A side hustle can be a great way to make some quick and easy extra income to finance your next vacation or pay off your student loans quicker, but it could also impact the way you do your taxes come April 18. According to TurboTax Creator data, there was a 207 percent increase from 2018 to 2020 in taxpayers claiming creator, streamer, influencer, or a related term as their occupation, says Lisa Greene-Lewis, certified financial planner and tax expert with TurboTax. “There has been a rise in self-employed [people] overall over the last couple of years, especially with the great resignation leading to an increase in people using third-party provider apps like Venmo and Paypal for their business.” If you’re one of those many people with a new side hustle that involves doing business through Venmo or another peer-to-peer platform, read on for what you need to know about how to handle your paperwork this tax season.
Can I use Venmo or PayPal for my business?
The short answer is yes, absolutely. It’s important to note, however, that Venmo, PayPal, and many other third-party payment processors charge fees for transactions of goods and services—and report these payments to the IRS. So if you’re using one of these services for a small business or side hustle, you will need to file your taxes as self-employed. You can do so through a product such as TurboTax Self-Employed, which Greene-Lewis says has special guidance for those who use third-party apps for their business and actually guides you through inputting your income. You can also head to Venmo’s site for details on using its app to buy or sell merchandise, goods, or services.
What do I need to know about reporting income?
If you’re only using Venmo to split dinner with a friend or transfer money to your spouse for your half of the grocery bill, then you don’t need to worry about getting taxed on your transactions. But as soon as you begin to use Venmo for payment transactions for goods and services, you are responsible for reporting it to the IRS come tax time. Here’s the tricky part: “You may not receive a Form 1099-K that reports your business income from a P2P service since they are not required to report income unless you have 200 transactions and $20,000 in 2021,” explains Greene-Lewis. If you don’t get this form, though, you are still required to report your income on your taxes. The good news is that this will become easier come tax season 2022 since the guidelines will change to third-party apps needing to report any transactions over $600, making it a bit more simple to track your income throughout the year.
Do I need a separate business account?
“Like all self-employment businesses, regardless of using a service like Venmo, you should set up a separate business [bank] account to make it easier to track your business income and expenses, so you don’t miss anything at tax time,” says Greene-Lewis. And yes, just as you should set up a separate bank account for your business, you should also make sure to have a separate Venmo or Paypal account through which you make business-related transactions. Venmo has a way for you to open a Venmo for Business account, as do other platforms, so the process should be reasonably straightforward.
Should I also track my business expenses?
According to Greene-Lewis, the biggest mistake she sees people make is “not keeping track of and deducting business-related expenses paid through third-party apps, which could possibly lower their net self-employed income.” If you’re curious about what deductions you may be able to take, TurboTax has a Self-Employed Tax Deductions calculator that includes creators and influencers. But the most important thing to keep in mind here is that, even if you expect to get a Form 1099-K at the end of the year, you should still be tracking all of your business income and expenses year-round. Several services can help with this, such as Intuit QuickBooks Self-Employed—but all you really need is an Excel sheet and some patience.
How do I find resources to help me?
Once you are ready to file your taxes, various online services can help. For example, H&R Block has a Self-Employed Online tax filing system that starts at $109.99. Meanwhile, TurboTax Self-Employed begins at $119 or $199 for the Live option, allowing you to connect with a tax expert who can help you. “TurboTax Self-Employed will search industry-specific deductions so that you maximize your business deductions so that you can save on your taxes,” says Greene-Lewis. Even better than saving on your taxes? The system asks you specific questions about your business, puts your information on the correct forms, guides you through inputting information from Form 1099-NEC and Form 1099-K, and basically means that you don’t need to know anything about taxes or forms. And if you have a side hustle that keeps you on the go, then saving time, money, and mental energy on your taxes is definitely worth it.
