When you have a side hustle, you may be getting some crummy advice from friends about how to file your taxes. Watch out for these common myths and misconceptions about side hustle taxes.
Benjamin Franklin once wrote, “in this world nothing can be said to be certain, except death and taxes.”
If you have a side hustle, you can be certain of a third thing: tax advice—specifically, crappy tax advice from friends and family members who have no idea what they’re talking about.
Yes, when you earn income from freelance work, creative projects, an ecommerce business, investing, babysitting, tutoring, ridesharing, or another line of work outside of conventional employment, the rest of the world takes it as a cue to tell you you’re doing your taxes wrong:
“Get paid under the table if you can.”
“Oh, dude, you can totally write this off.”
“I hope you saved all your receipts!”
I can admire the intentions behind these tips. Side hustle taxes aren’t easy. If you’re like me when I started freelancing, you do need help. But unless they have actual experience running their own businesses, your aunt Noreen and your buddy Eric are only going to confuse and complicate the situation for you. At best, their advice will add needless stress to your life; at worst, it could put you in financial and legal jeopardy.
Beware these six all-too-common myths and misconceptions about side hustle taxes:
Myth 1. You don’t need to report income earned from your side hustle.
Let’s start with the obvious. Your side hustle may not be your “main” job, but income is income. Regardless of how you make your money, you almost certainly need to file and pay taxes. Yes, there are exceptions. As you may know, anyone who makes under $12,000 in a year doesn’t need to file for that year. But the minimum is even lower for self-employed people—i.e. freelancers, entrepreneurs, and side hustlers. Earn just $400 from your side hustle and you need to report it.
Myth 2. Contractors don’t need to report all your income.
What about money you received “under the table,” as in envelopes or wads of cash? What if you didn’t receive a 1099 from one of your clients—you don’t have to report that, right? Wrong. Any money you receive from your side hustle is potentially taxable income. It’s illegal to try to cheat the system and knowingly hide it from the Internal Revenue Service.
Myth 3. Sider hustlers don’t need to pay quarterly estimated taxes.
There’s no letter you get from the IRS notifying you about this when you launch your side hustle (if only). But if you’re self-employed, you’re required to pay your taxes in installments throughout the year. Quarterly estimated taxes are due on the following dates (or the next business days if the dates fall on weekends or holidays):
When are quarterly taxes due for side hustlers?Quarter:Income Period:Quarterly Tax Due Dates:Q1Income received between January 1 through March 31April 15Q2Income received between April 1 through May 31June 15Q3Income received between June 1 through August 31September 15Q4Income received between September 1 through December 31January 15 (of the following year)
And remember: “Estimated” does not mean “optional.”
You need to pay on or before the deadlines. You can make late payments if you really need to, but be aware that you’ll be on the hook for additional fees. You can determine your estimated taxes either by basing them on what you earned the year prior or by calculating what you’ve already earned in the current year. Either way, when the annual tax filing season (April of the following year) rolls around, you’ll figure out what your real tax burden is. If you underestimated, you’ll need to pay the remainder; if you overestimated, you’ll get a refund.
Myth 4. You’re technically a business! So you can write everything off.
This is a big one. There’s a widespread belief among the general public that self-employed people can claim anything and everything as a business expense.
Use a computer? Write it off. Drive a car? Write it off. Buy dinner? Write it off. Purchase a plane ticket? Write it off. Pay rent? Owe credit card debt? Go snorkeling? You get the idea.
I’ve been as guilty as anyone with this particular strain of tax BS. I remember picking up the check for a round of beers with friends and saying I could write it off because we talked about freelancing for five minutes. I was half-joking—I never planned to actually claim it on my tax return—but I legitimately believed someone smarter than me probably could.
I’ve done this long enough to know “writing it off” is as real as “work-life balance” or “the American Dream.” While you can claim many costs as business expenses on your tax return, you can’t simply list everything you’ve paid for in the past 365 days, and you shouldn’t expect to use it to reduce your taxable income. Tax write-offs (also referred to as “deductions”) are much trickier than Noreen and Eric would have you believe.
First, there are limits in terms of what kinds of expenses you can claim. Iin order to be considered a business expense, something needs to be necessary to doing business. If I were a professional beer taster (someday!), I theoretically could write off those beers.
