With record-high inflation in 2022, many Americans took on side hustles to afford the increased costs of living. That included renting out part of their home, selling goods on sites like Etsy, delivering orders or driving passengers through platforms like Doordash, Grubhub and Uber.
The government is entitled to a cut of those earnings, which could mean a more complicated and expensive tax return. There are, however, some tax benefits to having a side hustle too.
Unlike Americans who work for an employer and receive a W-2, the tax form that documents their earnings for the year, independent contractors and freelancers often receive either a 1099-K or a 1099-NEC which serves a similar purpose.
Here’s what else you should know if you earned money through a side hustle this year:
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IRS delays reporting requirement for gig workers
The 2022 tax year was supposed to be the first where PayPal, Venmo and other platforms that facilitate side hustle income and freelance jobs were supposed to send anyone who earned at least $600 a 1099 form. But in December, the Internal Revenue Service announced it would delay the rule until next year.
For this year, e-commerce platforms would only be required to send 1099 forms to entities that earned $20,000 in payments from over 200 transactions in 2022. If you match that criteria, you should have received your 1099 by January 31.
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Importantly this doesn’t mean that people who earn at least $600 from e-commerce platforms can avoid paying taxes as they are still required to report all taxable income to the IRS. It just means that there isn’t as much oversight into how much money they owe in taxes.
Rafael Espinal, executive director of the Freelancers Union, recommends freelancers and gig workers who earned at least $600 last year document this in their tax return using the 1040 income reporting form.
“You want to protect yourself in case you end up in a situation where you’re being audited by the IRS for unrelated reasons, and in that audit, they may find that you earned extra side income,” he said. “In that case, you could end up paying more in fines than what you earned.”
If a third party you work with doesn’t have proper bookkeeping in place and doesn’t send you a 1099, you should still document the income you earned when you fill out your 1040 form, Espinal added.
Deductions for gig workers and freelancers
On the flip side, your side hustle could make you eligible for a wide array of tax deductions that you wouldn’t otherwise qualify for as a traditional worker.
For instance, if you earn a side income from home, you may be able to claim the home office deduction. That deduction, if you meet the IRS’ qualifications, could allow you to deduct a portion of your mortgage interest or rent, utility bills and more.
You may also be able to deduct business expenses such as your car’s mileage, office supplies, professional training events you attend as well as necessary expenses to conduct business. To claim these deductions, it’s crucial to have records of your transactions, the IRS says.
Elisabeth Buchwald is a personal finance and markets correspondent for USA TODAY. You can follow her on Twitter @BuchElisabeth and sign up for our Daily Money newsletter here
Story Credit: usatoday.com