This article was fact-checked by our editors and CPA candidate Janet Murphy, senior product specialist with Credit Karma Tax®.
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 you have more than one source of income, you’ll want to report it correctly on your federal tax return.
Here are some key things to know about filing taxes when you have multiple sources of income.
- Types of income that could be taxable
- Hustling on the side? You’re self-employed
- Reporting your self-employment income on your tax return
- Expenses offset self-employment income — and can lower your tax
- 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. You can work a full-time job, then get laid off from that job, withdraw from your 401(k) retirement plan, receive unemployment compensation, and start a side hustle to help make ends meet.
Or you could make a smart investment and find yourself with a nice dividend check. Maybe you won big at the casino or rented out your home through a vacation app.
All of these are examples of how you can have multiple streams of income within the same year. But is all that income taxable? For the most part, yes.
Whether your income is earned or unearned, it can be taxable. Some examples of taxable income include:
- Wages from an employer
- Money you earned freelancing
- Rental income from leasing your personal property
- Unemployment compensation
- Interest or dividends from investments
- Canceled debts, unless they are canceled as part of a bankruptcy
The type of income you have will influence how you 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? You’re self-employed
If you work in a trade or business as a sole proprietor, independent contractor or partner, the IRS considers you self-employed, whether you do the work full time or just part time. That includes your side hustle. The tax rules for self-employment income are different than the rules that apply to your W-2 earnings.
In many cases, the income you make 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 you’re not sure whether the self-employment income you received is taxable or nontaxable, check out Publication 525, Taxable and Nontaxable Income. You can also review the filing requirements listed in the Form 1040 instructions (PDF).
Reporting your self-employment income on your tax return
With multiple streams of income, you 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 you do with all the statements? Can you group all the 1099 statements together onto one Schedule C? Or should you file a Schedule C for each different 1099?
What is Schedule C?
The Schedule C is a form that goes with your 1040 tax return. You use it to report your business or side hustle activity. You also use the Schedule C to report income shown on the 1099-MISC. If you have business expenses less than $5,000, you may be able to file the Schedule C-EZ form.
Depending on the nature of the different businesses, you may have to file two or more Schedule C forms. You possibly could group activities together on the same Schedule C form if there are some similarities in the activities.
For example: You sell pet toys online and drive 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 you to group like businesses if you can support the grouping with facts and circumstances.
The Schedule C form shows whether you made a profit or loss. To fill out the Schedule C you’ll need to know how much income you made from the side hustle. This is where you’ll input certain income from your 1099-MISC, along with reporting any additional cash payments and checks that you may have received.
Expenses offset self-employment income — and can lower your tax
Earning an income from your side hustle doesn’t always mean you made a profit — especially when you factor in the expenses that came along with trying to run your 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 you put your income on the Schedule C, calculate the expenses that came along with running your side hustle. You can only deduct expenses that you incurred to run your side business. The expenses must be ordinary and necessary for you to conduct your business. By entering in your expenses on the Schedule C you’ll either generate a profit or loss that will be reported on the 1040.
If you made a profit, then you must add that amount to your taxable income. If you had a loss, you can subtract it from your taxable income. You only pay taxes on your business or side hustle profits.
Here are some of the most common expenses claimed on the Schedule C:
- Car and truck expenses (operation and maintenance)
- Legal and professional services
- Home office
However, there are about 30 expense categories on the Schedule C.
A word about self-employment tax
Until now, we’ve been talking about income tax that you must pay on the income you receive as a self-employed individual. But self-employed people must also pay something call “self-employment tax.”
Everyone who works is required to pay Social Security and Medicare taxes. When you earn a salary, your employer withholds this tax for you. When you’re self-employed, you have to make your 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 Line 21 of Schedule 1. It should be reported as “business income” on Line 12 of your 1040, with Schedule C or Schedule C-EZ attached. If you fail to calculate the self-employment tax on your extra income, the IRS could possibly alert you by letter that you owe additional taxes and penalties for failure to pay.
It’s important you report side hustle income correctly so you can pay your portion of self-employment tax.
Other multiple sources of income
What about other sources of income you might need to report to the IRS? How do you file them?
Examples of other sources of income are interest received from your 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.Self-employment tax forms 101: What to know
Having multiple streams of income doesn’t have to complicate your taxes when you’re ready to file. But it’s crucial that you keep up with the various income statements you may receive — and that you keep good records of all the extra income coming in and expenses going out. Staying organized and knowing how to report your multiple sources of income are key to filing your tax return correctly.
A senior product specialist with Credit Karma Tax®, Janet Murphy is a CPA candidate with more than a decade in the tax industry. She’s worked as a tax analyst, tax product development manager and tax accountant. She has accounting degrees and certifications from Clemson University and the U.S. Career Institute. You can find her on LinkedIn.