Ok, let me just start off by saying I am not a tax professional and this article is not intended to be taken as tax advice. I personally work with a tax accountant to file my tax return and make sure I’m doing everything right.
Side hustles. The term in general makes my skin crawl a bit, but it’s one of the most popular ways to describe extra income in 2019. Whether you’re babysitting, selling your own homemade soap or selling crap from your garage on eBay, you, my friend, have got yourself a side hustle.
But once the dollar signs start ringing on your PayPal account, are you ‘fessing up to the tax man?
Tax on Side Income
Let’s break it down. Tax is money you pay to the government, as a proportion of your income. The more you earn, the more you’ll to pay – unless you’re Amazon, but that’s another story.
So, whether your income is coming from a full time job or from selling your old beanie kids, technically you owe the government a percentage of it.
Oh life.
So when do you need to start thinking about tax on your side hustle?
The line that divides taxable income and non-taxable income is between an activity being a hobby or being for-profit.
For many side hustles, it’s clear whether it’s a hobby or a business. If you work weekends in a supermarket, I think we can all agree that’s income. If you offer babysitting or pet sitting services in your local area and charge for it, that’s profit and an exchange of services for money, so yeah, you owe the tax man a portion of your pay. In the case of the supermarket job, you’ll likely be an employee of the supermarket, so your employer should be withholding tax for you. In the case of the babysitting, you’re being paid privately, so it’s up to you to declare.
Tax When Selling on eBay
One of the blurriest lines between hobbies and businesses is when product is involved. Let’s say you make yourself a face oil and your friend says she’ll pay you to make her one too. At this point you’re still pretty safe. But when you start making product with the intention of selling it for a profit, that’s when you’ll trigger a tax obligation. It doesn’t matter whether your profit is $100 or $100,000. You’ll need to declare it and you’ll need to withhold tax.
Another side hustle that’s tricky tax wise is selling on eBay, Facebook Marketplace, Poshmark (US), Depop, etc.
If you clear out your wardrobe and sell your old Levi’s because you’re confident you’ll never squeeze your thighs into them ever again, that’s a hobby. You didn’t buy the jeans with the intention of making any money on them, and it’s unlikely that you sold them for more than you paid for them – so you haven’t made a capital gain.
If you’ve read Marie Kondo and decided to sell everything but your neutrals, you’re still pretty much in the clear. Again, you didn’t purchase the clothes with any intention of reselling them. You just sold something you already owned, that you’d already paid for.
The tax obligation comes when you start buying things that you plan to resell for more than you bought it for. The reason this is tricky is because lots of people gradually enter into this type of side hustle after selling their own things. Suddenly they spot a big brand handbag at a bargain price, and snap it up knowing it’ll fetch a tasty price on eBay.
That’s when you owe tax. You purchased the bag with the intention of making income.
What About Tax on Cash Income?
Okay, so cash is a really tricky one. If you want the technical answer, then yes, all cash needs to be declared. The reason it’s so hairy is because cash isn’t really traceable in the same way digital payments are, so the tax office can’t actually tell how much cash you took. But cash is still income, so yes, it is taxable.
What About In-Kind or Contra Agreements?
This one is a really, really weird one. When you’re receiving goods or services in kind (or a contra payment), it means you’re exchanging something for something else. So maybe you run a blog/Instagram account and get gifted free products to review, or maybe you provide plumbing services in exchange for a free gym membership. This kind of stuff falls into ‘bartering’ agreements, and unfortunately, it’s liable for tax. It sounds totally ridiculous, because you could earn zero dollars in one year. but if you were given $30,000 worth of free stuff, you’d be liable for tax on it.
Speak to a qualified accountant for information specific to your situation, as these types of exchanges can get quite complicated.
What About Deductions?
It’s not all doom and gloom. Declaring income also means you can make deductions. You don’t pay tax on income, you pay tax on profit.
Basically you can deduct costs associated with making the money you made.
If you spent $100 on clothing to resell, and sold it all for a total of $200, you pay tax on the $100 of profit – providing you can prove that you paid $100 in costs. That’s when you’ll need your receipts, a spreadsheet, and possibly a cloud-based accounting software.
If you’re unsure whether your side hustle requires you to withhold tax, speak to a tax professional for a definitive answer. They’ll also be able to help you with deductions and the best way to ensure you’re paying your dues.
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