When Filing Taxes for a Side Hustle Avoid These Common Mistakes
According to a Bankrate survey, 36% of Americans have a side hustle.
This speaks to the state of inflation and the economy as a whole.
If you’re involved in a side hustle, whether to earn extra cash for your savings account or monetize one of your hobbies, it’s important to account for the funds on your taxes – and properly.
Filing taxes for a side hustle can be complicated.
In today’s post, we’ll give you some expert tips to help you avoid common tax filing errors.
With the right side hustle tax tips, you can put more money in your pocket by preventing mistakes and the penalties that can result.
Read on and start maximizing tax returns.
1. Failing to Deduct Expenses
You can lower your taxes by deducting business expenses.
These include costs like advertising and any tools you need to run your business.
The more you can deduct, the less you’ll pay in taxes.
Home office expenses can also be deducted if you use part of your home for your side hustle.
If the space is used only for work, you can reduce your taxable income.
Tracking all your business-related expenses throughout the year ensures you’re not paying more taxes than necessary.
Be sure to keep receipts and records for everything you plan to deduct.
2. Claiming Personal Expenses
You can’t deduct personal expenses from your taxes for your side hustle.
The IRS only allows deductions for costs directly related to running your business.
Personal expenses – rent, groceries, etc. – are not part of your business.
Mixing personal and business expenses always causes problems.
For example, if you use your car for both work and personal trips, you can only deduct the business-related portion.
Keeping clear records of what is for work and what is personal helps avoid mistakes.
Always make sure to separate your personal and business expenses.
Deducting the wrong expenses can lead to fines or an audit. Stay organized and only claim what you truly use for your side hustle.
3. Improperly Reporting Past Side Hustle Income
Improperly reporting past side hustle income can lead to serious problems.
If you fail to report all the money you made, the IRS could audit you and charge penalties.
This could mean paying back the taxes you owe plus interest.
Incorrect reports can also affect your future taxes.
The IRS keeps track of your income and may flag you if your reporting doesn’t match their records.
This can cause delays and extra stress when filing your next tax return.
To avoid issues, always report all your income.
Keeping good records and being honest with your tax filings helps you stay on track and avoids complications in the future.
4. Misclassifying Income
Misclassifying your side hustle income can lead to serious problems with the IRS.
If you treat your business income as a hobby, you may improperly report it to the IRS, which can lead to higher taxes and even an audit.
To properly classify your side hustle income, report it as self-employment income.
This includes income from freelancing and offering products/services.
By classifying it correctly, you can deduct business expenses and reduce your taxable income.
Keep detailed records of your income and expenses throughout the year.
If you’re unsure, consider consulting a tax professional to ensure your side hustle income is reported properly.
5. Missing the Self-Employment Tax
Not understanding self-employment tax can lead to big problems when filing taxes for your side hustle.
Self-employment tax covers Social Security and Medicare.
If you don’t pay it, you could face penalties and interest.
This tax is around 15.3% of your net earnings, so it’s important to calculate it correctly.
Many people forget to account for self-employment tax because it’s not automatically taken out like regular income tax.
If you don’t pay it, you may owe more money when you file, which could be a surprise.
It’s also important to remember that self-employment tax applies to anyone making over $400 in side hustle income.
6. Ignoring State and Local Taxes
Missing state and local taxes when filing taxes for your side hustle can lead to serious problems.
Many people only think about federal taxes, but state and local taxes can be just as important.
In Arizona, state income tax ranges from 2.59% to 4.5%, depending on your income level.
You must report this income on your state tax return to avoid penalties.
Tempe, like many cities in Arizona, has a local sales tax that may apply if your side hustle involves selling goods or certain services.
Register with the city to collect and remit sales tax if required.
7. Not Hiring a Professional
Hiring a tax accountant to help you file taxes for your side hustle can save you time and money.
Tax laws can be confusing, but an accountant understands the rules that apply to your business.
They’ll instill more efficient tax processes and ensure you’re filing correctly.
An accountant can also help you avoid mistakes that could lead to penalties.
They can guide you through the process of calculating self-employment tax.
They’ll also ensure you’re compliant with state and local taxes.
Tax professionals will help you stay organized by keeping track of your expenses and income.
They can advise you on reducing your taxable income and make your business more efficient.
Hiring an accountant ensures your taxes are handled professionally and maximizes your potential savings.
Filing Taxes for a Side Hustle Can Be Easy with Our Help
There are plenty of potential pitfalls when filing taxes for a side hustle.
These are just some of the mistakes that can result in penalties and lost income.
With the help of a top accounting service, you can keep more money in your pocket while keeping the IRS off your back.
Master Accounting and Tax Service has 20 years of experience helping Tempe’s business owners and freelancers properly file their taxes.
Not only do we have an experienced government tax auditor on staff, but we carry an A+ rating on BBB.
Contact us today to learn how we can help you with your side hustle taxes.
Looking for a Tax Accountant in Arizona?
Master Accounting and Tax Service offers expert tax solutions tailored to your needs. Our dedicated team provides comprehensive tax accounting services, ensuring integrity and affordability to help you achieve financial clarity.
Call (480) 456-4999 or contact us today to get started!
