Tax Tip Tuesday: What You Should Know About Taxable Income for Side Hustles
With record-high inflation in 2022, many Americans took on side hustles to afford increased living costs, and it has transformed how people do business or provide services. If you earn money through a part-time, temporary, or side gig, you are required to report those earnings. This could mean a more complex and expensive tax return. There are, however, some tax benefits as well. Here is what you should know before you file your 2022 tax return.
Reporting Taxable Income
You must correctly classify and report all income on your tax return. Unlike Americans who work for an employer and receive a Form W-2: Wage and Tax Statement, independent contractors and freelancers who earned at least $600 are given a Schedule C (Form 1040): Profit or Loss from Business (Sole Proprietorship), 1099-K or a 1099-NEC. If you earned less than $600, you still need to report the income to the IRS. You can use the worker classification page on IRS.gov for guidance on classifying employees and independent contractors.
You may be able to lower the amount of taxes owed by deducting certain expenses related to your side hustle, depending on tax limits and rules. Therefore, keep records of your business expenses and transactions.
For instance, you can claim the home office deduction if you earn a side income from home. That deduction could allow you to deduct part of your mortgage interest, rent, or utility bills. You may also be able to deduct business expenses such as car mileage, office supplies, and professional training events.
Paying Taxes Throughout the Year
An employer typically withholds income taxes from their employees' pay to help cover employee-owned taxes. Individuals who earn income through a part-time, temporary, or side gig can cover their taxes in two ways:
If considered an employee of the company, you can submit a Form W-4: Employee's Withholding Certificates to the employer to have more taxes withheld from your paycheck, which covers the tax owed from your side hustle activity.
Generally, you are required to make estimated tax payments if you owe more than $1,000. You can make quarterly estimated tax payments to pay self-employment and income tax, including Social Security and Medicare taxes, by mail, phone, or electronically. If you made estimated tax payments throughout the year, you must report them on your tax return to get credit.
If you underpay, you could owe interest and penalties. If you overpaid in 2022, you should receive an income tax refund in 2023 unless you apply the overpayment to next year’s taxes.
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