Paying Tax on Your Side Hustle in Australia: What You Need to Know

Note: This article is intended for informational purposes only and should not be considered tax advice. Always consult with a qualified tax professional for guidance tailored to your individual circumstances.

Earning income alongside your primary job? A side hustle is any additional work you take on outside of your main job to earn extra income. Whether you’re crafting handmade products, freelancing on weekends, or offering online services, a side gig is an exciting way to earn secondary income. But amidst the excitement, there's an important factor to consider: do you pay tax on a side hustle? If you’re generating profit from your side gig, you’re required to pay taxes on that income. 

If you’re wondering about your tax obligations as a side hustler, you’re not alone. Navigating the tax system can be daunting, especially when balancing multiple income streams and figuring out what you owe. Whether you’re new to side hustling as a sole trader or you’ve been at it for a while, understanding the basics of tax can help you manage your money better, avoid any unpleasant surprises when tax time rolls around and ensure you’re meeting your obligations.

The good news? Understanding the tax requirements for side hustles in Australia isn’t as complicated as it may seem. In this blog, we’ll break down everything you need to know about handling tax obligations on your side hustle income in Australia. We’ll help you understand tax obligations, what counts as taxable income, and how to report side hustle income.  

Introduction to side hustle income and tax

Australian Bureau of Statistics (ABS) data from March 2024 shows that 974,000 Australians, or 6.7 per cent of all employed people, have opted to find another source of income through multiple jobs compared to 13.4 million single job-holders. With the cost of living going up, more people are finding creative ways to make money on the side. Many people have found out that their side jobs not only provide essential financial support and contribute to financial independence but also allow them to pursue their passions alongside their primary careers. 

Whether you’re freelancing, selling handmade goods online, or engaging in gig economy work, a side hustle provides additional income and gives an opportunity to develop new skills and test business ideas with low risk. With side hustles becoming an increasingly popular way to earn extra income, it’s essential to understand the tax implications of this income to avoid any unexpected tax bill during tax season.    

First and foremost, it’s important to know that income from a side hustle is taxable in Australia. The Australian Taxation Office (ATO) requires individuals to report all income, regardless of whether it comes from a primary job or a new business. So if you earn any amount of money through freelance work, gigs, online sales, or any other activities, you are required to declare it when filing your tax return and provide records showing the amounts. You may need to provide the ATO with a copy of these records when filing your tax return. Additionally, you are required to register for an Australian Business Number (ABN) if you are earning secondary income from a side hustle and operating as a sole trader.

Unlike income from a salaried job, where taxes are usually withheld automatically, side hustle business income often does not have any withholding. Therefore, it’s the taxpayer’s responsibility to account for the income and set aside funds for taxes. This may also include the Goods and Services Tax (GST) if your annual turnover exceeds $75,000. Once you go over this threshold, the ATO will require you to register for GST and charge it. You'll also need to lodge a business activity statement (BAS). 

Self-employed individuals are responsible for paying their income tax, which can vary depending on their income bracket. It’s advisable to set aside around 20-30% of your business income to cover your income tax liabilities, including GST if applicable. The ATO provides options for estimating your tax liabilities, allowing you to manage your cash flow effectively throughout the year. If you expect to owe more than $1,000 in taxes, you can make arrangements for quarterly tax payments to avoid a lump sum payment at tax time.  

One of the advantages of earning side hustle income is the ability to claim tax deductions. As a self-employed individual, you may be eligible to deduct business expenses, such as materials, equipment, home office costs, marketing costs, and travel expenses directly related to your side hustle. These deductions can help reduce your taxable income, ultimately lowering your tax payment. Keeping accurate records of both your income and expenses is crucial, as this will simplify the tax filing process and ensure you can substantiate any deductions claimed.

Understanding tax obligations for side hustles in Australia 

Having a supplementary source of income can be a game changer. It can offer you an opportunity for financial stability and personal growth. However, it also comes with tax liabilities that can’t be overlooked. If you’re earning money from your side hustle, you’ll need to understand what qualifies as taxable income, the thresholds for tax, and how your earnings can affect your overall tax bracket.

What qualifies as taxable income?

Any income you earn in Australia, whether through your primary job, a new business or a hobby, is considered taxable if it exceeds certain thresholds. Taxable income includes earnings from online sales, ride services, gig economy platforms, freelance work (like Uber, Airtasker, or Fiverr), or any other activities. This applies whether you receive payments directly into your bank account, in cash, or through digital platforms.

