Here’s What Happens When You Don’t Report Side Hustle Earnings

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Not reporting income to the IRS could have serious consequences. Read on to learn more. 

There are plenty of good things a side hustle can do for your finances. For one thing, the extra money you bring home could be your ticket to growing some savings if you’ve been lacking in that department. And a side gig might also help you pay off nagging credit card debt.

But if you’re going to work a side hustle, it’s important that you track your earnings. And it’s equally important that you report that income to the IRS. If you don’t report your side hustle earnings and the IRS finds out, you could end up with a costly penalty on your hands.

You need to pay taxes on all of your income

When you work a full-time job, you have taxes taken out of each paycheck before it hits your bank account. But just as you’re required to pay taxes on income from a primary job, so too are you required to pay taxes on side hustle income. And not reporting that income could get you into trouble.

Now, you may be wondering, “How will the IRS know that I’ve been earning money on the side?” But in many cases, the agency will know because one of your clients will report it to them.

When you earn $600 or more from a given company or client, they’re supposed to send you a 1099 form summarizing that income. Those 1099 forms are also submitted to the IRS. So if you ignore one and don’t report the income, the IRS will generally flag your tax return.

And if the IRS receives multiple 1099s that you don’t report, the agency might get suspicious. If it digs deeper and finds that you’ve intentionally been underreporting your income, you could be slapped with a huge penalty.

According to TurboTax, the penalty for substantially underreporting income is 20% of the amount of tax you’ve underpaid. So, let’s say you earn $20,000 in side hustle income but try to keep that from the IRS. If you fall into the 22% tax bracket, it means you were supposed to pay the IRS $4,400 on that $20,000. As such, you’ll be penalized 20% of that $4,400 for a total of $880.

Don’t try to hide income

It’s easy to see why you’d rather not report your side hustle earnings to the IRS. If you report that money, you have to pay taxes on it.

But unfortunately, that’s just how our tax system works. There are few sources of income that are exempt from taxes, so whether it’s interest in your savings account or capital gains in your brokerage account, almost every time you earn money, it’s apt to trigger a tax liability. And your side hustle is no exception.

So keep good records of your side earnings so you know what to tell the IRS during tax season. And also, reserve some of your side hustle income as you go so you’ll be able to cover your associated tax bill without stress.

In fact, you may want to figure out your tax bracket and set aside that much money every time you’re paid. So if you’re in the 22% bracket, just tell yourself that you only get to keep $0.78 for every $1 you earn. That could make things much easier on you.

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