Having a side gig can help you make ends meet or build your rainy day fund. Income from freelance work, running your own small business or working at a second job brings in extra income without requiring you to quit your day job. But, like your main source of income, a second job or side gig must be reported on Form 1040 at tax time.
Are you self-employed?
A side gig can be a hobby, a seasonal endeavor or occasional work that takes up a relatively small amount of your time. The IRS considers this type of job "other income" for tax reporting purposes.
But, if you devote a substantial amount of time to it, the IRS may treat you as self-employed. If this is the case, you must file Schedule C with your tax return. Schedule C is used to report business income and losses. Indications of self-employment are:
- Your primary purpose is to make a profit
- Your side work is regular and continuous
If you are employed by someone else, you cannot deduct business expenses directly from your income. Any unreimbursed employee expenses are an itemized deduction on Schedule A of your tax return.
Don't miss the miscellaneous income
Cash earnings from side jobs must be reported on your tax return, even if the earnings are minimal. Underreporting income from side work can lead to additional tax assessments and penalties. You can prevent this by reporting all income you get from your side gig, whether it's in the form of money, property or services.
Payers report most income to the IRS
If you're a freelancer or contractor and you received more than $600 from any side job during the tax year, the individual or company that paid you generally must supply you with Form 1099-MISC – as in miscellaneous income. Payers will also send this form to the IRS to report your income.
Payers should send out 1099 forms by Jan. 31 that state the dollar amount you earned. But, even if you don't receive this form, you still have to report your earnings. For example, in 2015, if you earned less than $600 from a side gig, the payer doesn't have to send you a 1099 form, but you still have to report the earnings.
Use allowable deductions to trim your tax bill
A tax deduction reduces the amount of taxable income, lowering your tax bill. You can deduct certain expenses from self-employment income.
Erik Lozano is a banker by day and a rideshare driver by night in San Diego, California. He tracks the mileage on his car related to his rideshare income and deducts that portion for mileage, maintenance, gas and insurance costs at tax time.
"Having a side job gives me 'fun' money," says Erik, whose rideshare side job accounted for about 20% of his income in 2015. "Here in San Diego, it's hard to live on only one full-time job."
First, determine the difference between your expenses.
- Ordinary expenses are those that are common and accepted for your business
- Necessary expenses are those that are helpful and adequate for your business
For example, a ski teacher might deduct her ski boots as an "ordinary expense" and a landscaper might deduct rent for a storage space used to store landscaping tools and equipment. While a storage space may not be required for landscaping, it can still be deducted as a "necessary expense" because it's helpful to the business.
Common deductible expenses related to your side gig include:
- Portion of your home used
- Mileage of your car used
- Dues and subscriptions paid to related organizations
- Necessary tools and equipment
- Tuition for related education
For example, if you earn $10,000 from a self-employment side job, and your deductible expenses total $3,000, you would owe taxes only on $7,000.
$10,000 - $3,000 = $7,000 taxable income.
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