The Side Hustle Tax Trap


“Before you talk, listen. Before you react, think. Before you spend, earn. Before you criticize, wait. Before you pray, forgive. Before you quit, try.” - Ernest Hemingway

Earning some extra cash from a side hustle is something many are doing these days. Here are some tax implications we want you to know about so you can hold onto as much of it as you can.

In most situations, you’ll be earning this extra income as an independent contractor, rather than as an employee. As a point of clarification, you may hear the following terms bandied about in relation to the gig economy

Independent contractor
Sole proprietor
Schedule C business
1099 contractor

Here’s the important part: All of these terms mean the exact same thing.
In other words, if you’re delivering for Doordash on the weekends, you’ve now become the self-employed owner of a Schedule C sole proprietorship business.
Now, let's prepare you for what this means in terms of your new tax situation and responsibilities.

You’re Responsible for More Taxes

When you work a regular job as an employee, your employer pays half of the legally required Social Security and Medicare taxes, and you pay the other half.
But when you’re self-employed, you pay both halves.
It’s not exactly a tiny tax either. The self-employment tax rate is 15.3%, which is in addition to your income taxes. The good news is you only pay this 15.3% on the self-employment income -- not the wages you earn from your day job.

Speaking of the income taxes, this extra income you’re making may end up pushing you into a higher tax bracket, further increasing your tax liability. Have your tax pro help you figure out how to navigate that.

You’re Responsible for More Frequent IRS Payments

In the United States, we have what is called a “pay-as-you-go” tax system. Basically, the government expects to receive their cut of your income on a pretty regular schedule and in a timely manner.
At your regular job, your employer takes care of this in a seamless fashion. You don’t even have to pay attention to the schedule of tax payments your employer makes.
But now that you’ve also got some self-employment income, you do need to care. While there are exceptions, most self-employed individuals fall into a quarterly tax payment schedule. These tax payments, called estimated tax payments, are due on April 15, June 15, September 15, and January 15. This year, the Feds extended the tax deadline to Monday May 17th.
If you can somewhat closely predict what your gig economy income will be for the year, there is another option. Instead of paying these quarterly estimated tax payments directly, you can increase the tax withheld from your paychecks at your regular job to balance out what the IRS is getting paid throughout the year. This involves just a little bit of number crunching.

You’re Responsible for More Recordkeeping

Since you are now a business owner, you need to keep records like a business owner. This is not only a legal requirement, but it’s also something that you’ll want to do for another reason: Claiming business deductions.
That’s right! Now that you’re a business owner, you’re going to have expenses you get to deduct on your shiny new Schedule C. We’ll want to see receipts for these expenses when we prepare your tax return. These deductions are subtracted from your business income, lowering the dollar amount that you have to pay tax on.
In addition to expense receipts, there are other important records you’ll need to keep, depending on the kind of side hustle work that you’re doing. For example, if you’re doing any sort of delivery driving with your vehicle, you’ll want to maintain a daily mileage log, which shows miles driven, date driven, and a description of the business purpose.
If you’re using a dedicated space in your home for running your new business, you’ll also want to keep records for another tax deduction related to the business use of your home. You’ll want to note the use of space, square footage numbers, and expenses for things like utilities, insurance, and rent in order to calculate this tax benefit.
The exact recordkeeping will depend on what you’re doing.

You’re Responsible for Filing More Tax Forms

In addition to the new Schedule C you'll need to file for your new side hustle, there are a few other forms you might need to file. There's the Schedule SE for Social Security and Medicare taxes. Perhaps a Form 8829 for that business use of your home. If you trade in an old car you used in the side hustle for a new car, there's a Form 4797 in your future.
There will also be some additional state obligations lurking underneath the surface in addition to the federal requirements we've been discussing.

To getting things done.
BE THE ROAR not the echo®

Janet Behm


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