There are plenty of good things a side hustle can do for your finances. For one thing, the extra money you bring home could be your ticket to growing some savings if you've been lacking in that department. And a side gig might also help you pay off nagging credit card debt.
But if you're going to work a side hustle, it's important that you track your earnings. And it's equally important that you report that income to the IRS. If you don't report your side hustle earnings and the IRS finds out, you could end up with a costly penalty on your hands.
You need to pay taxes on all of your income
When you work a full-time job, you have taxes taken out of each paycheck before it hits your bank account. But just as you're required to pay taxes on income from a primary job, so too are you required to pay taxes on side hustle income. And not reporting that income could get you into trouble.
Now, you may be wondering, "How will the IRS know that I've been earning money on the side?" But in many cases, the agency will know because one of your clients will report it to them.
When you earn $600 or more from a given company or client, they're supposed to send you a 1099 form summarizing that income. Those 1099 forms are also submitted to the IRS. So if you ignore one and don't report the income, the IRS will generally flag your tax return.
And if the IRS receives multiple 1099s that you don't report, the agency might get suspicious. If it digs deeper and finds that you've intentionally been underreporting your income, you could be slapped with a huge penalty.
According to TurboTax, the penalty for substantially underreporting income is 20% of the amount of tax you've underpaid. So, let's say you earn $20,000 in side hustle income but try to keep that from the IRS. If you fall into the 22% tax bracket, it means you were supposed to pay the IRS $4,400 on that $20,000. As such, you'll be penalized 20% of that $4,400 for a total of $880.
Don't try to hide income
It's easy to see why you'd rather not report your side hustle earnings to the IRS. If you report that money, you have to pay taxes on it.
But unfortunately, that's just how our tax system works. There are few sources of income that are exempt from taxes, so whether it's interest in your savings account or capital gains in your brokerage account, almost every time you earn money, it's apt to trigger a tax liability. And your side hustle is no exception.
So keep good records of your side earnings so you know what to tell the IRS during tax season. And also, reserve some of your side hustle income as you go so you'll be able to cover your associated tax bill without stress.
In fact, you may want to figure out your tax bracket and set aside that much money every time you're paid. So if you're in the 22% bracket, just tell yourself that you only get to keep $0.78 for every $1 you earn. That could make things much easier on you.
FAQs
If you receive any income at all from this “side hustle,” — then the answer is yes. [It is much more unpleasant to be audited years later, when the IRS tracks you down, and tells you that you now owe the federal government 10 or 15 or 20 times as much money, in back penalties, and accumulated interest.]
What happens if I don't report side hustle income? ›
If you have a full-time job, you can adjust your W-4 withholding to pay more taxes from your paycheck to cover your side gig income. Or, you can pay estimated taxes every quarter. If you don't adjust your withholding or make estimated tax payments — or if you make payments late — the IRS will charge you penalties.
How does the IRS know if you have a side hustle? ›
Payment apps and online marketplaces might issue a Form 1099-K, informing you and the IRS of how much money you got for selling things or providing a service. If you make a profit through these activities, it's considered taxable income.
What happens if you accidentally don't report income? ›
Often, the IRS will recalculate your tax return by including the missing income and determining the amount of tax they think that you owe. This can include penalties and interest. If you realize that you didn't include some income on your tax return, you can file an amended return that includes the missing information.
How much money can you make on a side hustle without paying taxes? ›
Frequently asked questions (FAQs) How much can you make from a side job before you need to pay taxes? The IRS states that anyone making $400 or more in net income from a side hustle must file an annual tax return and pay income taxes.
How much income can you make without reporting it? ›
So as long as you earned income, there is no minimum to file taxes in California. It is a good idea to talk with a tax professional to determine your filing status and whether you are required to file or could benefit from doing so anyway.
Can I get in trouble for not reporting cash income? ›
Tax evasion, supplying fraudulent information on your tax returns, and intentionally underreporting your income are also crimes in the state of California. If you commit tax fraud on your state taxes, you could get up to one year in county jail or state prison, along with fines up to $20,000.
Does IRS catch all unreported income? ›
Random Audits: While relatively rare, random audits can also uncover underreported income. During an audit, the IRS thoroughly reviews the tax payer's financial records and transactions to ensure accuracy. While these audits may seem daunting, maintaining detailed and organized records can help alleviate any concerns.
How much unreported income is tax evasion? ›
We estimate $1.33 trillion of income goes underreported on federal income tax returns. Nationally, we estimate that Schedule C business income constitutes 69 percent of underreported income in 2018.
Will the IRS catch a missing 1099? ›
The IRS employs various methods to detect discrepancies in tax reporting, including the absence of 1099 forms. While the IRS does not catch every missing 1099 immediately, their sophisticated systems and data-matching capabilities make it likely that discrepancies will be identified over time.
How much can a side business make before paying taxes? Individuals who have earned at least $400 in annual side hustle income may have to report that income to the IRS on Schedule SE. Self-employment taxes may apply if you've had net earnings of at least $400 from self-employment during the 2024 tax year.
How much can you make selling crafts before paying taxes? ›
Self-employment tax
Generally, you must pay self-employment taxes if your net profits are $400 or more. Self-employment taxes are Social Security and Medicare taxes. Use Schedule SE with your tax return to help you determine how much tax to pay.
How much can you make without being 1099? ›
Businesses are typically required to issue a 1099 form to a taxpayer (other than a corporation) who has received at least $600 or more in non-employment income during the tax year. A taxpayer might receive a 1099 form if they received dividends which are cash payments paid to investors for owning a company's stock.
Do I have to disclose my side hustle to my employer? ›
In California, an employer may request that employees disclose any secondary jobs to their primary employer, so that the primary employer can evaluate whether the outside employment violates any company policy.
Does the IRS catch unreported income? ›
Random Audits: While relatively rare, random audits can also uncover underreported income. During an audit, the IRS thoroughly reviews the tax payer's financial records and transactions to ensure accuracy. While these audits may seem daunting, maintaining detailed and organized records can help alleviate any concerns.
What happens if I don't declare all my income? ›
Underpayment may happen if you don't report all your income or you claim deductions or credits for which you don't qualify. We apply 2 common accuracy-related penalties to individuals: Negligence or disregard of the rules or regulations.
Is it illegal to not report all income? ›
The U.S. income tax system is based on the idea of voluntary compliance. Under this system, it is the taxpayer's responsibility to report all income. Tax evasion is illegal. One way that people try to evade paying taxes is by failing to report all or some of their income.