Second there are restrictions in terms of how much you can deduct. For example, you can’t necessarily say that an entire room is your “home office” (and thereby deduct it from your taxes) if you don’t use the room exclusively for work. Nor can you claim all meals as business expenses—the IRS only allows you to deduct 50% of the cost of a meal that’s “necessary” for your work, not “lavish or extravagant.”
There are hundreds of rules and plenty of micro-examples I could dig into when it comes to this topic, but that would be beyond the scope of this blog post and better left to an accountant. The point is you shouldn’t try to be clever with deductions unless you enjoy wasting your time and getting in trouble with the IRS.
Myth 5. You’re technically a business so you need to save every receipt.
This is another big one—and it’s related to the myths above and below.
Again, I’m not an accountant, but I’m going to give you a tip: Don’t hoard your receipts or obsess over the tax consequences of every single expense. It’s silly, it’s a waste of your time, and it’s ultimately unproductive.
Keep in mind these tips are for freelancers and new (-ish) side hustlers. If and when you have employees, you definitely need to track your expenses. If your business is just you, on the other hand, well…
There was a time when keeping your receipts in a filing cabinet or shoebox may have been financially prudent, but that was decades ago. We have the internet. We have debit and credit cards. Unless you’re paying for everything in cash and spending a lot of cash, you don’t really need to save your receipts. There’s no reason to hang onto a little paper document that proves you bought an 85-cent tube of lip balm from Walgreens on July 11th, 2018. Your bank and credit card statements are tracking most, if not all, of your purchases for you.
I realize this may irritate some of the more scrupulous and detail-oriented savers out there. To be clear, I’m on Team Digital. I’m not suggesting you ignore how much you’re spending or throw every receipt away without a second thought. But think about how much time and effort it takes to review and organize every proof of purchase. And then think about the value of your time. Is saving 50% of 85 cents worth a minute or two during tax season? Maybe. But probably not, considering the likelihood that you’ll benefit from taking the standard deduction—which brings us to myth #6:
Myth 6. Gig workers save a bunch of money by itemizing deductions.
In 2020, you can deduct $12,400 from your taxes—no questions asked. (If you’re married and filing jointly with your spouse, that number is $24,800; if you’re the head of your household, it’s $18,650.)
This is the standard deduction, and it’s basically the IRS offering you a free pass. They’re saying, “We don’t know what your business expenses were last year, but here’s a bunch of money we’re willing to give you if you’d rather not tell us. Take it or leave it.”
Why is the IRS willing to give you $12,400? Because, if you take it, you’re making life easier for them. They don’t have to pore over your return in as much depth as they would otherwise.
The standard deduction also simplifies filing for taxpayers. Rather than listing every business purchase and determining how much of it you can claim as an expense (a practice known as itemizing deductions), you check a box and instantly reduce your tax liability by five figures.
So it’s simpler and faster, but is it smarter financially? For many people, the answer is yes. According to the IRS, more than two-thirds (68.6%) of taxpayers claimed the standard deduction in 2018. A good number of those people probably chose it because they didn’t want to go through the trouble of looking over their receipts. But I’m willing to bet just as many found out that the standard deduction offered equivalent or much greater savings that itemized deductions would.
The average side hustle business would need to have had a lot (and I mean a lot) of expenses over the course of a year to get itemized savings close to standard deduction savings.
I can attest to this. The year I spent the most on my business, I went through the trouble of listing everything in my tax filing software to see how much I would save if I claimed itemized deductions. Then I went back and compared that number to the standard deduction. Turns out the standard deduction was still the more cost-effective option by a couple thousand dollars. And this was before the recent tax reform law, which nearly doubled the standard deduction and placed limits on itemized deductions.
You and your business may be different, of course. Depending on how much income you earn and what your expenses look like, itemizing could be a better option. But don’t buy into the idea that the easy way is for suckers. Sometimes, hard work is just hard work.
Consider that the main takeaway from this post. Don’t let tax saving become an exercise in frustration and futility. Take as many opportunities to save money as you can, but stay honest with the IRS—and with yourself. If it seems like you owe money—well, you probably do. You may be able to lower your bill, but no creative filing tricks will fundamentally change your situation.
Pay your side hustle taxes and move on with your life. After all, you have better things to do.
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