Understanding the Tax Implications of Your Side Hustle
Earning side income or freelancing is a great way to boost your finances, but it also comes with specific tax responsibilities. Understanding what to report and how to maximize deductions is essential to avoid penalties and make the most of your hard-earned income.
What to Report
Freelancers and side hustlers must report all income, even if they don’t receive a formal tax form like a 1099-NEC. Keep records of payments received through platforms like Venmo, PayPal, or direct deposits. The IRS considers all income taxable, so staying organized with invoices and payment records is key.
Deductions You Can Claim
Self-employment comes with perks, including deductible expenses that reduce taxable income. Common deductions include:
- Home Office: If you have a dedicated workspace, you can deduct a portion of your rent or mortgage.
- Supplies and Tools: This includes software, equipment, or materials used for your work.
- Travel and Mileage: Business-related travel and vehicle use may qualify.
- Internet and Phone Bills: Deduct the percentage used for business purposes.
- Keeping detailed receipts and using apps to track expenses ensures you claim every eligible deduction.
How to Avoid Penalties
- Pay Quarterly Taxes: If you expect to owe $1,000 or more in taxes, you’re required to make estimated payments quarterly.
- Save for Self-Employment Tax: This includes Social Security and Medicare taxes, totaling 15.3%.
- Stay Organized: Use accounting software to track income and expenses year-round.
Navigating taxes doesn’t have to be overwhelming. You can reduce stress and keep more of your income by staying informed and proactive.
Need help with freelance taxes? Contact MacNeal CPA for expert guidance to maximize deductions and stay compliant!