One of the common misconceptions is that casual or part-time earnings are exempt from tax, but that’s not true. All income, regardless of source or frequency, needs to be declared to the ATO. However, you can claim tax deductions for expenses, such as supplies, equipment, or even a portion of your home office expenses if you work from home. It’s crucial to maintain accurate records of all income and business expenses for proper reporting and to maximise any eligible tax deduction when filing tax returns.

Thresholds and tax brackets 

Australia uses a progressive tax system, meaning the tax rates increase with higher levels of income. The tax-free threshold is currently set at $18,200 per year, which means you won’t owe any tax on the first $18,200 you earn from your combined sources of income, including both your main job and small business income. However, once you exceed this threshold, you’ll need to pay tax based on the applicable Australian resident tax brackets. 

For the financial year 2024 - 2025, the tax rates are as follows:  

• For assessable income between 0 - $18,200, there’s no tax.

• For assessable income between $18,201 - $45,000, you need to pay 16c for each $1 over $18,200.

• For taxable turnover between $45,001 - $135,000, you need to pay $4,288 plus 30c for each $1 over $45,000.

• For taxable turnover between $135,001 - $190,000, you need to pay $31,288 plus 37c for each $1 over 135,000.

• For combined income $190,001 and over, you need to pay $51,638 plus 45c for each $1 over $190,000. 

The above rates do not include the Medicare levy of 2%. 

These rates apply to your combined income, so if your second job earnings push you into a higher bracket, you’ll pay the respective rate on the amount that falls within that bracket. It’s important to note that only the portion of your income that falls into each bracket is taxed at the corresponding rate, not your entire income.

How to report side hustle income 

If you’re a sole trader of a small business in Australia, you need to understand how to report the income generated from your business correctly to the ATO. This helps ensure compliance and avoid fines or penalties.

Here’s everything you need to know about record-keeping requirements and the forms you’ll need to file.

Record-keeping requirements 

As a side hustler, keeping accurate records of your income and expenses is essential. If you claim tax deductions, the ATO requires you to maintain clear, detailed records that show all money earned from your own business. This includes invoices, receipts, and any other documents, such as a credit card statement, that prove your business spent the money. To claim tax deductions for expenses, retain receipts and any related documentation that supports your business costs. This could include anything from supplies, advertising, market research, or numerous other expenses directly related to your side hustle.

If you acquire a capital asset, you may make capital gains or capital losses if you later sell the asset. If you make capital gain, you are required to potentially pay capital gains tax (CGT). On the other hand, if you make capital loss, you need to keep records from when you bought the investment property to ensure you don't pay tax more than necessary. This also includes investment income you received from the investment property or dividends from shares.

It’s recommended to keep these records for at least five years, as the ATO can request them at any time during this period. Keeping a separate bank account for your side hustle can simplify this process and make it easier to track income and expenses. Many find that using accounting software packages or apps tailored to small businesses can also help with organisation, ensuring you’re always prepared for tax season.

Forms you need to file 

When it comes to filing an income tax return, sales made through a side hustle are considered taxable sales by the ATO and need to be reported on your tax return. The documentation needed to report this income depends on your side hustle’s structure.

If you operate as a sole trader, you’ll report your income and expenses on your individual tax return. To file an income tax return and claim deductions, you’ll need to submit the required forms and documents to the tax authorities to report your total income, tax deductible, and tax liability for the year. 

For those with more complex business setups, like partnerships or registered businesses, different forms may be needed. If running a business in partnership, you’ll file a partnership tax return, while a registered business requires a company tax return. Additionally, if you’re earning over the GST threshold of $75,000 a year from your side hustle, you’ll need to register for GST and include it in your business activity statement. For more information related to tax lodgement, visit this site.

Quick reminder: The information in this article is general in nature. For personalised tax advice, please speak to a qualified accountant or tax professional.

Understanding it’s impact on your PAYG income tax

PAYG (Pay As You Go) income tax is usually withheld by your employer from your regular salary and paid directly to the ATO on your behalf. However, side hustle income is not automatically withheld, so it’s the taxpayer’s responsibility to set aside enough to cover any tax bill. When you file your annual tax return, your combined income from your primary job and second job will determine your tax rate. If the side hustle pushes you into a higher tax rate bracket, you may owe additional tax beyond what was withheld by your employer.

