Start a side gig in 2020? Whether you lost your job due to COVID-19, or you simply wanted to earn some extra cash, side gigs tend to complicate your tax filing a bit.
Over the years, the IRS refined its rules for gig workers. But obviously, the IRS still wants you to pay taxes on any income, whether it is your primary income source or profits earned from your side gig.
Whether you drive for a ride-sharing service, deliver groceries, or run a virtual business, you need to report your new side hustle income on your tax return. But before getting started, it’s important to understand all the possible implications so you aren’t hit with a surprise tax bill or tax penalty come tax time.
The IRS definition of gig work
With the rise of the gig economy, the IRS worked to clearly define what constitutes a “gig.” According to the IRS, the gig economy—also called sharing economy or access economy—is an activity where people earn income providing on-demand work, services or goods. Often, it’s through a digital platform like an app or website.
Side gig income must be reported on your tax return, even if you earned cash for the gig or didn’t receive any formal income statement.
Common examples of gig work include but aren’t limited to:
Driving for a ride-sharing app Delivering groceries or food through an app Selling items online Working as a freelancer or contractor Providing professional or creative services Renting out a property Selling crafts or other handmade goods
Again, these are just a few examples. Regardless of how you earned the money, you are responsible for reporting it to the IRS.
Understanding your side gig tax implications
So, it’s your first year of working a side gig. What does that mean when it comes time to file your own taxes?
No matter how much you earned, you must report that income as a self-employed individual. And if you also have a full-time job on top of your side gig, both forms of income need to be reported on your tax return.
That is assuming you are operating your side gig as a sole-proprietor or single-member LLC. If that’s the case, then you need to report your side income on your individual 1040 tax return.
By filing that way, you are personally liable to pay any taxes owed out of your own pocket. Because of that, it is vital to keep accurate records of your side income and expenses throughout the year. Be sure to keep any documentation even after you file your taxes in case you are ever audited.
If your side gig earnings are only a small amount and you had no expenses related to the work you did, it will be relatively easy to report your earnings. But if you were profitable and had high business expenses, it becomes slightly more complex. You may even be able to take the qualified business income deduction on your personal tax return. DIY tax software, like TaxAct, will calculate that deduction for you to help you accurately claim the benefit.
All about quarterly tax payments
In your first year of having a side gig, you may not know about quarterly tax payments. Any independent contractor or side gig worker is required to pay quarterlyContinue reading