Transcription
If you have a side hustle, even if it's a small amount, then this video is for you because the IRS is cracking down on side hustle income. And I don't want you to make these mistakes and for it to trigger an IRS letter.
So, this information I'm going to present to you, this is coming from my firsthand experience dealing with this. So, it's not coming from like a generic article. So, I'm going to be telling you the raw truth.
The first thing that we have to do is define what is side hustle income, like what qualifies. And let's do this in plain English. It's going to be any money that you earn outside of a normal W2 paycheck. And I'm going to give you some common examples. So, it's going to be things like Uber, Lyft, Door Dash, Instacarts. If you're going to sell things on platforms, so we're talking about eBay, Etsy, Facebook Marketplace, Amazon. Freelancing work, that's going to be a big one, too. And we're talking about if you do design work, editing, coding, marketing, consulting. If you do social media work, even if it's a smaller amount. So, we're talking about income that you receive from YouTube, Tik Tok, if you have affiliate income, sponsorship income, that's going to qualify. Another one's going to be cash jobs. So, if you get paid cash or through cash platforms, so we're talking about like Venmo or PayPal or Zel.
And here's the big part that people miss. It doesn't matter if it was part-time, occasional, seasonal, or, you know, just for fun, like a hobby. If you received income in exchange for a product or a service that you provided, then the IRS expects that to be reported on your tax return.
So, a very good question to ask is why is the IRS cracking down so hard right now, even on small amounts, especially on side hustle income? So, I'll tell you that simply put, it's because they can. Like they're capable of it with the technology. So what I mean by that is that platforms track transactions, marketplaces track sales, payment processors, they create records, and banks of course track deposits. So the IRS identifies who to go after using the matching strategy. And listen, you need to understand how they're doing this to avoid becoming a target for the IRS.
So here's what happens. Essentially, the IRS compares what you report on your tax return and what third parties report to the IRS about you. And when those numbers don't match up, then a computer is going to flag it. Essentially, it's an automated system that notices a mismatch between what you report and what others report about you.
Now, I want you to know that this is the number one trap. This is the biggest mistake and it's people think that the side hustle income that I received it's too small to matter. So a lot of people are going to say like I didn't make that much money for my side hustle so you know they're not going to care. So I just want to clarify this for you in your previous experience. Let's just say like you you made some money and you did not report it to the IRS and nothing happens. It's not because the amount you made was small. No, you didn't get an IRS letter because the IRS didn't see it and they didn't know about it. But if they see your income, the size is not going to protect you.
So, I want to give you a quick example. So, let's just say that you made $2,200 from a side hustle and the payer sends you a 1099, okay? And your tax return shows zero, like you didn't report it, then the mismatch is going to be clean and obvious. And that's the kind of thing that's going to trigger an IRS letter. So in this scenario, even if you made $2,200 and your expenses were greater than that, meaning that you had zero profits and zero taxable income, all the IRS is going to see is that you received $2,200, and they're not going to see your expenses. And then they're going to try to get you to pay taxes on that gross amount that you made, that $2,200 that you made, when in reality you shouldn't. So, I'm telling you, it's best to report it properly. You know, record the proper amount of expenses as well, rather than getting an IRS letter and then having them put you through an unnecessary and overblown, I'd say, witch hunt.
Now, I want to tell you about this mistake number two that I see gets a lot of people in trouble. It's when they wait around for a 1099 tax form and then it never appears and they they think that they don't have to report it. But, it doesn't work like that. So, here's a rule that's going to save you for and for you to understand and know. You must report your income whether or not you receive a tax form. Okay? So, if you don't get a tax form, that doesn't just magically erase the income.
So, a silly mistake that I've seen my clients make is that the 1099 tax form was sent to them, but like it truly got lost in the mail or they didn't realize that they had to download it their 1099. And they thought that because they didn't receive a copy that that income was never reported to the IRS. And their excuse, you know, there's so many excuses, but they try to use this excuse that, you know, I never received the copy. You know, I never received the copy of 1099. If you say it to the IRS, the IRS is not going to care if there was a mailing problem or a communication problem. The IRS is going to say that you should have known about it. It's your responsibility to report it correctly. So, I'm just telling you like that defense is not going to work.
And mistake number three is that a lot of people that are in working in the cash economy, they think that their cash payments and cash apps are going to be invisible, you know, to the governments. And I'm going to be honest with you, like if we're talking about cash payments, it's more difficult for you to be on the IRS radar. Like, I'll tell you that in all honesty. But in practice, if you get cash, then a lot of people with that cash, they make deposits, they make they make payments, they make transfers, etc. And if you're ever going to get audited, then your paper trail is going to be so obvious to an IRS agents and patterns are going to matter. So like if you get paid in cash, if you make a deposit of cash every week or you have consistent payments through apps, then the IRS is going to question it. If you can't explain it with your records, then you're going to be on the fence.
And mistake number four is when people mix personal and business money. Now, I want to tell you about this mistake in the event that you do receive an IRS letter. And this mistake is going to cause chaos at tax time. So, if you run your side hustle through your personal bank accounts, then you're going to create a documentation nightmare. Just think about it. Your side hustle income and your personal transfers and transactions are all going to get mixed together. And then you're not going to be able to easily prove, you know, what was what was related to your side hustle as a business deduction and what was personal. And your legitimate business expenses, like you can overlook them and you could forget about them because they're all mixed up. And then you're either going to overpay taxes because you forgot to claim real expenses related to your side hustle or you're going to underpay taxes because you know you're just guessing.
