How Are The Freelance Side-Hustle Earning Taxed In The United States?

Taxes are one part of adulthood that we grow into rather than learn at a young age. One day, you’re juggling a part-time job and your studies, and the next thing you know, you’re making enough money that by law, you’re required to file taxes. The change is not only sudden, but there is also a great deal of confusion that surrounds filing taxes. 

What’s a deductible? What qualifies as a deductible? What qualifies as income? It takes getting used to, but the process eventually turns into a routine. Until, of course, you start side-hustling. We could all use the extra cash on the side, but what does the IRS have to say about this source of income? To save you the confusion here’s all you need to know about the money you earn from your freelance side gig.

Tax Filing for a Freelance Side-Hustle

For added clarity, a freelancer is someone who is self-employed. In the eyes of the law and the tax authorities, if you are a freelancer, you are required to act as an employer and an employee. Meaning, you will have to report your own income and pay the related taxes.

If your side job requires you to handle projects for clients, any payments that exceed $600/year in return for your services means that you should expect to receive a 1099 tax form. This is sent by the client as proof of the payment.

If the amount of money you made from a certain client in a calendar year happens to be less than $600 – which is often the case when selling crafts or collectibles online – you will need to report the income yourself without relying on paperwork from your clients.

One thing you should keep in mind, if your freelancing gig is consistent, and you’re planning on keeping it, you might have to file quarterly taxes. Because each case differs, to be safe, ask an IRS staff member about your situation.

Tax Filing for a Steady Side-Hustle

If you work a second part-time job at a company or if you are self-employed, but still working under a company, like Uber or DoorDash, this is what you need to do.

First off, the same rule of $600 and above applies. If you make more than $600/year, you should receive a 1099 form which includes how much you were paid. Although, those who work as delivery drivers must be extra careful because the standard procedure when Filing DoorDash 1099 taxes dictates that you must report your tips as well.

Make sure you keep a detailed record of the amounts you were tipped since 1099 forms don’t account for tips. Because, to the IRS, you’re not considered an employee, you will also have to pay the full amount of the self-employment tax, also known as the FICA tax. It seems like a lot of taxes, doesn’t it? Well, there is some good news to come.

Tax Write-offs

The best thing about being self-employed is getting to list your deductibles. If you’re still unclear on deductibles, these are the costs of running a business. By deducting those from your side earnings, you’ll end up with a lower taxable income.

Before going any further, it is crucial that you keep records and receipts related to any expenses that you are planning on writing off. Without proof, you might be raising a red flag for the IRS which is not a smart choice. That being said, let’s look into what counts as a deductible.

Any expense that you regularly pay as part of your business operations. This includes meals with clients, purchased software, raw materials and supplies, gas mileage, parking fees, tolls, car or equipment maintenance, work phone bills, and the list goes on. As you can see, all of the expenses mentioned above are things that a business cannot do without.

Nevertheless, your business has to be one for profit. For example, if you play the occasional gig at a coffee shop, you can’t write off your expenses since the job was not for profit but to practice a hobby.

Tax Brackets

One mistake that tax newbies often risk making is thinking that side-hustle earnings are somehow separate from regular income. The truth is, one always has something to do with the other in terms of many things like student loans, other types of tax reliefs, and most commonly, tax brackets. 

While your stable job provides you with an income on which you pay a certain tax rate, additional income from your side-hustle could take you up an entire tax bracket, forcing you to pay a higher tax percentage. This is one of the reasons why you should take every opportunity when it comes to writing off expenses, needless to say, you should try as best as you can to follow the IRS’s criteria for deductibles.

Quarterly Tax Estimates

We’ve brushed the surface of quarterly taxes when we talked about freelancing. You only need to worry about quarterly tax if you expect to owe more than a thousand dollars after filing your tax return. So, if your side-hustle is not a huge income generator, you won’t have to go through this ordeal.

For those who have to calculate their tax estimates, you can talk to an accountant, an expert, or use tax calculating software. If you’d rather do it manually, calculate your taxable income, and multiply it by 30%. The result should be your total. For quarterly payments, divide by four.

This concludes the basics of how the United States with side-hustle earnings. In short, you have to report all your income regardless of its source and whether or not you’ve received a 1099 form.

There are also tax deductibles which should be taken into consideration when calculating taxable income. Then, depending on your side gig and how much money you make, you need to account for the other consequences, like shifting tax brackets and having to pay quarterly tax estimates.

A piece of sensible advice is to keep a percentage (25-35%) of your side-hustle income reserved for tax purposes so as to be on the safe side. Finally, it is normal to get overwhelmed when dealing with taxes. Should you need assistance, don’t hesitate to contact an accountant or someone from the IRS. It’s better to ask than to accidentally commit tax fraud.

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