The $600 Side Hustle Myth (and What the IRS Actually Sees)

If you have a side hustle, even a small one, this video is for you. Whether you're driving Uber, selling on Etsy, freelance consulting, creating content, or any other small business activity that results in picking up extra income on the side, there's one thing you need to understand. Right now, the IRS is paying much more close attention to side hustle income than it ever has before. Not because they suddenly hate side hustles or haven't done their best to track it in the past, but. But technology has changed the rules of the game. It is so much easier for the IRS to watch what you're doing. I actually think side hustles are one of the best paths to building wealth and financial independence. I love side hustles. I've often said they're the gateway drug to the American dream. And according to recent reports, over 40% of working Americans say they currently have a side hustle. And that trend is especially strong among younger workers. Even more crucial, as many as a third of those with side hustles say they rely on that extra income just to cover basic expenses. So this topic is a big deal. I'm Mark J. Kohler, CPA attorney, small business advocate, and I've had a side hustle since I was 16 years old. And today I want to explain why the IRS is watching side hustle income more closely. What's triggering problems for people, and how to run your side hustle the smart way so it doesn't turn into an IRS headache. But let's break it down. So first, what counts as side hustle income? I don't want any gray areas here, and let's start out with some definitions. Side hustle income is any money you earn outside of a traditional W2 paycheck, not being an employee. Common examples include a part time realtor, being a handyman, freelance consulting design, Uber Lyft, Doordash, Instacart, janitorial work, selling on Etsy, ebay, Amazon, Facebook, Marketplace, and then even YouTube, TikTok, sponsorships or affiliate income. Basically, if you're making money, especially on any app based payment like Venmo, PayPal, Zelle, Apple Pay, you've got a side hustle. And here's the key point. If you receive money in exchange for a product or service, the IRS expects it to be reported. We as Americans have decided that that's our law, that's our rule. IRS is not the bad guy. We have decided as a society that if you make money the product or service, that's income and you've got to report it. It's not just a hobby. I've got a small business on the side and from an intent standpoint, that doesn't matter. It doesn't override the income. Like, oh, well, this is just something I do for fun. Or it's just a hobby. Doesn't matter. It's still a small business. So why is the IRS paying more attention now? Well, it's not that they're paying more attention now. Like I said earlier, it's just easier for them to track transactions through payment processors. Marketplace reports on activity bank tracing deposits. The IRS now uses automated matching system that compare what you report on your tax return against what third parties report about you. When those numbers don't line up, a computer flags it. No human judgment required. Easy, schmeezy. This is why even small amounts are no longer invisible. And let's talk about this big myth. It's too small to matter. It's under $600. This is a trap I see people fall into consistently. They say, I didn't make that much. I made under $600. They didn't send me a 1099. And the IRS isn't going to care. It was only a few thousand dollars. Here's the reality. The IRS doesn't care how small the income is if they see it because there could be more. It could be the tip of the iceberg in their mindset. So if there's some income you're not reporting, it could open up a whole can of worms. So if a third party reports income that you earn to the irs, which they're required to do, and your return shows zero, that mismatch is obvious and is often enough to trigger an IRS letter, if not an audit. Now you may say, well, I've got expenses that wipe out that income. Well, if you don't report the income and report the expenses, the IRS doesn't know that. They just know that you had income. And what's interesting, many, many times clients that I've worked with in the past, they had expenses that exceeded the income. They could have gotten a write off, a loss that they could have used against their day job. W2, they could have actually got a bigger refund from the IRS by reporting their activity. So what a lot of Americans do is they get focused on the gross income, how much they're actually making, or being reported to the irs. Rather than thinking about what's the net profit, it could be in your favor. And let's talk about the 1099. Waiting for a 1099 is not a strategy. Another common mistake taxpayers make is assuming that if I didn't receive the 1099, then I don't have to report the income. Wrong. That's not how the law works and how the IRS sees it either. We're all required to report our income whether or not we receive a 1099. We're required to report our income even if we receive it in cash. And frankly, a lot of times 1099 can get lost in the mail. You may not even receive the 1099 even though it was issued and your name's on it. The IRS doesn't care if you never saw it. If income is reported about you, you're responsible for reporting it correctly. And let's talk about cash. Well, Mark, if I receive it in cash, then I don't have to report it. I don't know if that's fair to all of us, other Americans that are reporting our income. And I've had a lot of clients that live on this cash concept until it bites them in the butt later on. For example, they try to go get a home loan or get a auto loan or get a lease on a new apartment, and they have no income anywhere to speak of because they've been living under the table with cash, and they think they've been doing the right thing and hiding from the irs, and now they've got to go get a loan or do business, and there's no record of them in the system. And then you haven't filed your tax returns for how long, and you're going to just all of a sudden start recording your tax returns. We've got a problem here. Living on cash and not reporting