The unwelcome new tax surprise for side hustlers

More people are taking on side gigs to supplement full-time income. But tax rules are different than salaried jobs, and some workers are getting caught off guard.

Every day, Milo, a 29-year-old maintenance worker, reports to his full-time job at a university in London. But his salary, paid weekly, isn’t quite enough. So, he goes to his second job after he clocks out of his first.

He started his side gig – ­delivering food for app-based companies like Uber Eats – in September 2019, and is still doing it on nights and weekends. He also set up a YouTube channel, London Eats, where he documents his life on the road.

The delivery work and the YouTube channel bring in multiple streams of income where he used to have just one. He appreciates the extra money – but not the extra paperwork. Milo now has to report three separate jobs to the government. “Keeping records is one of the hardest things when it comes to being self-employed,” he says.

According to a 2022 survey by insurance company Aviva, one in five Britons has taken up a side hustle since the start of the pandemic, one-third of whom did so to make ends meet in financially trying times. The data shows average income from such side hustles is nearly £500 ($635) a month.

Yet with this extra income comes an extra tax bill. And since governments don’t take out taxes in advance for self-employment like they do with a salaried job, many new side hustlers aren’t prepared to owe money come tax time. For some people, the arrival of these documents may come as unwelcome surprise.

Historically, career paths have been relatively straightforward: leave school, join a business and work for a company. Every week or month, you receive your pay cheque, out of which tax is taken at source.

It’s a system that is familiar to many workers around the world. But a confluence of economic changes – among them the rise of the influencer economy, reseller sites, delivery and ride-share apps and digital nomadism – mean that increasingly, people work both for companies and themselves, supplementing a full-time salary with a side gig.

Independent workers, gig work and side hustles are all taxed differently from traditional payroll. No tax is taken upon payment, and workers must hold back part of their income to pay tax later. But some side hustlers don’t report their income or pay taxes: either deliberately by transacting in cash; or unknowingly, since they are not aware they this rule exists.

The change is unsurprising, says Stevie Heafford, tax partner at London tax firm HW Fisher. “With the cost-of-living crisis, more adults in the UK are turning to side hustles to bring in some extra income, and HMRC are concerned that some people are not paying the right amount of tax based on the profits that they make,” she explains.

While this may feel like a big shift, it’s not so much a new tax rule than an enforcement of an existing requisite guideline, says Heafford. “The reality is that trading profits, whether primary or secondary, have always been taxable,” she says. But people who are doing this for the first time may not know that, especially if they are accustomed to employers taking out taxes from their pay cheques.

In the US, the Internal Revenue Service (IRS) is implementing similar changes for earnings in 2024, specifically responding to the increased activity on peer-to-peer payment platforms, such as companies including Venmo, PayPal and Stripe. Congress is currently working through the details of what should be included in this new reporting rule.

These moves by the UK and US governments are designed to claw back more revenue through taxes, and to better reflect the changing way we work.

“Side hustles and alternative ways of earning a living remain on the rise, particularly among millennials, with most reporting it is to keep up with rising inflation rates,” says Kathy Pickering, chief tax officer at H&R Block, a Kansas City, US-based tax preparation company.

In the United States, 39% of people report having some kind of secondary income, according to Bankrate, and say they need the money to meet living expenses. The average American makes $810 (£639) a month from freelance income – meaning they’d easily fall under the auspices of the IRS’s reporting rules.

Milo, who’s now found himself with a tax bill, says things have gotten more complicated. “I think gig workers should have a separate tax system,” he says. “Especially if you also have a full-time job… especially if you’re just starting out. There’s a lot of stuff you can miss off and you’ll end up paying more tax than you’re meant to.”

This may come in the form of penalties for under-declaring income, late payment of tax and possible investigations into habitual non-payment. Sometimes these are innocent mistakes, and other times they’re not. Regardless, they’re expensive errors that can sometimes eat into workers’ earnings, if not cannibalise them entirely.

Some tax experts also think more could be done to update tax rules for the way we now work. “What can start out as a simple way to make some extra income can quickly turn into a confusing, complex and challenging exercise,” says Heafford.

She thinks adapting tax rules to closely match the way people earn money now would help authorities in the long run. “If it were made simpler, more people might be able to recognise the need to report their taxable profits, and make their reports accurately and on time.”