are due quarterly on the following dates:
April 15
June 15
September 15
January 15 of the following year
Missing these deadlines can result in penalties and interest charges, so it’s important to stay on top of your estimated payments.
How to Calculate Estimated Taxes:
To calculate your estimated taxes, you’ll need to project your total income, deductions, and credits for the year. The IRS provides Form 1040-ES, which includes a worksheet to help you estimate your tax liability.
If you’re unsure how much to pay, consider working with a tax professional who can help you determine the correct amount and avoid underpayment penalties.
Pro Tip: Set aside a portion of each payment you receive from your side gigs to cover your estimated taxes. Opening a separate savings account for tax payments can help you avoid spending money that you’ll need to pay the IRS later.
3. Self-Employment Tax: What It Is and How It Affects You
In addition to regular income tax, side gig income is also subject to self-employment tax. This tax covers Social Security and Medicare contributions, which are typically withheld by employers for W-2 employees. As a self-employed individual, you’re responsible for paying the full amount.
What Is Self-Employment Tax?
The self-employment tax rate is 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare.
Unlike traditional employees, who have half of their Social Security and Medicare taxes paid by their employer, self-employed individuals must pay both the employer and employee portions.
How to Calculate Self-Employment Tax:
Self-employment tax is calculated on your net earnings from self-employment, which is your total side gig income minus any allowable business expenses.
Use IRS Schedule SE (Form 1040) to calculate and report your self-employment tax.
The Self-Employment Tax Deduction:
While self-employment tax can increase your overall tax liability, there’s a silver lining: you can deduct half of your self-employment tax when calculating your adjusted gross income (AGI). This deduction helps reduce your taxable income, which can lower your overall tax bill.
Pro Tip: If self-employment tax comes as a surprise, consider setting aside more from your side gig income to cover this additional tax burden. Planning ahead can prevent a large tax bill at year-end.
4. Maximizing Deductions for Your Side Gig
One of the advantages of earning income from a side gig is the ability to deduct business-related expenses from your taxable income. Properly tracking and deducting these expenses can significantly reduce your tax liability.
Common Deductible Expenses:
Home Office Deduction: If you use part of your home exclusively for your side gig, you may qualify for the home office deduction. This includes a portion of your rent or mortgage, utilities, and other related expenses.
Supplies and Equipment: Deduct the cost of supplies, tools, and equipment used for your side gig, such as a computer, software, or materials.
Mileage and Vehicle Expenses: If you use your vehicle for business purposes, you can deduct either the actual expenses (such as gas and maintenance) or take the standard mileage rate (58.5 cents per mile for 2022, for example).
Advertising and Marketing: Deduct the cost of promoting your side gig, including business cards, website hosting, social media ads, and other marketing expenses.
Continuing Education: If you take courses or attend workshops to improve your skills related to your side gig, these costs may be deductible.
Keeping Records for Deductions:
It’s crucial to keep detailed records of all your business expenses, including receipts, invoices, and mileage logs. These records will support your deductions in case of an audit.
Consider using accounting software or a mobile app to track your expenses throughout the year. This can make it easier to categorize expenses and ensure you don’t miss any deductions.
Pro Tip: Be cautious about mixing personal and business expenses. Only expenses that are directly related to your side gig are deductible, and commingling funds can complicate your record-keeping.
5. Properly Reporting Your Side Gig Income
Reporting your side gig income correctly on your tax return is essential to avoid penalties and ensure compliance with IRS regulations. Depending on the nature of your side gig, you may need to file additional forms with your tax return.
Schedule C (Form 1040):
Most side gig income is reported on Schedule C, Profit or Loss from Business. This form allows you to report your income and deduct any business expenses to calculate your net profit or loss.
The net profit from Schedule C is then carried over to your Form 1040 and included in your total income for the year.
Schedule SE (Form 1040):
As mentioned earlier, you’ll use Schedule SE to calculate your self-employment tax based on your net earnings from self-employment.
Don’t forget to take advantage of the deduction for half of your self-employment tax on Form 1040.
Other Considerations:
If your side gig involves selling products, you may need to consider sales tax collection and reporting requirements, depending on your state’s laws.
If you hire others to help with your side gig, you’ll need to consider payroll taxes, workers’ compensation, and other employer responsibilities.
Pro Tip: Filing your taxes as a self-employed individual can be more complex than filing as a traditional employee. Consider working with a tax professional who can help you navigate the process and ensure that all income and deductions are properly reported.
Conclusion
Taking on a side gig during the summer can be a rewarding way to earn extra income, but it’s important to understand the tax implications that come with it. From making estimated tax payments and calculating self-employment tax to maximizing deductions and properly reporting your income, there are several key considerations to keep in mind.
At QuickTaxes, we’re here to help you navigate the complexities of side gig taxes and ensure you stay compliant with IRS regulations. Whether you’re new to freelancing or a seasoned side hustler, our team of tax professionals can provide the guidance you need to minimize your tax liability and avoid costly mistakes. Contact us today to learn more about how we can support you during tax season and beyond.
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