So you started a side-gig, now what for your taxes?
Having a side-gig can be a monumental help for making ends meet, paying off debt, or boosting your savings account for that next big purchase. When you're self-employed, whether it's driving for Lyft or Uber, teaching guitar lessons, freelancing as a writer, or selling your craft on Etsy, a second job allows you to earn that much needed extra cash.
Here's what you need to know about reporting your new-found self-employment income:
Don't skip the small stuff
Even if you earn only a few bucks, you are required to report your income on your taxes. Underreporting income from side work may lead to additional tax assessments and penalties. In order to prevent this, keep track and report all income from your additional earnings.
Report your income to the IRS
If you've earned more than $600 as a contractor or freelancer, the individual or company that pays you will generally provide you with a 1099-MISC form (typically for freelance work), or you may receive a 1099-K form from a third-party merchant like PayPal. The payer will provide you with a copy of the form by January 31 of each year and send a copy to the IRS. If you didn't make more than $600 from your short stint, you're not quite off the hook — you still need to report the earnings, but your payer is not required to send you a form.
Deduct business expenses to get every dollar you deserve
So you said you drive for Lyft? You can lower your tax bill by reducing your taxable income with allowable tax deductions. If you have expenses directly related to your business, those are tax deductible business expenses. You can deduct everything from expenses related to your car, supplies, water, other amenities for your guests, and possibly even the cost of your car. If you don't deduct actual expenses related to your car like repairs, tires, and lease payments, you may be able to deduct the business mileage at .54 cents per mile. Being able to deduct your mileage can turn into a hefty business deduction alone.
TurboTax Self-Employed with ExpenseFinder™ is a newly launched product from TurboTax that helps self-employed filers find tax deductible business expenses that you may not know you could claim, saving you more money. You can then confirm which expenses apply to your business to help you get every deduction you deserve. The product also comes with QuickBooks Self-Employed at no extra cost when you file your return through TurboTax Self-Employed.
One thing to note when taking tax breaks on a side-gig is whether the expenses are ordinary and necessary. There are necessary expenses that are helpful for your business and there are ordinary expenses that are common and accepted by industry standard. To be tax deductible, the expense must be both.
Say you are a freelance interior designer and you want to send out holiday cards to your clients to thank them for their business over the year. While this is not required for your business to run, it would qualify as a reasonable ordinary expense because it's helpful to the business regarding client relations.
As an interior designer, you keep all of your fabric swatches, design books, and conduct all business calls and accounting work out of your home office. Great news! You qualify for the home office deduction. The IRS allows you to deduct a percentage of expenses for your home, such as rent or mortgage interest, property taxes, and utilities, based on the portion of your home used for business. But here is the catch: your home office must be used exclusively for the purpose of your business, meaning you can't sit at your kitchen table, where you also provide meals for your family, and write the space off.
To avoid grey areas, keep your business and personal expenses separate.
You may need to pay quarterly taxes
An employer withholds taxes for you in a standard, W-2 job. However, as a side-gigger, you have to set aside taxes on your own. Generally, if you expect to owe $1,000 or more come time to file, you should pay quarterly estimated taxes every quarter (typically the 15th of April, June, September, and January).
A second job is a key way to earn extra cash without giving up your primary job. Knowing the basics of reporting your second income and being able to deduct business expenses you never even dreamed of makes that side-gig all the more worth your hard-earned money.
Article provided by TurboTax.com