Sales and Income Tax Implications of Side Hustles
Man, oh, man! Life can be expensive, and one of the most common ways to help mitigate the expenses of everyday living is a side hustle. We are exposed to many different sides hustles each day, some we might not even realize are opportunities. However, side hustles or extra streams of income can pose some serious potential tax implications.
We will dive into what are some of the most up-and-coming side hustles and how those can impact both sales and income tax.
Hustle, Hustle, Hustle
Making an extra income is oftentimes highly sought after. Different streams of income can diversify your budget and give you opportunities for more things at your leisure. As with most things, people will do them differently.
One of the most up-and-coming side hustles includes owning and operating vending machines and coin-operated laundry. A recent CNBC article touched on a man who turned their side hustle vending machine business into a six-figure business, only working four hours a week. On the outside, this seems great, but what do sales and income tax look like in this situation?
Sales Tax
A question you must ask yourself when it comes to sales tax…”Is what I sell taxable?” Having a clear understanding as to what is and is not taxable in your state is crucial to ensure sales tax compliance. In order to understand taxability, you must truly understand what you sell. How an item is used can impact its taxability. And since each state has its own tax rules, where you plan on selling can also impact taxability. For example, the state of Texas views the taxability of varying vending machines differently. Bulk vending machines with items sold under $.50 can be taxed differently than vending machines operated by non-profit organizations, which can then be taxed differently from a “classic” vending machine. Now you can see why it is so imperative you have a clear understanding of what you sell and what it is classified as in your state.
If your side hustle involves selling on a marketplace, then they might take care of sales tax for you. For example, Etsy is considered a marketplace and collects and remits sales tax on behalf of its sellers. Questions on marketplaces? We have a podcast that dives into examples of marketplaces, advice for selling on your own website, and much more here.
If your side hustle involves a service rather than selling a product, or a combination of both, that can also be taxed differently depending on the state you are in and the states you do business in. It is a common misconception that services are not taxable. That is not true! A lot of states tax a lot of different services, and the number of services that are considered taxable grows each year!
Income Tax
Extra income means extra taxes; there is no doubt about it. Depending on your side job will be dependent on the taxes that will be imposed. This extra income can also bring on some extra work during tax time as it will need to be reported to the IRS and any appropriate state.
Side hustles are one of the many ways that people create more income for themselves. It is a great added benefit but sometimes can bring along a slew of tax implications. Make sure you know what your obligations are before your side hustle becomes a financial liability.
By: Jayci Trujillo
This blog is intended for educational purposes and not as tax advice. Tax policies and procedures change frequently, so specific information, such as thresholds, rates, etc. included in this blog may have changed since it was originally published. Please request a consultation for more in-depth information.