IRS Cracking Down on Side Hustle Income (Avoid These Mistakes!)

"the IRS is cracking down on sidehustle income. And I don't want you to make these mistakes and for it to trigger an IRS letter."

"So the IRS identifies who to go after using the matching strategy. And listen, you need to understand how they're doing this to avoid becoming a target for the IRS. So here's what happens. Essentially, the IRS compares what you report on your tax return and what third parties report to the IRS about you. And when those numbers don't match up, then a computer is going to flag it."

"But if they see your income, the size is not going to protect you. So, I want to give you a quick example. So, let's just say that you made $2,200 from a side hustle and the payer sends you a $1099, okay? And your tax return shows zero, like you didn't report it, then the mismatch is going to be clean and obvious. And that's the kind of thing that's going to trigger an IRS letter."

"So, here's a rule that's going to save you for and for you to understand and know. You must report your income whether or not you receive a tax form. Okay? So, if you don't get a tax form, that doesn't just magically erase the income."

"If you say it to the IRS, the IRS is not going to care if there was a mailing problem or a communication problem. The IRS is going to say that you should have known about it. It's your responsibility to report it correctly. So, I'm just telling you like that defense is not going to work."

"But in practice, if you get cash, then a lot of people with that cash, they make deposits, they make they make payments, they make transfers, etc. And if you're ever going to get audited, then your paper trail is going to be so obvious to an IRS agents and patterns are going to matter. So like if you get paid in cash, if you make a deposit of cash every week or you have consistent payments through apps, then the IRS is going to question it."

"So, I'm telling you, it's not a laborintensive process for the IRS, nor is it expensive. So that's why they're capable of sending millions of IRS letters to Americans even if their suspicions revolve around a smaller amounts in question."

"The IRS often is going to get involved because of mismatches and patterns, right? And these are common situations. So, if a third party reported income to you and on your tax return like you don't have the matching amounts, then that's going to be a mismatch and that's going to catch their attention. If you have large deposits that don't fit your reported income, then obviously something's wrong there and they could you're going to be flagged. If you have huge expenses with tiny revenue from your side hustle, then yeah, you're going to be flagged. If you have sudden swings, like one year you have big income and then the next year it drops to close to nothing, like big swings, then yeah, that's going to be picked up. And if you have multiple platforms reporting activity and you just write such a minimal amount or just zero or forget about it, then yeah, that's going to be, you know, detected."

"And then they're going to try to get you to pay taxes on that gross amount that you made, that $2,200 that you made, when in reality you shouldn't. So, I'm telling you, it's best to report it properly. You know, record the proper amount of expenses as well, rather than getting an IRS letter and then having them put you through an unnecessary and overblown, I'd say, witch hunt."

"Myth number one is that if it's on a cash app, like you provided services or sold a product and you got paid through a cash app, then it's not income. But that's going to be false. Income is income. It doesn't matter the manner that you received it. Whether you receive cash or a check or, you know, through a cash application, if it's income, then it's going to be income and they're going to see that reported. And myth number four is that if it's a hobby, then you could you could just ignore that income that you received, but not in the eyes of the IRS. In again, income is going to be income whether it's a hobby or not."

"So, if you run your side hustle through your personal bank accounts, then you're going to create a documentation nightmare. Just think about it. your side hustle income and your personal transfers and transactions are all going to get mixed together. And then you're not going to be able to easily prove, you know, what was what was related to your side hustle as a business deduction and what was personal. And your legitimate business expenses, like you can overlook them and you could forget about them because they're all mixed up. And then you're either going to overpay taxes because you forgot to claim real expenses related to your side hustle or you're going to underpay taxes because you know you're just guessing."

"Now, if you don't report it, then you're setting yourself up for an IRS notice, and the IRS is going to demand that you pay taxes on the full $6,000, and that's going to come out to something like $1,500 in taxes. That's because they don't see your related business expenses that brought down your your total profits."

"And the IRS has been adapting to this modern economy where income is easier to see and to match. And the bottom line is that they, the IRS, wants their money. And if you put yourself in a position for them to come after you, then they're going to come after you and additionally impose penalties."

"So, I'm going to be telling you the raw truth. The first thing that we have to do is define what is side hustle income, like what qualifies. And let's do this in plain English. It's going to be any money that you earn outside of a normal W2 paycheck."

"So the IRS identifies who to go after using the matching strategy. And listen, you need to understand how they're doing this to avoid becoming a target for the IRS. So here's what happens. Essentially, the IRS compares what you report on your tax return and what third parties report to the IRS about you. And when those numbers don't match up, then a computer is going to flag it."

"And mistake number four is when people mix personal and business money. Now, I want to tell you about this mistake in the event that you do receive an IRS letter. And this mistake is going to cause chaos at tax time. So, if you run your side hustle through your personal bank accounts, then you're going to create a documentation nightmare."

"And mistake number three is that a lot of people that are in working in the cash economy, they think that their cash payments and cash apps are going to be invisible, you know, to the governments. And I'm going to be honest with you, like if we're talking about cash payments, it's more difficult for you to be on the IRS radar. Like, I'll tell you that in all honesty. But in practice, if you get cash, then a lot of people with that cash, they make deposits, they make they make payments, they make transfers, etc. And if you're ever going to get audited, then your paper trail is going to be so obvious to an IRS agents and patterns are going to matter. So like if you get paid in cash, if you make a deposit of cash every week or you have consistent payments through apps, then the IRS is going to question it."

"So, I'm telling you, it's not a labor intensive process for the IRS, nor is it expensive. So that's why they're capable of sending millions of IRS letters to Americans even if their suspicions revolve around a smaller amounts in question."

"You must report your income whether or not you receive a tax form. Okay? So, if you don't get a tax form, that doesn't just magically erase the income."

"If you have huge expenses with tiny revenue from your side hustle, then yeah, you're going to be flagged."

"If you have sudden swings, like one year you have big income and then the next year it drops to close to nothing, like big swings, then yeah, that's going to be picked up."

"And myth number four is that if it's a hobby, then you could you could just ignore that income that you received, but not in the eyes of the IRS. In again, income is going to be income whether it's a hobby or not."

"Now, if you don't report it, then you're setting yourself up for an IRS notice, and the IRS is going to demand that you pay taxes on the full $6,000, and that's going to come out to something like $1,500 in taxes."