Incorporating Miscellaneous Sources of Income

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CUNY Borough of Manhattan Community College *

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330

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Accounting

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Nov 24, 2024

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11/19/23, 9:41 PM Intuit Academy https://intuit.docebosaas.com/ia/learn/course/6798/play/22660/intuit-academy-tax-level-1-schedule-1-oics6723;lp=518 1/4 Incorporating Miscellaneous Sources of Income Many people get income from more than one source. Whether the taxpayer works a side gig or gets a tidy sum each year from interest and investments, here’s help for reporting various income sources on a tax return. For many Americans, a 9-to-5 job pays the bills, but for some, it’s additional income — like investments or side hustles — that helps them get ahead. Many people have multiple sources of income. Whether it’s a second job, freelance work, or interest and dividends from investments and financial accounts, if the taxpayer has more than one source of income, they’ll want to report it correctly on their federal tax return. Here are some key things to know about filing taxes when the taxpayer has multiple sources of income. Types of income that could be taxable Hustling on the side? The taxpayer is self-employed Reporting self-employment income on a tax return Expenses offset self-employment income — and can lower taxes A word about self-employment tax Other multiple sources of income Types of income that could be taxable So much can happen in a year. The taxpayer can work a full-time job, then get laid off from that job, withdraw from their 401(k) retirement plan, receive unemployment compensation, and start a side hustle to help make ends meet. Or the taxpayer could make a smart investment and find themselves with a nice dividend check. Maybe they won big at the casino or rented out their home through a vacation app. All of these are examples of how the taxpayer can have multiple streams of income within the same year. But is all that income taxable? For the most part, yes. Whether the taxpayer's income is earned or unearned, it can be taxable. Some examples of taxable income include: Wages from an employer Money earned freelancing Rental income from leasing personal property Unemployment compensation

11/19/23, 9:41 PM Intuit Academy https://intuit.docebosaas.com/ia/learn/course/6798/play/22660/intuit-academy-tax-level-1-schedule-1-oics6723;lp=518 2/4 Interest or dividends from investments Canceled debts, unless they are canceled as part of a bankruptcy The type of income the taxpayer has will influence how they report it to the IRS, and how the IRS taxes that income. For many Americans, a side hustle is their largest source of extra income, so let’s take a look at that first. Hustling on the side? The taxpayer is self-employed If the taxpayer works in a trade or business as a sole proprietor, independent contractor, or partner, the IRS considers them self-employed, whether they do the work full-time or just part-time. That includes a side hustle. The tax rules for self-employment income are different than the rules that apply to W-2 earnings. In many cases, the income made from self-employment gets reported on a 1099- MISC. 1099-MISC income statement These year-end statements are for people who worked for a company, but not as an employee of the company. The 1099-MISC also reports rental payments, services (including parts and materials), prizes, and awards. If the taxpayer is not sure whether the self-employment income they received is taxable or nontaxable, check out Publication 525, Taxable and Nontaxable Income. Reporting self-employment income on a tax return With multiple streams of income, the taxpayer could end up receiving a lot of 1099-MISC income statements and other types of income forms in the mail at the end of the year. What should the taxpayer do with all the statements? Can they group all the 1099 statements together onto one Schedule C? Or should the taxpayer file a Schedule C for each different 1099? What is Schedule C? Depending on the nature of the different businesses, the taxpayer may have to file two or more Schedule C forms. They possibly could group activities together on the same Schedule C form if there are some similarities in the activities. For example, the taxpayer sells pet toys online and drives an Uber on the weekends. Those are two distinctly different types of business activities, so they can’t be grouped together into one Schedule C. But say you had an online pet toy store, and you also had a dog-sitting service. You could possibly group these into one Schedule C because both activities are related to running a pet service business. The IRS will generally allow the taxpayer to group like businesses if they can support the grouping with facts and circumstances. The Schedule C form shows whether the taxpayer made a profit or loss. To fill out Schedule C, the taxpayer will need to know how much income they made from the side hustle. This is where the taxpayer will input certain income from the1099-MISC, along with reporting any additional cash payments and checks they may have received. Expenses offset self-employment income — and can lower taxes

11/19/23, 9:41 PM Intuit Academy https://intuit.docebosaas.com/ia/learn/course/6798/play/22660/intuit-academy-tax-level-1-schedule-1-oics6723;lp=518 3/4 Earning an income from a side hustle doesn’t always mean the taxpayer made a profit — especially after factoring in the expenses that came along with trying to run a side business. As the saying goes, 'you have to spend money to make money.' Self-employed people typically have to spend money on their businesses. After entering income on Schedule C, calculate the expenses that came along with running a side hustle. Taxpayers can only deduct expenses incurred to run their side business. The expenses must be ordinary and necessary to conduct the business. By entering in expenses on Schedule C, the taxpayer will either generate a profit or loss that will be reported on Form 1040. If the taxpayer made a profit, then they must add that amount to their taxable income. If the taxpayer had a loss, they can subtract it from their taxable income. Taxpayers only pay taxes on business or side hustle profits, but self-employed taxpayers must also pay "self-employment tax". Here are some of the most common expenses claimed on the Schedule C: Supplies Car and truck expenses (operation and maintenance) Depreciation Legal and professional services Taxes Utilities Insurance Home office However, there are about 30 expense categories on Schedule C. A word about self-employment tax Until now, we’ve been talking about the income tax a taxpayer must pay on the income they receive as a self-employed individual. But self-employed people must also pay something called “self- employment tax.” Everyone who works is required to pay Social Security and Medicare taxes. When a taxpayer earns a salary, their employer withholds this tax for them. When one is self-employed, they have to make their own contributions to Social Security and Medicare. The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for Social Security (old- age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance). It’s important to remember, however, that self-employment income doesn’t get reported as “other income” on Lines 8a- z of Schedule 1. It should be reported as “business income” on Line 3 of Schedule 1, with Schedule C attached. If the taxpayer fails to calculate the self-employment tax on their extra income, the IRS could possibly alert them by letter that they owe additional taxes and penalties for failure to pay.

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11/19/23, 9:41 PM Intuit Academy https://intuit.docebosaas.com/ia/learn/course/6798/play/22660/intuit-academy-tax-level-1-schedule-1-oics6723;lp=518 4/4 It’s important the taxpayer report side hustle income correctly so they can pay an appropriate portion of self-employment tax. Other multiple sources of income What about other sources of income might a taxpayer need to report to the IRS? How does the taxpayer file them? Examples of other sources of income are interest received from a checking or savings account, dividends from stocks, Social Security benefits, or unemployment compensation. All these types of income will be reported on the new, shorter 1040 and on the new Schedule 1 Additional Income and Adjustments to Income. Bottom line Having multiple streams of income doesn’t have to complicate the taxpayer's taxes when one is ready to file. But it’s crucial that the taxpayer keeps up with the various income statements they may receive — and that they keep good records of all the extra income coming in and expenses going out. Staying organized and knowing how to report multiple sources of income are key to filing a tax return correctly.