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Using Business Expenses To Lower Side Hustle Taxes
What are side hustle taxes?
Starting a side hustle is a great way to make some extra cash. As they start to become more common, and the gig economy grows, the question on everyone’s minds is “Do you have to pay taxes on side hustles?” The answer is yes, you probably do. Maybe you started working as an Uber driver or selling custom keychains on Depop to supplement your W-2 income.
The IRS considers anyone who has a side hustle to be “self-employed.” From a tax standpoint, this means paying another 15.3% in self-employment taxes on top of the federal income tax. Before you start to spiral, take a moment to remember that you only have to pay taxes on your side hustle if you have a net income of $400 or more in a year. And, if you do have to pay that 15.3%, half of it is deductible – more on that later.
First, let’s talk about gross income. This will be shown on Form 1099, which you will receive from every entity that you worked for. Every independent contractor, freelancer, gig worker and self-employed individual should receive this form by the end of January.
And what is your net income? Also called Adjusted Gross Income (AGI), this is your taxable income for the year after deducting tax write-offs from your gross income. You can use a self-employed income tax calculator to help you figure this out. You will need all this information when you file Form 1040.
Key takeaways:
- You have to pay self-employment tax on side hustles if you make $400 or more in net income.
- You should receive any 1099 forms coming to you by the last day of January.
- You can write-off business expenses as tax deductions to lower your side hustle tax bill.
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How to pay taxes on a side hustle?
Just like income from any other source, self-employed individuals have to pay taxes on their side hustle income by the April 15 deadline (or the next working day if it is a weekend or public holiday). So if you were thinking about how to avoid paying taxes on your side jobs, I’m afraid there’s no way out.
One exception to this, as we mentioned earlier, is if your net income is under $400. If you're still struggling with your taxes, use a self-employment tax calculator to get a clear breakdown on how much you owe the IRS.
When you’re filing taxes for a side hustle, you will report all your income and business expenses on your Schedule C. To find industry specific tax write-offs you can claim and reduce your side hustle tax by using a 1099 tax calculator.
You will then use Schedule SE to calculate your self-employment tax. That 15.3% includes Social Security tax (12.4%) and Medicare tax (2.9%). As our tax system works on a “pay as you go” basis, you might need to make estimated quarterly tax payments if you think you will pay over $1,000 in income tax.
If doing these calculations seems confusing, you can use a quarterly tax calculator to do the math for you. When paying taxes every quarter, you will use Form 1040-ES. If you missed a quarterly tax deadline, use a tax penalty calculator to calculate your tax liability.
How much tax will I have to pay on my side business?
You can’t avoid paying taxes on your side jobs but you can lower your side hustle taxes. How? With the help of tax deductions. For example, an Uber driver can claim any "ordinary and necessary" expenses like tolls, tool kits, first aid kits and business licenses as itemized deductions on their indepedent contractor taxes.
If you're also paying federal income tax, you can lower it by claiming the standard deduction available to all taxpayers based on their filing status. But for self-employment taxes, claiming all your itemized deductions is your best bet to pay as little as possible.
Suppose you started photographing weddings as a side hustle to help pay off your loans quicker. You decided to invest in some rain protection gear for your camera and lens so that the weather doesn't affect your job. That gear counts as a business expense that is essential to making you money and hence can be “written off” as a tax deduction.
This will reduce your net income and will get you a lower tax amount. You can do this for a variety of expenses like business meals, car mileage, hotel accommodation, and even laundry and dry cleaning expenses. If you're a delivery driver or just use your vehicle to meet clients and/or run work-related errands, you also write off car depreciation. To do this, you will have to keep an extremely close eye on your expenses and save all your receipts all throughout the year.
If that sounds like a nightmare, let FlyFin's A.I. automatically analyze your expenses to find every deduction that you can take advantage of just by linking your expenses, FlyFin is specifically tailored for self-employed individuals and have CPAs who are experts in 1099 taxes who you can reach out to 24/7 to ask questions or ask to prepare and file your tax returns for you.
Another alternative method to decrease taxable income is open an Individual Retirement Account (IRA). The IRS allows self-employed individuals to contribute up to 25% of their earnings to their pension, and this money can earn interest completely tax-free while it is in the account.
Managing a side hustle while working a full-time job can take up a lot of your time. To avoid that yearly (or quarterly) tax season panic, make sure to track your expenses and have all your information ready to file as soon as you can. If you’re missing any 1099s, reach out to the entity that paid you to get one, so you can know what they reported to the IRS, and you can get your taxes done accurately and don’t miss the deadline.
What’s FlyFin?
FlyFin caters to the tax needs of freelancers, gig workers, independent contractors and sole proprietors. It offers a host of cutting-edge tax tools that help you quickly find deductions. You can also use tools like a home office deduction calculator.
FlyFin uses an A.I. to track all your business expenses automatically and find every possible tax deduction.
Once you have all your possible deductions in one place, our CPA team files a guaranteed 100% accurate tax return for you. It saves you a couple of thousand dollars and a ton of time on your taxes.
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