Guess who else wants to share in your success? The tax people.
And unlike your friends and family, who share in your success by offering you encouragement and celebrating your accomplishments, the tax people want something from you. Actually, they want two things from you:
- Lots of documents and forms
You won’t find a one-size-fits-all playbook or checklist for your side hustle taxes. Your tax-filing requirements will vary depending on:
- The legal organization you set up for your side hustle
- What type of business you’re doing for your side hustle
- Where you live and work
How to file taxes for a side hustleIf you organized your side hustle as a sole proprietorship or a single-member limited liability company (LLC), I have good news for you: Your U.S. federal tax filings for your business will be just another section of your personal taxes on your Form 1040. You don’t have to file any separate returns, at least at the federal level. You will, however, need to file an additional form — a Schedule C — that is basically an attachment to the rest of your personal tax return.
What if you set up your side hustle as an S corporation or a partnership? Or what if you set up an LLC with a partner? Great news … if you enjoy more paperwork. In addition to your personal tax return, you’ll need to file a separate return, not just an additional form attached to your personal tax return. Depending on how you structured your business, you need to file either:
- Form 1065 if your side hustle is organized as a partnership or a multi-member LLC
- Form 1120-S if your side hustle is organized as an S corporation
You use an IRS form called a K-1 to carry your side hustle corporate or partnership finances over to your personal return. (You’ll have slightly different versions of a K-1 depending on whether your side hustle is an S corporation, a partnership, or a multi-member LLC.)
The more complicated your side hustle’s legal structure is, the more complex your filing requirements will be — basically, you have a straight-line relationship up the complexity ladder.
Here’s a little bit of good news: If your side hustle is one of those where you’re paid as a part-time employee rather than as an independent contractor — say, teaching a class or two at the local community college — then you’ll receive an IRS Form W-2 for each tax year, the same as you get from your full-time employer. In that case, all you need to do for your taxes is treat your side hustle just like it’s another job and add your side hustle income to your regular income.
Side hustle tax rules and formsIf your side hustle is service-oriented and you aren’t dealing with any physical inventory, your tax returns won’t be all that complicated, even if you did set yourself up as an S corporation or a partnership. If, however, you’re running an online store where you need to keep track of your cost of goods sold and the value of your inventory, then not only is your overall side hustle record-keeping more complicated, but your taxes may turn into a head-scratcher, too.
Remember this simple equation when you're working on your side hustle tax filing: The more physical items you have that play any sort of a role in your side hustle, the more complicated your taxes will be. If you’re buying goods to resell, or if you need to purchase shelving and containers to hold products, then your taxes will be more complicated than if you’re recording and uploading videos, or doing software work, or doing ridesharing for Uber or Lyft.
Everyone wants a piece of the tax actionIf you live in the United States, you’re well aware of the Internal Revenue Service (IRS). If you live outside the United States, then you need to file tax returns with the equivalent of the IRS in your country.
You don’t only have to pay up and file returns with the feds, however. Your state and maybe even your city want their cut of your side-hustle profits, and you’ll need to file the proper returns along with writing the checks or doing the electronic funds transfers to pay the taxes that you’ll owe.
As complicated as the federal side of taxes can be, in many cases the state and local side is even more complicated. Why?
- If you’re doing your side hustle in Arizona, you’ll file different state tax return forms than if you’re side hustling in Pennsylvania or California or any other state.
- Some states just wants a copy of your federal return, but others have their own sets of forms. And to complicate matters even further, many states allow different deductions for expenses than the feds do, meaning that the net income from your side hustle for tax purposes may be different for the IRS than it is for the state where you live.
- Some cities get in on the act also, and you have to file yet another set of tax returns — and shell out even more money — to the city where you live and where you’re side hustling. Or maybe you’re getting hit at the county level rather than the city level. Sometimes those local taxes are only on W-2 wages (basically, the money you make from your day job), but in other cases, they’re full-blown tax returns that apply to side hustles.
Decision timeYou have two paths you can take when it comes to your side-hustle taxes and filing your returns:
- Do it yourself.
- Hire an accountant.
All of the big tax-filing programs, such as Credit Karma Taxes, TaxSlayer, TurboTax, and many others, will step you through not only your personal taxes but also basic small-business taxes that would apply to your side hustle, no matter how you set up your business (sole proprietorship, partnership, S corporation), even if your side hustle is just another part-time job with a regular old W-2.
And speaking of small-business taxes: You don’t need to be an expert in taxes for your side hustle. After all, you have dozens or even hundreds of other tasks to take care of or decisions to make. However, you should still have a basic idea of the big picture, tax-wise, for your side hustle. Beyond the basics I cover in this article, you can also check out Small Business Taxes For Dummies, 3rd Edition.Even if you made the command decision to hire an accountant to file the tax returns related to your side hustle, you still need to pay attention to some key points and beware of a few big-time traps that could really trip up you and your side hustle. Specifically:
- Avoid the temptation to use your side hustle to “get creative” with your tax returns.
- Be aware that if your side hustle crosses state lines, your tax picture could get murky and complicated.
- Remember that tax laws change frequently and can be tricky.
- Be sure to correct any tax-related mistakes that you make.
Staying legal and staying honestMaybe you’ve read or heard someone saying something along the lines of “I deduct all kinds of expenses through my home business — it’s great!”
If that person’s statement really meant “I legally deduct all kinds of allowable expenses through my home business,” then no problem. If, however, the statement actually meant “I sneak in all kinds of personal expenses and deduct them through my home business,” then that person may be in for all sorts of tax and legal problems. And if you follow in their footsteps and start playing shady tax games with your side hustle, you could wind up in a lot of trouble.
Business deductions for your side hustleSuppose your side hustle is an online retail site, where you buy clothing items from wholesalers that you then list and sell. While you’re buying clothing items for your business, why not buy some for yourself that you can “hide” among your business purchases? Then you can deduct all that clothing, and basically get your jeans and shirts and shoes at a 30 percent or 35 percent discount because you’ll owe less in federal and state taxes.
Don’t do it!
Maybe you do a little bit of traveling for your side hustle, and you deduct all those travel-related expenses. You know what? Why not deduct the costs of your next family vacation as well? You already have a bunch of legitimate tax deductions for airfare, hotels, meals, and other travel expenses, so who would ever know if you added a few more travel expenses that really shouldn’t be on your side hustle’s tax return?
Don’t do it!
Suppose you send a lot of packages to your customers via FedEx, UPS, and the U.S. Postal Service (USPS). Everything that you spend on packing materials and shipping costs is deductible. Why not also include the cost of shipping about a dozen packages to your out-of-town friends and family members for the holidays?
Don’t do it!
Even if you’re not swayed by the morality and ethics of cheating the government by lying — yeah, I said lying! — on your tax returns, how about a practical reason to be honest when it comes to your side hustle’s taxes? If you get caught, you’ll be in big trouble! At best, you’ll owe money — maybe a lot of money! — for back taxes, interest, and (most likely) penalties. At worst, the government could decide to criminally charge you with tax fraud. Even if you escape being convicted, you’ll have to spend a ton of money on attorneys’ fees.Will the government really come after you for claiming $100 in shipping expenses that you shouldn’t have, or for “only” $2,000 in personal travel that you inaccurately claimed as a legitimate business expense? Maybe not — but do you really want to take the chance?