During college, I had a job every summer. After my freshman and sophomore years, there were full-time paid internships with companies that issued me a Form W-2 and offered benefits, and in those years I reported my income from my W-2 form on my tax return.
But, there was one year in which I didn’t have a full-time paid internship or job because of some travel, and I made extra money doing the occasional side hustle. I sold some software applications I’d written, I re-sold items on eBay, and other similar side gigs.
When I think back to that experience, I recall reporting that income as “other income” on my tax return and not giving it a second thought. As it turns out, there are rules to determine what kind of income it is.
Always Report Income
First things first, if you earn money during the year through a side-gig, you have to report it on your tax return. Side gigs are great, but they are not reported the same as W-2 wage income, so it’s important to keep track of your earnings and taxable income.
Are You Self-Employed?
If you regularly earn an income from a side-gig, the IRS will consider it self-employment income.
More importantly, if that income is significant, you may need to make quarterly estimated tax payments if you think you will owe $1,000 or more in federal taxes for the year. When you work for an employer typically, they will regularly take a percentage of your paycheck to cover your taxes. When you work for yourself you don’t have an employer to take taxes out so that means you may need to pay those taxes every quarter.
For example, if you decided to start driving for a rideshare service like Uber or Lyft, you aren’t considered an employee of the rideshare company. You’re considered an independent contractor or self-employed and at the end of the year, you’ll get a tax summary that includes your earnings and some expenses.
You may be issued one or more of these IRS forms:
- 1099-K if you earned more than $20,000 in customers payments and at least 200 rides or deliveries in 2022, the lower $600 threshold and any number of rides will be effective for 2023
- 1099-NEC for any promotion, referral or other miscellaneous payment you may have received
- 1099-MISC if you have received other income such as prizes or legal settlements.
Even if you don’t make enough to receive a 1099-K from a third party provider or a 1099-NEC or 1099-Misc for income earned as a freelancer or contractor, you still need to report all your income on your taxes.
The next question you might have is whether you owe self-employment tax. Generally speaking, you will owe self-employment tax if your self-employment earnings exceed $400 a year. There are some exemptions but most folks who earn over $400 a year in self-employment income need to pay taxes on their earnings.
How to File Your Taxes
Don’t worry about knowing these tax rules. Meet with a TurboTax Full Service Expert who can prepare, sign and file your taxes, so you can be 100% confident your taxes are done right. Start TurboTax Live Full Service today, in English or Spanish, and get your taxes done and off your mind.
Side gigs are a great way to help with bills, boost savings or pay down debt but make it easy at tax-time and track your income and expenses year-round.
Passive Income 101: What It Is and How to Get…