Exploring the Earnings Threshold: How Much Can You Make on a Side Job Without Paying Taxes?
Whether it’s picking up the occasional shift at a neighborhood restaurant, offering freelance writing services, selling homemade crafts online, or renting a room in your home through Airbnb, the extra income earned from a side job or a “side hustle” can be a significant financial boost. However, a question that often arises is “do you have to report side hustle income?” This article explores the answer to that and details the potential implications of additional income on your tax obligations.
Firstly, it’s crucial to make clear that the Internal Revenue Service (IRS) expects you to report any income you earn, be it from a full-time job or a side gig. In the eyes of the IRS, all income is taxable unless specifically excluded by law. Side hustles, like babysitting or pet-sitting, typically aren’t exempted. So, the answer to “do you have to report side hustle income?” is a resounding yes, regardless of how small the earnings may be.
Expenses associated with your side job could be deductible and could reduce the amount of income you have to report, ultimately lowering the amount of tax you owe. It is essential to keep full and accurate records of your income and expenses associated with your side hustle.
However, it is also important to take note of the standard deduction – the base amount of income that is not subject to tax, that you can take if you do not itemize your deductions. For the tax year 2020, this is $12,400 for single filers and $24,800 for married couples filing jointly. Essentially, if the sum of your earned income from all jobs (including side jobs) and other deductions is less than the standard deduction, you would not owe any federal income tax.
With these basics covered, let’s focus on the earnings threshold that allows you to make money on a side job without owing any taxes. The IRS considers $400 to be the magic figure. According to the IRS, if your net earnings from self-employment were $400 or more, you must file an income tax return. If they were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 instructions.
Self-employment taxes (Medicare and Social Security) are another consideration. These are due when your net earnings from self-employment exceed $400. The self-employment tax rate for 2020 is 15.3%, with 12.4% going to Social Security and 2.9% allocated to Medicare.
Note that self-employment taxes are on top of your regular income taxes. Therefore, even if your income is low enough that you don’t owe any income tax, you may still owe self-employment taxes if your net earnings exceed the $400 threshold.
If you have a side job and you’re bringing in extra income, it’s best practice not to ignore the potential tax implications. Understanding your tax obligations when you have side hustle income is critical to avoiding problems with the IRS. Penalties can range from having to pay past-due taxes with interest to possible criminal charges for tax evasion, depending on the amount of unreported income and how long it has remained unreported.
In light of this, always remember to accurately report your side income, be aware of the standard deduction, and do not overlook the potential deductions you may qualify for. Using these strategies and understanding the tax laws can help you optimize your earnings, maintain financial integrity, and avoid penalties. Remember, tax issues are complex, and it’s always recommended to seek advice from a tax professional who can guide you based on your specific situation.
In conclusion, exploring the earnings threshold for side jobs can help clarify when you are obligated to pay taxes on this incremental income. While the income from a side job can provide financial relief and embolden entrepreneurial endeavors, it’s crucial to familiarize oneself with the tax issues that may arise from these undertakings to prevent undesirable tax situations. Always remember – when in doubt, do not hesitate to seek professional advice.