How to File Taxes for Your Side Hustle: Complete Beginner's Guide for 2024
Last Updated: September 11, 2024
Got a side hustle? Whether you're driving for Uber, selling on Etsy, or freelancing on the weekends, this guide will walk you through everything you need to know about taxes. We'll keep it simple and tell you exactly what to do, step by step.
The rise of the gig economy has made it easier than ever to earn extra income on the side. However, with this opportunity comes the responsibility of properly reporting your earnings to the IRS. Don't worry - while tax requirements for side hustles might seem complex at first, they're quite manageable once you understand the basics.
First Things First: What You Need to Know
- You must report ALL income, even if it's just a few hundred dollars
- You'll need to pay taxes if you earn $400 or more
- Your client should send you a 1099 form if you earned $600+
- Keep track of EVERYTHING you spend on your side hustle
The $400 threshold is particularly important because it's when self-employment tax kicks in. This tax covers your Social Security and Medicare contributions, which are typically handled by employers in traditional jobs. As a side hustler, you're considered both the employer and employee, which is why proper tax planning is crucial.
💡 Make Tax Filing Easy
Use FreeTaxUSA to file your taxes. They have a special section for side hustles and will walk you through everything step by step.
Step 1: Track Your Income
- Save all payment receipts from clients
- Keep records from payment apps (PayPal, Venmo, Cash App)
- Track cash payments in a spreadsheet
- Save all 1099 forms you receive
- Keep bank statements showing your earnings
Starting in 2024, payment apps are required to report transactions totaling over $600 to the IRS. This means keeping accurate records is more important than ever. Even if you don't receive a 1099 form, you're still legally required to report all income. Consider using a dedicated bank account or accounting software to make tracking easier.
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Step 2: Track Your Expenses (This Saves You Money!)
Common things you can deduct:
- Gas and mileage if you drive for work
- Your phone bill (the portion used for work)
- Internet costs (if you work from home)
- Supplies and equipment you buy for your side hustle
- Part of your home expenses if you work from home
- Software subscriptions for your work
- Marketing and advertising costs
Deductions are your best friend when it comes to reducing your tax bill. Every legitimate business expense you can document lowers your taxable income. Just remember the golden rule: the expense must be "ordinary and necessary" for your business. Keep detailed records and receipts - a simple photo of each receipt stored in a cloud service can save you hours of headache during tax season.
Step 3: Set Aside Money for Taxes
🚨 Important!
Set aside 25-30% of your side hustle income for taxes. This might seem like a lot, but it's better to save too much than not enough!
The 25-30% recommendation accounts for both income tax and self-employment tax. Your actual tax rate may be higher or lower depending on your total income, deductions, and state tax requirements. Consider opening a separate savings account specifically for tax payments to ensure you're prepared when tax time comes.
Step 4: Know Your Tax Deadlines
- Quarterly Tax Payments:
- April 15 (for January-March)
- June 15 (for April-May)
- September 15 (for June-August)
- January 15 (for September-December)
- Annual Tax Return: April 15
💰 Tax Saving Tip
Open a Solo 401(k) with Solo401k.com to reduce your taxes. You can save a LOT of money this way, and they'll help you set everything up.
Step 5: Filing Your Taxes
- Gather all your income records
- Collect all expense receipts
- Use tax software made for self-employed people
- Report your income on Schedule C
- Don't forget about self-employment tax
- Consider getting help if you're confused
Schedule C is where you'll report your side hustle income and expenses. This form helps you calculate your net profit or loss, which then carries over to your main tax return. While tax software can make this process easier, don't hesitate to consult a tax professional if you're dealing with complex situations or multiple income streams.
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Common Side Hustle Tax Mistakes to Avoid
- Not reporting all your income (the IRS knows!)
- Missing out on deductions you could take
- Not keeping good records
- Forgetting about quarterly taxes
- Missing deadlines
- Not saving enough for taxes
Frequently Asked Questions
Do I need to pay quarterly taxes on my side hustle?
The general rule is that if you expect to owe $1,000 or more in taxes from your side hustle, you should make quarterly payments. In practical terms, this usually means if you're making more than $3,000-4,000 in profit, it's time to start thinking about quarterly payments. While it might feel like a hassle to pay taxes four times a year, it's actually helpful for your cash flow - it's much easier to pay smaller amounts throughout the year than get hit with a huge tax bill in April. Use Form 1040-ES to estimate your quarterly payments, and consider setting aside 25-30% of your earnings to be safe.
