Need some extra cash? Get a side hustle! Want to save for retirement? Get a side hustle! Trying desperately to break the cycle of living paycheck to paycheck? Get a side hustle!
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Many advocate for side hustles tirelessly (and they really can help you get ahead), but there isn’t as much focus on the financial fine print that comes with each and every side hustle, no matter how small. The fine print: Side hustles are a big deal come tax time. Here’s how even a small side hustle can impact your taxes and what you need to know to comply with tax laws.
That Income Is Taxable
So here’s the deal: That income you’re making from that side hustle is still income.
“All income earned from any business, even a seemingly small side hustle, is taxable,” said Jason W. Stanfield, Ph.D., CPA, member of the American Accounting Association. “The IRC states in Section 61(a) that ‘gross income means all income from whatever source derived, including … (2) gross income derived from business.'”
So what is the minimum taxable amount? “Many erroneously believe that there is some de minimis threshold, such as the $400 threshold for paying self-employment tax or the $600 threshold which requires payors to issue Form 1099s, but all income, no matter how small, must be reported,” Stanfield said.
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You May Be Imposed With a Self-Employment Tax
Depending on your earnings situation, you could have an extra tax bill to pay.
“You’ll also likely be subject to self-employment tax, meaning 15.3% of that side hustle income is potentially not available to you,” said Gene Bott, CPA, tax advisor and partner at Tax Hive. “You’ll also pay regular federal and state income taxes on that income as well.”
You May Be Pushed Into a Higher Tax Bracket
The paychecks from your side hustle may not be as high as those you earn as a full-time W-2 employee, but as income, it has the potential to bump you up into a higher tax bracket.
“The progressive structure of the U.S. federal income tax means that taxpayers who are pushed into a higher tax bracket only pay the higher rate on the marginal income in that bracket,” Stanfield said.
Suffered Financial Blows as a Side Hustler? You Can Claim a Loss
The ostensible silver lining of working as an independent contractor and having to file a report of your earnings, no matter how small: Your independent business can potentially reduce your income if you suffer financial losses.
“So long as it isn’t considered a hobby business,” Bott said. “This can help you get refunds on taxes you paid to the IRS.”
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This article originally appeared on GOBankingRates.com: Here’s What a ‘Small’ Side Hustle Can Do to Your Taxes — and How To Prepare
