When Australia first plunged into lockdown earlier this year, many of us jumped head first into a side hustle. Some due to redundancies and some due to the sheer lack of, well, anything to do. But if your iso side hustle has become a profitable labour of love (and lockdown), it’s time to talk taxes.
Here’s everything you need to know about side hustle taxes from our resident money guru and side hustle queen, Emma from The Broke Generation.
How Tax Works On Side Hustles
Income taxes are paid on any money we make as an employee or as a side hustler. Assuming you’re a sole trader, your side hustle income is taxed at the same rate as your employment income. The income you earn during the tax year as an employee is added to the income you make from your side hustle, and taxed as one total amount. That means, every dollar you make as an employee is of equal weighting from a tax perspective as every dollar you earn from your side hustles. The difference is, your employment taxes are likely paid through your employer without you even seeing them.
Let’s say you earn $60,000 a year, and have a side hustle that makes $5,000 in profit. You’ll pay tax on $65,000 total, in line with the marginal rates set by the ATO.
|$0 - $18,200||0%|
|$18,201 - $37,000||19%|
|$37,001 - $90,000||32.5%|
|$90,001 - $180,000||37%|
Since you’ll probably have had the taxes on your $60,000 salary withheld by your employer, you’ll just pay tax on the $5,000 come tax time. Based on a $65,000 total taxable income, you’d pay 32.5% on that $5,000 in side hustle profits, which means a bill of $1625.
You Only Pay Tax On Profit
It’s important to remember that you only pay tax on your side hustle profit. So, if your lockdown hustle selling jewellery online made $5,000, but you spent $2,000 on materials, postage and packaging, you only pay tax on $3,000. Keep a record of all the costs you incur to run your side hustles. You don’t need to actually show them all to the ATO (as much as they’d love to see your receipts from the bead shop), but you need to have records ready in case you’re audited. You can also deduct costs of running your side hustle from home, and costs of running a car if you use it for business.
How To Pay Your Side Hustle Tax
You pay your side hustle tax when you lodge your tax return—you’ll see an option to add other income. You’ll input the total income from your side hustles, and then enter your deductions when prompted. From here, your tax liability will be churned out by the tax system. Once you’ve side hustled consistently for a tax return or two, you may be prompted to pay your tax quarterly, based on an estimate of what you’ll earn. If you prefer, you can pay annually as normal, though.
Top Tax Tips For Side Hustlers
Tax on side hustles can feel scary at first, but once you get your head around it, you’ll be a tax-paying pro. Here are UL’s top tips on bossing your side hustle taxes:
● Keeping on top of your taxes throughout the year will make it feel far less stressful (and far less heartbreaking) when you make the payment come tax time.
● Keep your records securely stored, digitally if you can, for maximum ease of access should you need to provide them.
● Accounting softwares like Rounded or Quickbooks can help with invoicing and expense tracking.
● Set up a savings account specifically for your taxes, and reserve a percentage of each sale or invoice that comes in. This keeps you up to date with tax obligations and ensures you’ve got enough to pay your bill.
● Consider having an accountant lodge your return. They’ll be able to offer tailored support based on your circumstances, and make sure you’re doing everything by the book.
All this tax talk got you thirsty to make more income from your side hustle? These podcasts will have you making bank in no time.
Emma is a finance blogger at The Broke Generation and a reformed spendaholic. She shares hot tips on saving, property, tax, career and investing for millennials who want to break the spending cycle and get financially confident.
Image Credit: John Tuesday