In today’s day and age, it’s not uncommon to come across people who have side hustles to make some extra cash, especially since the start of the Covid-19 pandemic. The fact that many people have found themselves unemployed, making less money overall, or just have more free time than they did before gave even more rise to an already rising trend.
Side-hustles have provided people with the much-needed supplemental income, which has benefits and drawbacks. And while side hustles are a relatively new thing, a hustler’s tax obligations are not.
Income Tax Rules For Common Side-Hustles
Income Earned from Selling Products Online
Before the pandemic, many people were ahead of the curve by selling products on websites like Facebook Marketplace, Etsy, and Pinterest, and usually accepted payment through official online channels such as Venmo or PayPal. These are only a few websites people use to sell and market their fresh ideas, but the income reporting methods are similar for each one.
The tax form a hustler would use for any income gained through these channels isForm 1099-K: Payment Card and Third Party Network Transactions,if they’ve made 200+ transactions and made $20,000 in gross income from those transactions.
Since 1099’s are sent to you and the IRS, it is important to make sure that you’ve got the right forms when tax time rolls around. If you don’t receive one and you think/know you should be receiving one, it is important to contact the company as soon as possible. Also, it’s a good idea to keep track of your records and sales. Even if you do not meet the requirements for receiving a 1099-K, the income must still be reported.
Income Earned From Tips
With waiters and waitresses making most of their income from tips, many are unsure about the taxes associated with gratuities. There are plenty of hustlers who work their regular 9-5 during the week and then pick up a few waiting/bartending shifts on the weekends to earn a few extra bucks. Some may think that waiters, waitresses, and bartenders get to cash in their tips and move along with their day, but that is not the case. This is especially true considering the federal minimum wage for waitstaff is listed at $2.13 (different states may vary), according to theU.S. Department of Labor.
With these wages being so low, it isn’t an out-of-this-world idea to say that the IRS may notice if the only income tax is paid on comes from those wages and that’s it. Whether the tips are cash, shared, or charged (credit/debit card), they need to be reported to the IRS if the total amount is more than $20-$30 (depending on the state you reside in) within any given month.
What About DoorDash, Uber, etc.?
Fortunately, if a hustler’s hustle of choice is a delivery service, like Uber, DoorDash, or Instacart, a hustler should not have to worry too much about separately filing their tips. A delivery employee’s tips are added electronically to their wages, so it’s already there and removes a bit of the headache come tax time.
If a hustler makes more than $600 from a business, they should receive a Form 1099-NEC from the employer. However, even if a hustler does not receive a form from their employer, all income must still be reported. And again, since 1099’s are sent to you and the IRS, it is important to make sure that you’ve got the right forms when tax time rolls around. If you don’t get them, contact your employer as soon as possible.
Whether someone is working for an employer or themselves, they may receive a cash payment for their services. A side-hustle can also be an odd job here and there. For example, if a carpenter takes a side job building a deck for one of their neighbors separate from his work as a full-time carpenter at a company. This additional income should still be reported, especially if it’s cash.
Not reporting cash income to the IRS may result in tax evasion charges.Tax evasioncharges can carry up to five years in prison and a $250,000 fine. Aside from failing to report your income to the IRS, the IRS can also charge you for filing a false return. A false return consists of false or misleading information on your tax return, which can carry up to three years in prison and up to a $250,000 fine if a hustler is found guilty.
Avoiding IRS Penalties As An Independent Contractor
Many make the mistake of not reporting their cash income to the IRS but doing so can create an unnecessary headache and some potentially hefty penalties. If the IRS finds out that income is not being reported, they will take action to get what they’re owed.Since cash income is becoming more and more prevalent due to side hustles, it is a must to make sure that you are reporting income to the IRS. While it may be tempting to try and hide the cash from the IRS, the penalties a hustler could face should make you think twice before tucking that cash under the mattress.