Maximize Your Side Hustle: Essential IRS Guidelines for Self-Employed Clients

Understanding the Tax Implications for Side Hustles

Source: Financial Planning

The Rise of Side Hustles

• Increasing inflation and stagnant wages have pushed many Americans to seek additional sources of income.
• Over 54% of Americans are now engaged in side hustles to supplement their primary income.

Tax Classifications for Side Hustle Income

• Individuals earning from side gigs generally become "self-employed" for tax purposes.
• Common forms of income include 1099s for contracted work.

Estimated Taxes and Record Keeping

• Any net income exceeding $400 must be reported to the IRS.
• Financial advisors should counsel clients to set aside 25% to 30% for quarterly estimated taxes.
• Encourage clients to maintain a separate bank account specifically for side hustle income and expenses.

Deductions for Business Expenses

• Business owners can potentially deduct up to 20% of their business income.
• Direct and indirect home office expenses may be deductible, including depreciation and utility costs.
• For clients utilizing vehicles for business, many expenses—like repairs and mileage—can also be deducted.

Meals and Travel Deductions

• Business-oriented meals and travel can qualify for deductions.
• Meals for direct employees are fully deductible, while others are typically 50% deductible.

Retirement Planning for Business Owners

• Employers can deduct the employee portion of self-employment tax if structured as an S-Corp.
• Setting up retirement plans like 401(k)s or SEP IRAs can provide higher contribution limits.

Conclusion

It is essential for financial advisors to equip their clients with the necessary knowledge regarding the IRS rules governing self-employment income to maximize benefits and minimize any tax liabilities.