What records should I keep for my side hustle?
Good record-keeping doesn't have to be complicated, but it does need to be consistent. At a minimum, hang onto all receipts, bank statements, payment records, and mileage logs if you drive for your business. Digital records are perfectly fine - I personally take photos of receipts right away and store them in a dedicated cloud folder. Create a simple spreadsheet or use basic accounting software to track income and expenses by date. The key is finding a system that you'll actually stick with. One tip that's helped me: set aside 15 minutes each week to update your records while everything's fresh in your mind. Keep everything for at least 3 years after filing your taxes, though 7 years is even better if you have the storage space.
Can I deduct my home office for my side hustle?
Yes, you can deduct your home office if you have a space that's used regularly and exclusively for your side hustle - meaning it can't double as your personal Netflix-watching spot. You've got two options here: the simplified method, which lets you deduct $5 per square foot up to 300 square feet, or the actual expense method, where you calculate what percentage of your home expenses (rent/mortgage, utilities, insurance, etc.) your office represents. While the simplified method is definitely easier, don't automatically default to it. If you live in an area with high housing costs or have a larger office space, the actual expense method might save you more money. Take time to calculate both ways for your situation - the extra effort could be worth it.
What happens if I don't report my side hustle income?
Let's be straight here - not reporting income is tax evasion, and it's just not worth the risk. The IRS is getting better at detecting unreported income through payment processors, platforms, and bank deposits. Even if you didn't receive a 1099 form, the income still needs to be reported. Think of it this way: the stress of wondering if you'll get caught isn't worth the tax savings. Plus, reporting your income legitimately often comes with benefits - you can build a documented income history (helpful for loans), contribute to Social Security, and take advantage of business deductions that can significantly reduce your tax bill anyway. If you're worried about owing too much, there are always legitimate ways to minimize your tax burden through deductions and credits.
Should I form an LLC for my side hustle?
The decision to form an LLC depends on several factors unique to your situation. While you don't need an LLC for tax purposes (you can file Schedule C as a sole proprietor), it can provide valuable personal asset protection. Consider forming an LLC if your side hustle could potentially face liability issues, if you're making significant income, or if you're planning to grow the business. For example, if you're doing consulting work with minimal liability risk and modest income, you might be fine as a sole proprietor. But if you're selling products that could potentially cause harm, working with valuable client property, or earning enough that you want extra protection for your personal assets, an LLC might make sense. Remember that an LLC also adds some complexity - you'll need to maintain separate business records and possibly file additional paperwork. It's worth having a conversation with a legal professional who can look at your specific situation.
How do I handle taxes if I have multiple side hustles?
Managing taxes for multiple side hustles isn't as daunting as it might seem. The key is organization. File a separate Schedule C for each distinct business activity - this helps you track which ventures are most profitable and keeps your deductions clear. For example, if you drive for Uber and do graphic design, keep these separate. Your self-employment tax will be calculated on the combined net income, but seeing each business's performance individually is invaluable for making decisions about where to focus your energy. I recommend creating separate bank accounts or at least separate categories in your accounting software for each venture. This makes tax time much easier and gives you better insight into your businesses. You can still use one tax savings account for everything - just make sure you're setting aside enough based on your total income from all sources.
What tax deductions am I missing for my side hustle?
There are probably more deductions available than you realize. Beyond the obvious ones like supplies and equipment, consider things like: business insurance premiums, professional development courses (including online courses and books related to your field), bank fees for business accounts, a portion of your phone and internet bills, professional subscriptions, and small tools or equipment under $2,500 (which can be deducted immediately instead of depreciated). If you qualify, don't forget about retirement plan contributions and health insurance premiums. Even smaller items add up - professional organization dues, cloud storage fees, software subscriptions, and business-related parking fees are all deductible. One often-overlooked area is marketing expenses, including business cards, website hosting, and social media advertising. Keep in mind that these deductions need to be reasonable and directly related to your business. The key is to keep good records throughout the year and review your expenses regularly to identify potential deductions.