Working both a regular 9-to-5 and side job can be a lot of, well, work… But having a side job can allow you to pursue your passions without quitting your day job, help you make ends meet, or build your rainy day fund. However, like your main source of income, a second job or a side gig must be reported to the IRS at tax time.
Whether your side gig is a seasonal endeavor or occasional work that takes a relatively small amount of your time, the IRS still considers these types of jobs “other income” for tax reporting purposes. And, if you devote a substantial amount of time to your side job, the IRS may treat you as self-employed. How do you know if you’re self-employed? According to the IRS, indications of self-employment are that your primary purpose is to make a profit and your side work is regular and continuous. If this is the case for you, you must file Schedule C with your taxes, which is used to report business income and losses. Fortunately, there are several business tax deductions you can take advantage of this year when filing your taxes.
Let’s breakdown how having a regular job and a side-gig impacts your taxes.
Report all miscellaneous income.
Cash earnings from side jobs must be reported on your tax return, even if the earnings are minimal. Underreporting income from side work may lead to additional tax assessments and penalties. To prevent this, track and report all income you get from your side gig, whether it’s in the form of money, property or services.
Payers report most income to the IRS.
If you’re a freelancer or contractor and you received $600 or more from any side job during the tax year, the individual or company that paid you generally must supply you with Form 1099-MISC. This form, which is generally mailed out to you and the IRS by January 31, states the dollar amount you earned. But, even if you don’t receive this form, you still have to report your earnings so it’s important to track them throughout the year.
You may have to pay self-employment tax.
Generally, if your net profit is $400 or more, you must pay self-employment taxes. The self-employment tax can be a surprise for newly self-employed people — freelancers, sole proprietors, independent contractors and the like — because they notice they’re suddenly paying more in tax as a self-employed person than as an employee. That’s because the self-employed person must pay for the employer and employee portion of Social Security and Medicare taxes. The good news is that the IRS recognizes this extra tax burden. For that reason, they allow you to deduct half of your self-employment tax.
Use allowable deductions to trim your tax bill.
A tax deduction reduces the amount of taxable income, ultimately lowering your tax bill. You can deduct certain expenses from self-employment income. Say you earn $5,000 from your self-employment side job, and your deductible expenses total $1,000, you would owe taxes on only $4,000.
So what types of business expenses are tax deductible? In order to be tax deductible, your business expenses must be ordinary and necessary for your business.
Ordinary expenses are those that are common and accepted for your business. Necessary expenses are those that are helpful and adequate for your business. These types of expenses are generally tax deductible.
For example, a ski teacher might deduct her ski boots as an ordinary expense and a landscaper might deduct rent for a storage space used to store landscaping tools and equipment. While a storage space may not be required for landscaping, it can still be deducted as a necessary expense because it’s helpful to the business.
Common deductible expenses related to your side gig may include: a portion of your rent mortgage interest, property taxes, and utilities; car mileage; dues and subscriptions paid to related organizations; necessary tools and equipment; tuition for related education.
Working a regular job and a side job is pretty common these days, and when filing your taxes, you easily file your income from your employer and claim your business income from your side gig on one tax return. Just don’t forget, with a side gig you can claim deductions you’re not able to claim as an employee saving you money for your business.
Originally published at medium.com