Everyone has a side hustle these days. Earlier this year, Bankrate released a report claiming over 44 million American adults are earning money outside of their main source of income.
Of course, I’m one of them. I started freelance writing as a side hustle in October of 2015 and turned it into a full-time gig ten months later.
Maybe you’re considering a freelancing to save for a big purchase, pay down debt, or just pursue a passion you hope to eventually take full-time.
Unfortunately, many people don’t consider the financial aspects of the side hustle until they’ve made a few mistakes. Whether your freelance work earns just a few dollars a month or a several thousand, tracking your profits and paying taxes are non-optional. Here are a few essential steps to get started on the right foot.
Last year, I wrote a blog for Henry + Horne about how slow the IRS has been to adapt to the on-demand economy. In it, I quoted a report from the Kogod Tax Policy Center that found:
1/3 of on-demand workers did not know whether they were required to file quarterly estimated tax payments
36% were not familiar with the kinds of records they would need to maintain to substantiate income and expenses for their work
43% had no idea how much they would owe in tax for their on-demand work and had not set aside money for taxes
1/2 were unfamiliar with deductions and credits that could be used to offset their self-employment income
Last year, I worked with a young lady that drove for one of the ride-sharing companies and got into a bit of tax trouble. It seems she never received a 1099 from the company and wasn’t aware that the money she made was taxable income, so she didn’t do a good job of tracking expenses. A couple years later, she received a notice from the IRS telling her she owed thousands of dollars in back taxes, interest, and penalties.
Fortunately, we were able to help her recreate her records enough to have some documented expenses to offset that income and get her tax bill lowered. But the situation just reinforced how little information many of these workers receive about the tax implications of the gig economy.
So I was excited to write this piece for Credit Karma Tax, providing step-by-step instructions for on-demand workers to file their tax return – for free! – using Credit Karma Tax.
All you need to do is sign up for a free Credit Karma account and follow the instructions to report business income from any 1099-MISCs and 1099-Ks you receive from any ride-share companies and any income you earned from ride-sharing work that wasn’t reported on a 1099.
If you know anyone working in the gig economy, feel free to pass this along!
Tax season is in full swing, and all of those 1099s and W-2s are trickling into our mailboxes. Are you worried about owing additional tax when you file your 2016 return? It may be too late make a charitable donation, pre-pay your next mortgage payment, or make an estimated state income tax payments to increase your itemized deductions for 2016, but you might have a couple options for reducing your 2016 taxable income. The best part about these deductions is, unlike prepaying your mortgage interest, you’ll keep the money in your own pocket.You have until April 18, 2017, to make traditional IRA contributions for 2016, but not beyond that date, even if you file an extension.
Make an IRA contribution
For 2016, you can contribute up to $5,500 ($6,500 if you’re age 50 or older). There are no income limits for contributing to a traditional IRA, but if you have a retirement plan through your employer, your deduction may be limited.
You can also contribute to an IRA for a spouse that isn’t working as long as you file a joint return. The maximum contribution to both spouses’ IRAs can’t exceed your joint taxable income or double the annual IRA limit, whichever is less.
Traditional IRA contributions can be taken as an “above-the-line” deduction on Line 32 of Form 1040. Above-the-line deductions can be valuable because they reduce your adjusted gross income (AGI), so they could potentially increase other tax benefits that are phased out or disallowed altogether based on AGI. Also, you don’t have to itemize to take advantage of above-the-line deductions.
Make a SEP IRA contribution
Self-employed taxpayers and freelancers may be able to put away more money for retirement and benefit from bigger deductions by opening a SEP IRA. The maximum SEP contribution can’t exceed the lesser of 1) 25% of your net profit shown on Schedule C reduced by the deductible portion of your self-employment tax, or 2) $53,000 for the 2016 tax year.
You have until the date you file your return, including extensions, to make SEP contributions. Those contributions can be deducted as an above-the-line deduction on Line 28 of Form 1040.
Make an HSA contribution
If you were covered by an HSA-eligible health insurance plan for 2016, you have until April 18, 2017, to make your contribution for 2016. For 2016, you can contribute up to $3,350 for an individual or $6,750 for a family.
To qualify for an HSA, you must be insured under a high-deductible health plan (HDHP) that is HSA-eligible. An HDHP is any plan with a deductible of at least $1,300 for an individual or $2,600 for a family. And although the average deductible for single coverage is currently $1,478, few insurance plans are actually HSA-eligible. That is because the IRS specifies that except for preventive care, “and HDHP may not provide any benefits for any year until the deductible for that year is satisfied.” So more generous plans that pay for anything other than preventive care benefits before the deductible is met are not HSA-eligible.
If you made contributions through an employer’s pre-tax plan, those contributions have already been deducted from your taxable income in Box 1 of Form W-2, but if you make contributions on your own, you can claim those as an above-the-line deduction on Line 25 of Form 1040.