If you have a side hustle, you are partially “self-employed” as far as tax authorities are concerned. Self-employment offers benefits of flexibility but has both advantages and disadvantages when it comes to federal income and employment taxes.
Withholding Income Taxes
Most don’t realize that income taxes are not withheld from your side-hustle income, so you will probably owe money at the end of the year, says Jenna Ivanoski, gig-economy product manager at Tax Act.
How to Fix The Withholding: If you (or your spouse) have a day job with a regular employer, increase your withholding at the day job to account for the additional income from side-hustles.
FICA stands for the Federal Insurance Contributions Act. It is the money that’s taken out of worker paychecks to pay into the Social Security and Medicare systems. Typically, workers pay 7.65% of their wages into these systems, and their employers pay the other 7.65%. When you’re the employer, you pay both sides or 15.3% of your business income.
You only pay this tax on the amount that’s left of your business income (after deductible business expenses). Business deductions are substantial. As a business owner — even a part-time business owner — you can deduct much more than you could as an employee.
Any reasonable or necessary expense to conduct your business is potentially deductible. The expenses depend on the type of side hustle. Expenses can include things such as advertising and marketing costs, commissions and fees, insurance, office expenses, meals, gas, repairs and maintenance, supplies, travel, education costs, and contract labor costs.
Suppose you produce items on Etsy. Any materials (part of the cost of a new computer), art supplies, the courses you took to improve your skills or learn marketing are all deductible items. Commissions and fees paid to the site and any business-related travel subtracts from your business income. Rent paid for an art studio is deductible, as are other office maintenance expenses.
If you’re a delivery driver and leased a car to conduct business, part of your lease payment is deductible; limited to the amount you use that vehicle for business. Parking and tolls paid are also deductible, as are drinks and snacks for your passengers, maintenance, and repair expenses for your car. The purchase of a smartphone may be deductible as well if it was necessary for your business.
Advertising costs, food and drink paid when doing business with clients, costs for web related services are all partially or fully deductible expenses.
Keep Your Receipts
Diligent record-keeping is important to explain legitimate write-offs like an expensive dinner.
At the time of filing, documentation is not required for your deductions; however, it is if you are audited. Audits are relatively rare; yet, self-employed people are audited far more often than employees. You need to keep your receipts and records for at least four years.
Fees paid to a tax preparer are also deductible.