36% of American workers have some role in the current are part of the access economy, defined as people earning income providing on-demand work, services or goods. Also known as the gig economy, in the United States it's growing three times faster than the traditional American workforce.
According to Team Stage, independent contractors, temporary positions and permanent part-time work is here to stay. Instead of just providing additional “catch up” income, side hustles are more often than not how folks pay all of their bills. All that work means income and like any other earnings, that means paying taxes to the Internal Revenue Service.
With this in mind, here are five important things to keep in mind, before you file your taxes with the IRS.
1) Side Hustles Aren’t Free Money
It’s easy to be under the impression that gig work is just easy side money, but that money isn’t just a bonus on work you do outside your normal nine to five. It is completely taxable, whether you made $1 or $100,000; you must report your side hustle income to the IRS on a Schedule C form.
1099-NEC: One really easy way to make sure your side gig income is reportable is to ask your clients to fill out a 1099-NEC. This form replaces the formerly used 1099-MISC and requires you to also fill out a Schedule C, but both forms will help ensure your income is reported correctly.
2) Tax Forms Matter
Nothing says ‘here comes a headache,’ faster than saying ‘Tax Season.’ When it comes to filing taxes, the entire process from start to finish can be a pain, to say the least. Questions immediately bombard you. Which forms do you need, did you fill them out correctly, what about dependents, credits, deductions; the stress can be overwhelming.
There are two easy ways to deal with anxiety when it comes to filing taxes for your side hustle income. The first is to know what you need and when you need it. As a gig income earner, you’re automatically going to need a 1040 and a Schedule C, and may need one or more additional forms.
1040: This is the standard tax form that almost every person fills out, whether self-employed or working for someone else.
Schedule C: This lets the IRS know that you consider yourself a business owner, so they know what classification to put you under.
1040-EZ: This form is like a stripped-down version of the 1040 form. It isn’t needed in all situations, but depending on what your side gig is, it might be the better option.
Form SE: This form is used solely to report Self-Employment taxes, which are most often what gig income falls under.
3) Stash Your Receipts for Tax Day
Gone are the days when you toss your receipt in the garbage while cleaning out your car. Now, receipts are your proof that the money you earned went back into your business. Dinner out with a client, a business-centered phone bill, advertising costs; all those business-related costs become deductions that you should include in your taxes. This slashes the amount you owe to the IRS and greatly reduces your tax bill. It also increases the odds of you receiving a refund from the IRS.
4) Claim All Your Dependents
Tax Credits are few and far between when it comes to filing taxes. This means that every time a credit opportunity comes up, you take it. For some, this means claiming children, elderly parents, and even siblings, according to Mighty Taxes. When you claim someone on your taxes, you might be eligible for EIC or earned income credit, the Child Tax Credit, and other dependent credits.
5) Tick off All Your Deductions
Deductions are your new best friend and as a gig worker, you now have access to all sorts of deductions. For instance, if you use your car solely for business, you can deduct the entire amount you spend to operate it. Repairs, gas, oil, tire changes, insurance; everything you use to keep your car running and legal can be deducted from your tax liability.
File Early, File Right and Pay Up
Whether your gig work consists of a serious commitment outside your day job or is something you do on weekends for a little spending money; making sure you know the ins and outs of filing taxes is important to ensure you maximize your possible refund.
One way to make sure you file your taxes correctly is to choose one of two options. You can use a reputable tax software program, or you can hire a tax professional to help you file your taxes. With the software, if you choose the ‘guided’ option, a series of questions will make sure you claim all your credits and deductions to all but guarantee you get the best refund available.
Whichever option you choose, your best bet is to file your taxes well before what is generally considered Tax Day in the US, April 15th (Monday, April 18 in 2023). Any time after that and you can incur fines and fees related to filing your taxes late. And just in case you happen to owe taxes, don’t put off setting up a payment plan as the IRS doesn’t take kindly to people who skip out on their tax obligations.
This article was produced and syndicated by Wealth of Geeks.