Do I Have to Pay Taxes on a Side Hustle?
Over the last several years, Americans have felt the disruption of Covid, the rise of interest rates, and the reach of inflation. With these factors at play, many have turned to side hustles to boost their income, keep up with expenses or simply to take advantage of a gig economy. A recent study by LendingTree and PYMNTS found that 48% of Americans have supplemented their income, whether through holding a second job or managing a side hustle. If you are one of the many Americans bringing in a little extra income, you may be wondering, “Do I have to pay taxes on a side hustle?”
You’re not alone. The tax requirements surrounding extra income can be confusing for those who normally have income tax removed by their employer. If you primarily earn income from a ‘day job’, you very likely have taxes taken off at the source and reported through a W2 form. In other words, tax payment might be built into the system that provides your main source of income.
A side hustle, on the other hand, can work quite differently. Depending on the nature of your employment—whether you are considered an employee, an independent contractor, or self-employed, you may or may not have income tax removed from the payments you receive.
So, do I have to pay taxes on a side hustle or not? Let’s dive into the details. First, a closer look at the rise of the gig economy and what it means for your income taxes.
A Rising Gig Economy
Over the last several years, more and more Americans have turned to side-hustle jobs, as part of a growing gig economy. Often these are conducted around full-time or more robust sources of income. Sometimes, workers piece together several smaller jobs, instead of a primary source of income.
Side hustle jobs are often part-time, temporary, and/or freelance. They include roles such as:
- Selling goods or services online
- Engaging in temporary, freelance work
- Driving for ride or delivery services
- Providing rentals or services for events
Part of the growth in the gig economy comes down to availability. The internet has helped to disseminate work for several years, making it easier for work to be accomplished from remote locations. As companies realize they can piece out specific components of jobs, assigning it to a freelance worker, rather than pay for full-time employees and their benefits, there is more of this kind of work available.
The growth of service apps has had the same impact, allowing individuals to work as little or as much as they want. This flexibility, often with low barriers to entry, offers a convenient way for workers to boost their income, on their schedule.
A Growing Need for Extra Income
Of course, the reasons that workers want another source of income are as diverse as the types of jobs people take on as side hustles. Younger workers often take on peripheral work to support themselves through school or to supplement the lower wages of first jobs.
Workers of all ages have also felt the long reach of inflation in recent years. Not only have daily expenses risen sharply, but higher interest rates have made mortgages and other costs go up quickly. The sudden shift in the cost of living has forced an unexpected cohort to join the ranks of gig workers, to pay rising or surprise expenses: recent retirees.
No matter your age or the reason you’ve taken on a side hustle, by the end of the year, you might be wondering about your tax responsibility. If you’re asking, ‘Do I have to pay taxes on a side hustle?’, there are a few key things to think about.
Tax Guidelines for Side Hustles
If you’ve done gig work as an employee, your employer should have withheld taxes from each paycheck. In turn, they should issue you a W2 form at the end of the year, documenting the deductions. For many, working as an employee simplifies the question of income taxes. Not only are taxes removed at the source, but they are calculated and documented for you.
If you work as a contractor, on the other hand, or as a freelance employee, you will need to do more work to figure out the taxes you owe.
“Do I have to pay taxes on a side hustle?”
The short answer is: yes. According to the IRS, if you make net earnings of $400 or more from self-employment in a given year, you must file a tax return.
In the eyes of the IRS, it doesn’t matter if this income is from a second job, a side hustle, part-time work or temporary employment. If you earn more than $400 through any self-employment or side hustle, you need to record your income and file and pay taxes.
Keeping Track of it All
Of course, if you’re working more than one job, supplementing your income with a side hustle, you are busy to begin with. The thought of tracking your taxes owed on supplemental income might feel like more than you can manage.
On top of the time commitment, you will also need to have the financial discipline to set aside enough money to pay your taxes at the end of the year. For those trying to boost their income through a side hustle, tracking, separating, and paying income taxes can feel like a challenge.
Do I have to pay taxes on a side hustle? The answer is yes, no matter how challenging it is to track and pay them. If you work any job, not as an employee, but as a contractor or a self-employed worker, you can lighten your administrative load by working with a team of tax experts.
Tax experts have experience in all aspects of tracking and optimizing the amount of income tax you need to pay. If you owe back taxes and eventually need help communicating and negotiating with the IRS, it’s important to have the right expertise on your side. Keep in mind, if you fail to pay the right amount of income tax on your side hustle, the IRS could come after you for back taxes owing.
While it may be tempting to keep and spend all of the income you make through a side hustle, it’s important to track your income and pay your taxes each year, to avoid the attention of the IRS. If you end up owing back taxes, it’s important to seek professional help, or you could face intimidating IRS notices, phone calls, audits, or more.
At Franskoviak Tax Solutions, we have helped thousands of clients with taxes and tax problems for more than 30 years. We provide comprehensive tax services with first-class expertise and a personalized, boutique-style approach. Speak to our team about personal and business taxes, IRS tax deadlines, payroll taxes, IRS tax relief, and tax problems such as IRS tax notifications, IRS threats to place liens or levies on assets, delinquent taxes, and more.
Start with a free consultation—if you’re wondering, ‘Do I have to pay taxes on a side hustle’, you’re not alone. We’ll help you understand the amount you need to pay in taxes to meet your obligations. If the IRS has already come after you for back taxes, we can help to negotiate with them on your behalf.