If you are starting a side hustle, it’s not too early to start thinking about side hustle taxes. Just because your money is coming from a side hustle doesn’t mean it’s exempt from taxes; you need to prepare now to deal with your tax obligations and stay in compliance with the IRS.
If you’re going to form an LLC for your side hustle, you should also know about EIN registration. Let’s take a closer look at what an Employer ID Number (EIN) is and how it can help you deal with small business taxes and accounting for your small business.
What Is an EIN?
EIN is the acronym used for Employer Identification Number, also known as a Federal TIN or Tax Identification Number. According to the IRS, an EIN is a unique number assigned by the IRS used to “identify a business entity.” Think of it like a Social Security number, but for your business. Not all businesses are required to have an EIN, but here is a list of questions used to determine if you should apply:
If you answered yes to any of the questions from this list, then you should apply for an EIN for your side hustle or small business. The application process is free and can be conveniently completed online. If the entire process of applying seems time-consuming and bothersome, Incfile has you covered with the Incfile EIN service, which will take care of the paperwork and requisite legwork for you.
Do I Need an EIN for my Side Hustle?
Not every side hustle needs an EIN. If you are a sole proprietor running a side hustle and excluded from the IRS list, you aren’t required to get an EIN or even register your business with the government. The rules change as you look at business entities such as corporations, but as a general rule, most sole proprietors are not required to have an EIN.
What Happens If I Don’t Get an EIN?
If you choose not to get an EIN for your side hustle, you will simply use your Social Security number instead to file taxes. However, not getting an EIN means that you cannot set up a business bank account, and you might not benefit from some of the potential tax advantages of forming an LLC and keeping your business finances separate from your personal finances.
Getting an EIN is not required for many small business owners, but depending on your business income and overall situation, you might want to get an EIN for your own good.
How Much Money Do You Have to Make On a Side Hustle to Pay Taxes?
Although there isn’t a specific amount of money you need to make in order to acquire an EIN for your business, there are thresholds for how much money you have to make on your side hustle in order to pay taxes. Generally speaking, if you make $400 or more in net earnings from your side hustle, you will need to pay self-employment taxes. If you have employees, you may have additional tax responsibilities outside of simply paying your own Social Security and Medicare taxes; take a look here for additional information on that from the IRS.
Do I Need to Pay Quarterly Taxes on My Side Hustle?
Federal taxes are considered “pay-as-you-go,” which is why as an employee, you will see your employer deduct federal taxes from each paycheck. When you are self-employed, as with a side hustle, you will be responsible for estimating the taxes that you owe and making payments on your own as you receive income from your business.
At the sole proprietor level, anyone who is expecting to owe $1,000 or more in taxes needs to make estimated tax payments. The IRS divides the year into four payment periods for tax purposes, which means that you will indeed need to pay quarterly taxes on your side hustle if your total tax responsibility for the year is going to be $1,000 or more. Form 1040-ES will assist you in calculating and paying your estimated tax. Always be sure to pay quarterly taxes on time and in full to avoid penalties that could be assessed otherwise.
Managing the taxes for your side hustle doesn’t have to be complicated. The most important thing you can do to start is get organized! Decide how you want to manage your taxes. Will you list your income and expenses on a spreadsheet? Or you can get a bit more tech-savvy and invest in small business accounting software that can do most of the work for you.
Whether you decide to keep track of income and expenses on a spreadsheet or through a software application, the most important piece here is that you keep track of it! At tax time, you need to be able to separate out what you have brought in through your side hustle, and equally important, what tax-deductible business expenses you have incurred for your side hustle. In addition to keeping track of your income and expenses, make sure you are also tracking your quarterly tax payments, so they are not forgotten come tax time.
When it all comes down to it, do you need an EIN for your side hustle? If you’re just starting out, if you are happy to operate as a sole proprietor and if you’re just trying to make some extra money on the side, then the most likely answer is no. Most small business sole proprietors with no employees will not be required to apply for an EIN.
However, as your business grows, if you decide that you want to form an LLC and make your business your full-time income, then you will want to get an EIN. Just like forming an LLC, getting an EIN makes your business “official” as a legal entity with its own separate finances, business bank account and tax reporting. Your side hustle EIN could be the start of a stronger financial foundation for your business and for your future career earnings.
Ben Gran is a freelance writer from Des Moines, Iowa. Ben has written for Fortune 500 companies, the Governor of Iowa (who now serves as U.S. Secretary of Agriculture), the U.S. Secretary of the Navy, and many corporate clients. He writes about entrepreneurship, technology, food and other areas of great personal interest.