The gig economy is more popular than ever. It’s a great way to pursue your passion while still having the steady income and benefits a regular full-time job provides.
However, the government wants its share regardless of how you make money.
Don’t forget the self-employment tax
The IRS requires that you report all of your income, even if you don’t receive a tax form, such as a 1099 or W-2. This includes rideshare operators, freelancers, online sellers and part-time gigs such as tutoring or playing in a band.
One bonus is that you can take advantage of tax deductions that will lower your taxable income, such as:
- Home office expenses
- Supplies and materials like art supplies or baking equipment
- Professional fees, like productivity software or tax preparation services
- Marketing costs, including ads for your services and website hosting fees
- Business auto use
You must keep detailed records and receipts for all your expenses.
Unfortunately, if you made more than $400 from your side hustle, you may also have to pay self-employment taxes, which cover Social Security and Medicare taxes. In a traditional job, your employer usually pays a portion of these taxes. However, with a side hustle, you will need to pay both the employer and employee portion, which is currently 15.3% of your net earnings.
It can be tempting not to report the income from your side hustle, especially if it’s cash under the table or you don’t receive a 1099. But with the continued rise of the gig economy, the IRS has systems in place to track unreported income.
Not paying your taxes can result in serious consequences, such as:
- Accrued penalties and interest making the amount you owe significantly higher than your original tax bill
- Audits
- Tax liens against your property
- Wage and bank account levy
Many people run into tax issues because they didn’t realize they were breaking the law. You will want to discuss the situation with a legal professional if that occurs. They may be able to help you negotiate with the IRS and minimize the financial impact.