With the rise of the gig economy, more people are turning to side gigs to supplement their income. Whether you're driving for a rideshare service, selling handmade crafts online, freelancing, or offering consulting services, earning extra money can be exciting—but it also comes with tax responsibilities. Here's what you need to know about your tax obligations when starting a side gig.
1. You’re Likely Considered Self-EmployedIf you’re working a side gig and are not classified as an employee, the IRS generally considers you a self-employed individual. This means you're running a business, even if it's small or part-time, and you're responsible for tracking your income and expenses.
2. Reporting IncomeYou must report all income earned from your side gig, even if you don’t receive a 1099 form. Many platforms, such as Etsy, Uber, and Upwork, issue a 1099-K or 1099-NEC if you earn more than a certain amount. However, it’s your responsibility to report all income, whether it’s paid via cash, check, or digital platform.
3. Self-Employment TaxAs a self-employed individual, you’re responsible for paying both the employer and employee portions of Social Security and Medicare taxes—collectively known as self-employment tax. For 2024, this rate is 15.3%. You’ll calculate this using Schedule SE and pay it in addition to your regular income tax.
4. Quarterly Estimated TaxesIf you expect to owe $1,000 or more in taxes for the year (after subtracting withholding and credits), the IRS requires you to make estimated quarterly payments. These are due in April, June, September, and January. Failing to pay them could result in penalties and interest.
5. Business Expense DeductionsThe good news is you can deduct ordinary and necessary expenses related to your side gig. This might include:
- Office supplies
- Business mileage
- Software or subscriptions
- Home office expenses
- Marketing and advertising costs
Make sure to keep detailed records and receipts to substantiate these deductions.
6. Separate FinancesTo make tax time easier, consider opening a separate bank account for your side gig. This helps clearly separate business and personal expenses and makes bookkeeping and tax filing more straightforward.
7. Local and State TaxesDon’t forget that you may also owe state and local taxes, including income tax, sales tax (if you sell products), or business licenses and fees, depending on where you live and the nature of your work.
8. Filing Your TaxesYou'll typically file a Schedule C (Profit or Loss from Business) along with your personal tax return (Form 1040). If your gig becomes more substantial, you might explore forming an LLC or electing S-Corp status for tax benefits, but these decisions should be made with professional advice.
Final Thoughts Taking on a side gig can be a great way to boost your income and pursue passions. But it's important to stay ahead of your tax obligations to avoid surprises during tax season. Consider consulting a tax professional, especially in your first year, to ensure compliance and maximize your deductions.