With the rise of the gig economy, more people are earning additional income through side hustles. Whether you’re driving for a rideshare company, freelancing, or selling products online, it’s important to consider the tax implications of your extra income.
First and foremost, any income earned from a side hustle is taxable and must be reported on your tax return. This includes cash payments, checks, and payments received through platforms like PayPal or Venmo. Failing to report this income can result in penalties and interest, so it’s crucial to keep accurate records of all earnings.
In addition to income, you may also be eligible for certain deductions related to your side hustle. These can include expenses for supplies, advertising, and even a portion of your home office if you work from home. Keeping detailed records of your expenses will help you maximize your deductions and reduce your overall tax liability.
Another important consideration is self-employment tax. As a side hustler, you’re responsible for paying both the employer and employee portions of Social Security and Medicare taxes, which can add up quickly. However, you may be able to deduct half of your self-employment tax on your tax return, which can help offset the cost.
If your side hustle is generating significant income, you may also need to make estimated tax payments to avoid underpayment penalties. This is especially important if you’re not having taxes withheld from your primary job. Estimated payments are due quarterly, with the next deadline on September 15th.
Additionally, if you’ve formed a business entity for your side hustle, such as an LLC, there may be additional tax considerations to keep in mind. For example, LLCs can choose to be taxed as a sole proprietorship, partnership, or corporation, each with its own set of tax implications. Consulting with a tax professional can help you determine the best tax strategy for your situation.
Finally, consider the impact of your side hustle on your overall tax situation. Depending on your income level, additional earnings could push you into a higher tax bracket, resulting in a larger tax bill. A mid-year tax review can help you anticipate any potential issues and make adjustments before it’s too late.
For personalized guidance and to ensure your tax strategy is on track, contact our office at (202) 824-8123. Our tax professionals are here to help you navigate these mid-year adjustments and optimize your tax situation.
