Start a side gig in 2022? Whether you lost your traditional job or you simply wanted to earn some extra cash, side gigs tend to complicate your tax filing a bit.
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Over the years, the IRS refined its rules for gig workers. But obviously, the IRS still wants you to pay taxes on any income, whether it is your primary income source or profits earned from your side gig.
Whether you drive for a ride-sharing service, deliver groceries, or run a virtual business, you need to report your new side hustle income on your tax return. But before getting started, it’s important to understand all the possible implications so you aren’t hit with a surprise tax bill or tax penalty come tax time.
The IRS definition of gig work
With the rise of the gig economy, the IRS worked to clearly define what constitutes a “gig.” According to the IRS, the gig economy—also called sharing economy or access economy—is an activity where people earn income providing on-demand work, services or goods. Often, it’s through a digital platform like an app or website.
Side gig income must be reported on your tax return, even if you earned cash for the gig or didn’t receive any formal income statement.
Common examples of gig work include but aren’t limited to:
- Driving for a ride-sharing app
- Delivering groceries or food through an app
- Selling items online
- Working as a freelancer or contractor
- Providing professional or creative services
- Renting out a property
- Selling crafts or other handmade goods
Again, these are just a few examples. Regardless of how you earned the money, you are responsible for reporting it to the IRS.
Understanding your side gig tax implications
So, it’s your first year of working a side gig. What does that mean when it comes time to file your own taxes?
No matter how much you earned, you must report that income as a self-employed individual. And if you also have a full-time job on top of your side gig, both forms of income need to be reported on your tax return.
That is assuming you are operating your side gig as a sole-proprietor or single-member LLC. If that’s the case, then you need to report your side income on your individual 1040 tax return.
By filing that way, you are personally liable to pay any taxes owed out of your own pocket. Because of that, it is vital to keep accurate records of your side income and expenses throughout the year. Be sure to keep any documentation even after you file your taxes in case you are ever audited.
If your side gig earnings are only a small amount and you had no expenses related to the work you did, it will be relatively easy to report your earnings. But if you were profitable and had high business expenses, it becomes slightly more complex. You may even be able to take the qualified business income deduction on your personal tax return. DIY tax software, like TaxAct, will calculate that deduction for you to help you accurately claim the benefit.
All about quarterly tax payments
In your first year of having a side gig, you may not know about quarterly tax payments. Any independent contractor or side gig worker is required to pay quarterly estimated taxes on the income they earn throughout the year.
Why? Well, consider a traditional full-time job. Federal income taxes are automatically taken out of each paycheck so you can keep up with your tax liability all year long. The entire U.S. tax system is designed to be pay-as-you-go. With side gig income, however, there are no taxes automatically taken out. As a result, the IRS requires side gig workers to pay estimated taxes every quarter to pay their fair share before the end of the year. Quarterly tax payments are due on the following dates for 2023:
- April 18 for payment period Jan. 1 to March 31, 2023
- June 15 for payment period April to May 31, 2023
- Sept. 15 for payment period June to Aug. 31, 2023
- Jan. 15 for payment period Sept. 1 to Dec. 31, 2024
How to file taxes for a new side gig
Regardless of whether you paid quarterly taxes when tax season rolls around, there are some things you need to prepare before you file.
Track your income
First thing’s first: track your side gig income throughout the year.
If you worked a side gig through an app, it should be relatively easy to track your income. The app typically tells you how much they paid you throughout the year. On the other hand, if your side gig didn’t use an app, you will need to track it on your own. You can do that by checking any invoices you sent out or simply looking back on your bank statements.
Track your expenses
Once you’ve tracked your income, you can track any expenses related to your side gig. Tracking and reporting expenses that are considered “ordinary and necessary” in the course of business may qualify you for tax deductions and lower your overall tax liability. Typical expenses may include things like mileage, office expenses, equipment needs, and client meals.
Collect your forms
Next, keep track of any tax forms you received for working your side gig, such as Form 1099-K, Form 1099-MISC, Form 1099-NEC, or any other income statement. If you earned at least $600 as an independent worker, you should receive a 1099 form from the business that paid you. However, even if you don’t receive an income statement for the work you completed, you are still responsible for reporting and paying taxes on that income. Make sure any forms you receive match your own records.
File your taxes
Even if you filed your taxes on your own in the past, your tax situation has gotten even more complicated now that you have to report your side gig information. Check out TaxAct Self-Employed to help you file your self-employment income and deductions accurately. Our Deduction Maximizer feature will help you keep more of your self-employment income by identifying deductions most commonly claimed by other filers like you.
Prepare for your second year of business
It’s never too early to plan ahead for next year! Once you file your tax return, there are some things you should consider doing to make next year even easier.
First, consider opening a separate business checking and savings account for your side gig. That way, it’s easy to track your business income and expenses and keep them separate from your personal money. Plus, that also makes it easier to set aside money for quarterly tax payments.
Next, mark the quarterly tax deadlines on your calendar! If you use TaxAct to file your return, you can set up automatic quarterly tax payments to ensure you never miss a deadline.
Lastly, create a system to better track business expenses throughout the year. There are plenty of apps to help you organize your annual expenses. Do your research and implement a new system – your future self will thank you!
The post How to File Taxes for a New Side Gig appeared first on TaxAct Blog.
Read MoreBy: Amy Roepke
Title: How to File Taxes for a New Side Gig
Sourced From: blog.taxact.com/filing-taxes-for-a-new-side-gig/
Published Date: Wed, 11 Jan 2023 03:08:14 +0000
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