So I'll tell you that the fix like the solution to this is real simple. It's to separate accounts. You know at a minimum I would say use a separate checking account or a separate credit card, you know, for your expenses related to your side hustle. And I'm just telling you this so you avoid this accounting nightmare.
Now, this part is very important because I want to tell you what actually triggers IRS attention. And I want to make this as practical as possible for you so you avoid these just common mistakes. The IRS often is going to get involved because of mismatches and patterns, right? And these are common situations. So, if a third party reported income to you and on your tax return like you don't have the matching amounts, then that's going to be a mismatch and that's going to catch their attention. If you have large deposits that don't fit your reported income, then obviously something's wrong there and they could you're going to be flagged. If you have huge expenses with tiny revenue from your side hustle, then yeah, you're going to be flagged. If you have sudden swings, like one year you have big income and then the next year it drops to close to nothing, like big swings, then yeah, that's going to be picked up. And if you have multiple platforms reporting activity and you just write such a minimal amount or just zero or forget about it, then yeah, that's going to be, you know, detected.
Okay, so how's this possible? It's because all of this is this whole system, this whole process, like the IRS is all automated. So, their software is going to analyze any oddities. And if your tax return looks suspicious, again, it's a computerized system and it's going to trigger an IRS letter. And just think about it, if everything's automated, you know, running through the computer, I'm telling you, it's not a labor-intensive process for the IRS, nor is it expensive. So that's why they're capable of sending millions of IRS letters to Americans even if their suspicions revolve around a smaller amounts in question.
So listen, if you want to stay out of trouble and just sleep well at night, like here's a simple approach. So the first thing that you have to do is track your side hustle income. Like do this independently. Don't rely on the 1099 at year end. You know, if you're going to use a spreadsheet, like that would be fine. Like you don't need fancy software. And then separate your side hustle money from your personal money. Again, you don't want that accounting nightmare at the end of the year. And keep basic records like keep your invoices, your receipts, your platform statements. These are all going to serve as your documentation and your proof. And don't wait around for your forms, like your 1099 forms, okay? Like that's what they're reporting about you. But like for me, I track everything independently. And then I treat those forms like the 1099 forms. I treat them as confirmation, not as like the source. And don't guess your expenses, you know, document them, have them organized. And of course, set aside money for taxes as you go.
So, I'll tell you that this is not about fear. It's about staying organized so that you're in control. And I'm I'm going to be honest, like the people that get hit the hardest are the ones that are just disorganized and the ones who say that, "Oh, I'll just deal with it later." Like I like doing this on a quarterly basis like you know the four installment periods. A lot I know a lot of people prefer to just save all the work the accounting and bookkeeping work for the end of the year but again it just it can really become a nightmare especially if you're mixing personal and business related expenses.
Now I know I'm going to get a lot of questions about these in the comments and a lot of people have asked me the these questions before. So I just want to bust a few myths really quickly.
Myth number one is that if it's on a cash app, like you provided services or sold a product and you got paid through a cash app, then it's not income. But that's going to be false. Income is income. It doesn't matter the manner that you received it. Whether you receive cash or a check or, you know, through a cash application, if it's income, then it's going to be income and they're going to see that reported.
Myth number two is that if you didn't get a tax form that it's going to be optional for you to report that income. And that's not that's not true. Like we covered this. Just because it's not on a form or you didn't get the form doesn't mean that you don't have to report it.
And myth number three, if you're not an LLC, then it's not a business. And that's going to be false. The structure, it's not going to decide the taxability. Like if you don't have a formal business entity like an LLC, it doesn't matter if you got income, it's going to be income and you operating as a sole proprietorship. Like that's how they see it and classify it.
And myth number four is that if it's a hobby, then you could you could just ignore that income that you received, but not in the eyes of the IRS. In again, income is going to be income whether it's a hobby or not.
And now I want to walk you through this real life example like this scenario so you can see how this all works in action. So let's just say in the scenario that you have a side hustle. You receive $6,000 in income and you get a tax form. Okay? So you make $6,000, but let's just say that you have $4,000 of legitimate expenses related to the production of that income. So in this case, your taxable income would be $2,000. Like that's your profits. So, in other words, you would have to pay taxes on that $2,000 of profit that you made, and that's going to come out to something like maybe $500 in taxes.
Now, if you don't report it, then you're setting yourself up for an IRS notice, and the IRS is going to demand that you pay taxes on the full $6,000, and that's going to come out to something like $1,500 in taxes. That's because they don't see your related business expenses that brought down your your total profits. And then you're going to have to go through the trouble of proving your expenses to bring down your tax liability from that estimated $1,500 down to that $500. And of course, I mean, if you think about it, I'm sure you can imagine that's going to be very stressful. It's going to take months. Like, it's not a short process. And it's going to be lingering with you in the back of your mind for all that time. And you may even want to hire an accountant to help you with that. And of course, that's going to take time and money. So, something like that, it's going to be a terrible situation and I don't want you to suffer through that and I would rather have you of course avoid that situation.
As you probably noticed, like these days, side hustles are more common than ever. And the IRS has been adapting to this modern economy where income is easier to see and to match. And the bottom line is that they, the IRS, wants their money. And if you put yourself in a position for them to come after you, then they're going to come after you and additionally impose penalties.
So, please avoid these mistakes. Like, don't assume that it's too small for it to matter because, yeah, the IRS is going to try to get every penny that they can. You know, don't wait for tax forms. Don't treat cash apps like invisibility cloaks. And don't mix personal and your business money. And please don't guess expenses. And don't wait until April for you to get serious about this.
So, I hope this helps. Please subscribe. I thank you for the support and I wish you a very nice day.