For many Americans, a side hustle is a great way to earn some extra income. It can also help you transition into a new career, perhaps as a small business owner. There are many reasons you may choose to work as a freelancer, and while there are perks to the gig economy, things can get complicated at tax time. Here is what you need to know about filing taxes for your side gig this year.
You should receive a 1099
If you worked for another company as a contractor, the company should send you a Form 1099-MISC. The form lists all the compensation the company paid you as a non-employee. According to NBC News, you must report this income on your tax return because the company has also sent this form to the IRS. If you do not report it, you may wind up in hot water with the IRS. However, even if the company you worked for does not send you a 1099, you probably still need to report this income, even if you received it as cash.
You may need to file a Schedule C or C-EZ
Sole proprietors typically report their business income and expenses on a Schedule C form. However, if your business had less than $5,000 in business expenses, you can file with Schedule C-EZ form, which is much shorter. You may wish to consult with a tax professional, like an accountant or tax attorney when filling out this information.
You must pay self-employment tax
When you work as a freelancer, the company you work for does not typically take out Social Security and Medicare taxes. If you made more than $400 from your side gig, you must pay self-employment tax to the IRS. The self-employment tax rate is 15.3 percent, made up of 12.4 percent for Social Security and 2.9 percent for Medicare. However, only a portion of your wages are subject to Social Security taxes. You must add a Schedule SE to your tax return to calculate how much you owe in self-employment taxes.
You may be eligible for a tax deduction
The Tax Cuts and Jobs Act created a new tax deduction for people that report their business income on their personal tax return. This includes people with sole proprietorships, partnerships, S corporations and LLCs. Only certain business income qualifies for this deduction, and you cannot make over a certain threshold. Your taxable income must be less than $157,500 as a single person or $315,000 as part of a couple.
If you meet these qualifications, 20 percent of your business income is deducted from your taxable income. So, you will not be taxed on that portion of your income. People over these income thresholds may still qualify for partial deductions.
Filing your taxes when you have a side hustle can be complex. If you have questions about the new tax law or what deductions you can take, you should contact an experienced tax professional. Misreporting your income or making errors on your income tax return could lead to an audit from the IRS.