Taxation of a Side Hustle

Your side business could result in a tax headache whether you rent out your home on Airbnb, provide guitar lessons and accept payment via Venmo, or sell shoes on eBay.

A new law mandating users who earn more than $600 in revenue to receive tax forms from sites like eBay, Etsy, and Airbnb as well as payment processors like Venmo and Cash App was postponed by the Internal Revenue Service for a year.

But regardless of whether you receive a 1099-K form or not, you must pay the taxes you owe on that additional income before the regulation goes into effect for the upcoming tax season. Users receive 1099-Ks from payment processors like Venmo and gig marketplaces like eBay, which detail all of a user’s payments.

There are millions of Americans who work a side job of some kind, and that number is rising. On payment services like Venmo and PayPal, transactions for everything from ride-sharing to tutoring increasingly produce digital records.

Being a sole proprietor entails additional tax obligations, such as maintaining accurate records throughout the year.

You must include any profit-making sales you make on Amazon or payments you receive for babysitting clients via Venmo when you file your taxes. The following information explains side income and when you might owe taxes.

Businesses like Venmo and Etsy are already required by some states to provide 1099-K forms to clients who receive relatively small sums of cash. The barrier is $600 in Maryland, Massachusetts, Mississippi, Vermont, Virginia, and the District of Columbia, according to payment platform Stripe. Additionally, it is $2,500 in Arkansas, $1,000 in New Jersey, $1,000 in Illinois, and at least four transactions.

Regardless of whether a business sends you a 1099 or not, you must declare all earned income. Therefore, if you work as a dog sitter for the app Rover or provide private piano lessons and your students pay you via cash, check, credit card, or another app, you must record the income on Schedule C. The same holds true if you use an e-commerce site to sell products for a profit. Schedule C filers should keep track of their expenses all year long because they can be deducted from their self-employment income.

Any rent received by a landlord or Airbnb host is treated as taxable income for tax purposes and is reported on Schedule E, the form used by taxpayers to record rental income. Keep track of all costs, including those for property upkeep and repairs that are tax deductible. Homeowners can rent out their property for no more than two weeks per year under a federal tax exemption.

Gains for assets cannot be offset by losses from the sale of personal assets, and gains and losses must be declared separately.

If you receive a Form 1099-K for a personal item sold at a loss, report the information on Form 1040, Schedule 1, Additional Income and Adjustments to Income with offsetting transactions. For example, if you receive a Form 1099-K for selling your couch online for $700 you will report:

Part I – Line 8z – Other Income – Form 1099-K Personal Item Sold at a Loss $700. Part II – Line 24z – Other Adjustments – Form 1099-K Personal Item Sold at a Loss $700. The net effect of these two adjustments on adjusted gross income would be $0.

Your gain is taxable as a capital gain if you sold something you owned for personal use, such as a car, refrigerator, furniture, stereo, jewelry, or silverware, for a profit. Report your gain in accordance with the Schedule D Instructions (Form 1040).

You can enter “Form 1099-K, Received in Error” on Schedule 1, Line 8z, and Line 24z if a buddy sends you $700 via Venmo or PayPal to pay you back for a party and you receive a 1099-K listing this as income.

You should make plans for the 2023 tax year if you have any self-employment income, such as if you work a full-time job and occasionally drive for Uber.

If your side business brought in $1,000 or more and you didn’t previously pay enough in taxes throughout the year through W-2 withholding from your day job, you will need to file estimated tax payments. Estimates are due on April 18, June 15, September 15, and January 15, 2024, for the tax year 2023.