As the cost of living continues to rise, more and more people are turning to side hustles to supplement their income. While this extra cash can be a great boost to your bank account, it’s important to understand how side hustles can affect your taxable income.
First and foremost, it’s important to understand that any income you earn from a side hustle is considered taxable income. Whether you’re selling products online, driving for a ride-sharing service, or freelance writing, the IRS expects you to report that income when you file your taxes.
Those who are self-employed will need to file a Schedule C form with their tax return, which will detail all of their expenses and income from their side hustle. This can sometimes be complicated, as freelancers and small business owners may not know which expenses are deductible and which are not.
If you’re earning a significant amount of money from your side hustle, it’s important to set aside a percentage of your earnings for taxes. This will prevent any unpleasant surprises when tax time rolls around. As a general rule, self-employed individuals should aim to set aside 30% of their income for taxes.
Another thing to keep in mind is that your side hustle may push you into a higher tax bracket. This means that you’ll pay a higher percentage of your income in taxes. For example, if you earn $60,000 a year in your full-time job, you’ll fall under the 22% tax bracket. However, if you earn an extra $10,000 a year from a side hustle, your total income is $70,000, and you’ll now fall under the 24% tax bracket.
It’s important to note that not all side hustles are created equal when it comes to taxes. Some side gigs, such as selling goods online, may only net you a small profit, while others, such as freelance writing or consulting, may earn you a significant amount of money.
In some cases, you may even be able to deduct certain expenses related to your side hustle. For example, if you’re using your personal vehicle to drive for a ride-sharing service, you may be able to deduct mileage expenses. However, it’s important to keep good records of your expenses so that you can accurately claim any deductions on your tax return.
In conclusion, side hustles are a great way to earn some extra cash, but it’s important to understand the tax implications of your additional income. By setting aside money for taxes, keeping good records of your expenses, and staying aware of how your side hustle may affect your tax bracket, you can ensure that you’re staying on the right side of the IRS.