Have a Side-Hustle? Keep These Tips in Mind This Tax Season
Like many people who live the transient military family life, I have a side-hustle.
A 'side-hustle' is a form of passive income you can take with you when you PCS all over creation and don't have a job waiting for you once you arrive. Many military spouses also use it to augment their income, even when they do find full time employment.
Having a side-hustle has its perks. When I first moved to the D.C. area, the money I earned as a freelance writer helped keep my family afloat until I found a full time gig five months later. Since my family relies on two incomes, having that side-hustle meant we had money coming in while I was sifting through the saturated job market. I still freelance on the side to help rebuild the savings we had to dip into from that PCS two years ago.
If you're a side-hustler like me, you're probably familiar with the old 1099-MISC tax form for independent contractors. I've learned some hard lessons when it comes to tax obligations as a 1099. Some of those lessons cost me a pretty penny and I don't want you to make the same mistakes I did. Here are some things all milspouse side-hustlers should know this tax season:
Understand the $600 Rule. If you make less than $600 from a company you do business with, they are not required to send you a 1099-MISC form. They are only required to send you the form if they paid you $600 or more that year. But that doesn't mean you aren't required to report your earnings. The $600 rule only applies to the business that's paying you. If you earned money from them, you have to report it. Which leads to
Report EVERY penny you earn. If you don't receive a 1099 in the mail, you'll still need to self-report the income on your taxes. If you don't, the IRS could audit your tax returns which can result in some pretty nasty penalties.
Write off those business expenses. Independent contractors have a lot of leeway with the IRS' definition of 'business expense.' If the majority of your side-hustle takes place in a home office, for example, then commuting costs to meet a client can be written off as a business expense. This is the best way to cut down your tax bill so you won't owe so much on the back end. I wish someone would have told me this my first year as a freelancer. I probably could have written off a large portion of my tax liability!
What about personal expenses? When you're preparing to itemize for write-offs, you really want to pay attention to what your personal expenses are versus your business expenses. For example, if you have a home office and want to deduct the cost of your house payment, you can't just write off the whole amount of your rent or mortgage. You'll need to whittle it down to the square foot. So if your house is 2000 sq. ft. and your office is only 300 sq. ft., you'll need to crunch some numbers and determine how much that space actually costs. That's the amount you'll be able to deduct as a business expense.
Keep your records straight. I cannot stress this enough: keep all of your records in order and save everything! If you don't have proof of purchase in the form of a receipt (bank records don't count), and you end up being audited by the IRS, you're on the hook for some of those nasty penalties!
Pay your taxes quarterly. If you've been an independent contractor for well over a year, the IRS wants you to start paying your taxes quarterly. Full time employees have their taxes taken out every pay period by their employers, but independent contractors need to do the math themselves to pay every quarter once their side-hustle has been established for over a year.
Don't forget to change your address (again). If you just made another PCS move and haven't changed your address, that doesn't mean you don't have to report that income if you don't get your 1099 in the mail. You're still on the hook for those earnings so make sure the company you do business with has your new address information so you can get a copy.
The deadline to file your taxes is April 15, 2018, so you have a few months to prepare. The more knowledgeable and organized you are with your side-hustle, the less likely you'll be audited by the IRS. Take it from me you don't want to learn this the hard way, so start cracking!
What lessons have you learned navigating your side-hustle taxes?