your income is a long road you don't want to come back from. And if some of you are there, I want to encourage you that there is a way back, and it doesn't mean you're going to get audited, but you got to start taking this serious. So I don't want to take the moral high ground and say, well, you should be reporting all your cash just for some other, bigger altruistic reason. But what I'm saying is by just living on cash and never reported any income, and not filing a tax return is going to be worse for you, because if you're trying to build wealth and take advantage of tax strategies where you may not even have to pay income tax on your side, hustle income, there is a path for this and a little bit of education in this area, which I love to talk about, will keep you out of harm's way from just Living on cash. So another major point, cash and app payments are not invisible. I've talked to many clients that think, oh well, I got it on Zelle, so I'm okay. Or I got it over here, so I'm okay. Do not assume that a lot of these apps are not off the IRS's radar. And that assumption can be really dangerous. Cash gets deposited, apps create transaction histories, patterns emerge. And if deposits again don't match up to reported income, or if spending patterns don't make sense, questions follow. For example, this was really interesting this last year. A lot of influencers out online on their big old Instagram or TikTok account might do box openings or review a product that someone sent them. Well, when you receive that product or that service and then you report on it on your social media, you are to report the value of what you received. Isn't that interesting? That's right. Well, I got income, so. So I have to report that I just got a service or I got this trip given to me and I Instagrammed about it when I was in Hawaii at their resort or whatever. That is income you have to report. The IRS has a task force on this. They go out and look at online influencers that have over X number of followers and look at their box openings and the product reviews they do and know that they're getting paid for that a lot of times through the affiliate link too. Right? And they're receiving product and services. All they have to do is pull their tax return. No match. Audits are rolling and there's a lot of cases already showing up of influencers not paying any taxes at all. Thinking affiliate income or a product review is okay. No, it's not. So what the IRS is seeing is how much these influencers are using of a product or service. And just like the IRS did in the past, they would track drug dealers and see how much they were living on and driving these nice cars, but have very low income on their tax returns that doesn't match up that triggers an audit. So the issue isn't just one payment. It's consistency and patterns over time of income or expenses or lifestyle. And hence, it's become easier for the IRS to audit this huge swath of taxpayers that tend to operate under misinformation or want to cheat on their taxes. I'm sure that's not you. I'm just talking about those other people. Now, why does reporting properly actually help you? Oh my gosh, this is so powerful. And here's the irony. People try to hide their side hustle income to save taxes and end up paying more and cause more problems when if they just reported the expenses they were entitled to they could have a loss with write offs that would increase their refund on their W2 income. There are so many cool strategies for small business owners and this is another opportunity for you to make money on your side hustle. Take legitimate write offs and cram it into a Roth IRA or a health savings account and start building even more tax free income for the future. Have a quality tax return. It allows you to get a mortgage on a home or get a SBA business loan or expand. I have a lot of clients that take a side hustle to a main hustle and start building wealth they never dreamed of and it's because they reported it properly. Bottom line, when you report side hustle income properly, you unlock business deductions, mileage and auto write offs, home, office supplies, equipment, software, travel, meals, retirement strategies, putting your family on payroll, putting your kids or spouse, your mom or dad, having board meetings that are tax deductible. Trip side hustles are a business. Businesses get write offs, businesses grow, businesses build wealth. Handled correctly, many side hustles can be close to neutral or even tax efficient. So what's the right way to think about side hustles in today's IRS environment? The goal of this video is not to scare you. The goal is to help you run this side hustle like a business. The goal is to help you save taxes, build your business, build wealth, and stay out of harm's way with the irs. That means supporting what you earn, tracking what you spend, learning a little bit more about tax and legal strategies, having separate bank accounts and merchant accounts for business versus personal, keeping good records and not trying to hide or guessing at things. Side hustles are still one of the best wealth building tools available. Sloppy execution is what gets people into trouble. Finally, the IRS isn't paying more attention to side hustle income. It's just easier for them to pay attention to it. And it doesn't mean the rules of the game have changed either. It just means they're clear and enforcement is more automated. But if you treat your side hustle like a real business, keep good records, plan ahead. This side hustle will save you taxes, help you build more income and grow wealth. If you have a side hustle and want to get it organized properly, get it structured correctly under today's rules. My team at KQS Lawyers helps business owners do this every day of the weekend on Sunday, well, not really on Sunday, but every day of the week. We want to help you turn your side hustle into maybe your main hustle and help you better live your American dream. And if this video was helpful, do me a favor. Hit the like button, subscribe to the channel, and turn on notifications so you don't miss future videos. Thanks for watching. I'm Mark J. Kohler, and I'll see you in the next video.