Curious about taking on a side gig – or know someone who has one? We’ll go through some of what a so-called “side gig” actually is, how to get one, some of the most popular ones, and what kind of implications they have come tax time each year.
So what is a “Side Gig” Anyway?
Essentially, a side gig is a second job. It’s usually not as demanding, lets you have a flexible schedule, and is generally in addition to another part-time or full-time job. You may think of it as more of a hobby, especially if you don’t profit much from it.
This situation goes by many names – in today’s gig economy, we say the terms side gig, side hustle, or freelancing. Additionally, as far as the IRS is concerned, you are at least partially self-employed.
The so-called gig economy is booming right now, with thanks to one of the biggest side gigs out there – Uber (and its cousin, Lyft). For those who have been living under a rock for the past five or so years, these two companies allow anyone to act as a taxi driver. An Uber or Lyft driver turns on the proprietary smartphone app, and sees people nearby who are hailing a ride. They pick up riders wherever, much like a taxicab, and drop off the rider at their destination. Instead of handing the driver cash, the rider pays the driver digital in the smartphone app – while the ride-hailing companies take a cut, of course.
Similarly, crowd-sourced delivery services are also on the rise – you probably know names like GrubHub, DoorDash, Postmates, Uber Eats, and more. These really work the same way as ride-hailing services, but a driver only transports food to its destination. The difference is that you don’t work directly for a specific restaurant, you work for any restaurant contracted with one of these companies. You take your orders – again – from a smartphone app. (Instacart is another similar delivery service, but delivers groceries to client’s homes instead.)
Another newer category of side gigs are on the more crafty side – brought out mostly by Etsy. You can find just about anything crafty on the Etsy website from all kinds of sellers – all of which use the website as a place to market their products, with Etsy taking a cut of the profits, of course. Etsy is similar to eBay, except everything is price-fixed, and most of the products are personalized and/or hand-crafted.
Even the more traditional side gigs have increased now with help from the internet and better abilities to crowd-source. For example, accountants, lawyers, and other service professionals have always been the largest categories of freelancers, but now the internet allows them to grow their business differently. There are large amounts of websites showcasing professionals to hire – Thumbtack, Fiverr, and UpWork – to name just a few. These service professionals simply post a profile and wait for the leads to come in.
So Why Do I Care?
Well, for starters – one of these might seem appealing to you! If you need a little extra cash, but can only work when it’s convenient (or around another, more demanding job) – then maybe a side gig like the ones we covered is for you!
Second – if you already participate (or are thinking of participating) in a side gig, there are some tax implications that you’ll need to know before you dive in head-first.
What does my Side Gig do to my Taxes?
Of course, being a tax blog – we’re going to focus on the tax implications of having a side gig. We agree this is a great to make a little extra income – but unfortunately, the IRS wants a cut of it.
As we mentioned in the beginning, a side gig makes you part of the self-employed category as far as the IRS is concerned.
You will need to file a Schedule C with your tax returns.
This is a schedule that is part of the regular individual IRS Form 1040. This particular schedule shows income and expenses from your side gig that are otherwise not taxed.
Track your expenses!
Since Schedule C looks at income and expenses, every business expense that you have may be deductible against your income. If you keep track of your expenses well, you may be able to offset quite a bit of your income, therefore owing less tax!
This is a huge issue with most freelancers – they don’t have any bookkeeping skills! For example, they fail to keep track of their miles traveled or vehicle maintenance & repair costs or the cost of their supplies.
Boundless is a Quickbooks ProAdvisor & Solutions Provider, as well as a Wave Accounting Pro Network member – so ask us to help you get set up on either of these systems – we’ll get you a much better deal!
You may need to file estimated quarterly payments throughout the year.
You are earning income that is otherwise non-taxed and needs to have tax collected on it. This only occurs at certain thresholds, but generally if you are making more than $1,000/year from your side gig, this is worth looking into. Unfortunately if the IRS deems you should have made estimated payments and you neglected to, you will be faced with penalties & interest come filing time.
Boundless can help with this too – just contact us! We can help you figure out if you should be remitting estimated payments to the IRS.
You will likely receive a Form 1099-MISC reporting your income to you at the end of the year.
This works much like a W-2 form, but is much more simplistic – in fact, it’s usually only one number: non-employee compensation. What this form tells the IRS is you worked for a company or organization that did not withhold taxes from your pay throughout the year. Rest assured, the IRS gets a copy of this form – and it should tie to your gross income number reported on your Schedule C.
You’ll likely pay more for tax preparation services.
This is true whether you do your taxes yourself or go to a tax preparation professional (such as Boundless). This is due to the complexity of the Schedule C and the need for a good bookkeeping system (see #2 above) to track expenses properly. Boundless does charge more to file an individual return with a Schedule C, but only an additional $50. Plus, an IRS-credentialed Enrolled Agent is looking at your Schedule C (and your entire return) to make sure everything is represented correctly. You wouldn’t want to miss any expenses – they can raise your tax amount owed!
Because of the point raised above – if you have a side gig, side hustle, freelance…whatever you want to call it – seek the help of a professional come tax filing time. We have found that do-it-yourself software does not do a great job of covering all bases when it comes to expenses that can be deducted and representing everything accurately. Because even do-it-yourself software charges more to file your taxes with a Schedule C, it is a good time to evaluate using a tax professional instead.
As a shameless plug – Boundless can help! We have IRS-credentialed Enrolled Agents on staff that have extensive knowledge of what can & cannot be deducted on your Schedule C.