Tax Consequences of Having a Side Business
When it comes to stretching your budget, working a side job is an effective way to ensure you’re earning enough to cover your expenses. But this can carry repercussions for your taxes. Freelancers should prepare for the very real tax results of essentially running a side business. If you’re accustomed to punching in as a traditional employee, you may need to start thinking like a self-employed small business owner, depending on your side job.
Budget for what you’ll owe the IRS. When you work as a traditional employee, your boss handles income-reporting and tax-withholding for you. This typically reduces what you owe at tax time since taxes are withheld from your paycheck. If you’re working as an independent contractor, freelancer or self-employed part-time business owner, you’ll be responsible for tracking and reporting the money coming in.
Keep an eye out for a 1099 form. If you receive at least $600 as an independent worker, you might receive a 1099-K or 1099-MISC form that logs what you’ve received in income. You’ll use that to fill out the Schedule C form detailing the income earned in your side job. But even if you don’t receive a 1099 form, you’re responsible for tracking your earnings and expenses, reporting them and paying the appropriate taxes on them.
Track qualified business expenses. One way to reduce the taxes you owe as a side hustler or freelancer is to track and deduct qualified business expenses. Use a separate bank account, credit card and debit card for all transactions related to your side hustle.
Understand that this will impact your personal taxes. Keep in mind that not only will you potentially have a higher tax bill and a more complex tax-filing process, but this will impact your personal tax situation as well. If you earn enough, you might lose access to the earned income tax credit or the student loan interest deduction. Plus, students or parents who have a child headed to college might find that the extra earnings impact their eligibility for need-based financial aid or eliminate eligibility for the federal work-study program or Pell Grant.