To manage this, you can make voluntary PAYG instalments to the ATO throughout the year. By spreading out payments, you’ll make it easier to manage your cash flow and avoid a large tax bill at the end of the financial year. The ATO can provide estimates for PAYG instalments based on your previous year’s tax return, which can be adjusted if your income changes significantly.

Common tax deductions for side hustlers 

Knowing about tax deductions helps you plan to withhold just enough tax to cover your tax bills. Eligible businesses can claim an immediate tax deduction for the business portion of an asset's cost in the year it's first used or installed and ready for use.. You can find out more about immediate deduction here.

Here are some common tax deductions to consider as a side hustler in Australia.

Home office expenses

If you run your side hustle from home, you can claim a portion of your household expenses. This includes rent, mortgage interest, office furniture, electricity, gas, and internet expenses, based on the space used for business purposes.

Work-related travel costs

Many side hustles require some degree of travel, whether meeting clients, attending events, or purchasing supplies. Travel expenses directly related to your business can be claimed, including car expenses, public transport fares, and parking fees. Find out what you can and can’t claim under this category. 

Equipment and tools

Whether it’s a laptop, camera, computer, internet, stationery, books, or specialised machinery and tools, these purchases can be claimed as deductions. Check out what you can and can’t claim under this category. 

Marketing and advertising costs

Expenses for social media ads, website hosting, printing flyers, and even hiring a graphic designer can all be deductible as business expenses. Find out what more you claim and can’t under this category. Just ensure these costs are directly related to promoting your side hustle and attracting new clients. 

Professional services

If you hire an accountant, legal professional, or even pay for courses related to your side hustle, these can also be deducted. Keep all receipts and a detailed account of these expenses to substantiate your claims with the ATO.

To know more about claim deductions for expenses, click here.

Tips for paying tax on a side hustle 

When you’re running a side hustle in Australia, it’s important to stay on top of your tax obligations to avoid any surprises come tax time. One effective strategy is setting aside a percentage of your income for tax purposes.

Setting aside a percentage of your income 

When earning extra income from a side hustle, you’re required to report this income to the ATO and pay taxes on it, just as you would with any other source of income. A good rule of thumb is to set aside a portion of your earnings as they come in to avoid a hefty tax bill at the end. 

A popular approach is to set aside around 25-30% of your side hustle income for taxes. This percentage can vary depending on your total income and tax bracket, but it provides a solid buffer. If you’re unsure about the exact amount, consulting with a tax agent can help you determine how much tax you're required to pay based on your specific financial situation. By setting this money aside regularly, you’ll be less likely to fall short when it’s time to pay your taxes.

For more insider tips, visit the ATO community forums.

Potential penalties for not paying taxes on side hustle income 

Individuals and businesses are required by law to pay taxes. Businesses that fail to meet their tax obligations may be subject to interest charges and penalties.

Failing to report your income can lead to several penalties. These penalties are typically calculated as a percentage of the tax shortfall. You might also be required to make quarterly PAYG instalments if you owe a significant amount in tax. Businesses may face a penalty for failing to withhold or pay a PAYG withholding amount when required. Filing your tax return late can incur a Failure to Lodge (FTL) penalty. How a FTL penalty is calculated depends on the size of the entity and the period of time since the due date for lodgment. 

It’s a criminal offence to evade or attempt to evade paying tax. If you owe tax and don’t pay on time, the ATO will apply a General Interest Charge (GIC), which compounds daily. You may also be charged with tax evasion.

Failing to pay taxes on side hustle income can potentially impact your future credit. While the ATO doesn’t report directly to credit bureaus, significant unpaid tax debts can result in legal action. For instance, if the ATO issues a garnishee order (where a portion of your wages or funds from your bank account are garnished to recover unpaid taxes) or a court judgement, these may show up on public records and can be accessed by financial institutions. Such actions can make it more challenging to obtain credit, loans, or other financial services, as they indicate financial risk to lenders.

Find out more about tax-related penalties and how they are calculated here.

Consulting a tax professional 

Given the potential penalties and complexities associated with tax return filing, consulting a tax professional can be a wise decision. Tax agents are up-to-date with tax requirements and laws and can help ensure that all income is reported correctly, deductions are maximised, and taxes are paid on time.

Tax professionals can provide guidance on estimating and paying quarterly taxes, which is essential for those who earn significant income from side hustles. Furthermore, a tax professional can assist with filing an amended return if there were mistakes on previous returns or overlooked income, potentially avoiding some penalties or interest.

Summary 

Earning extra cash from a second job is exciting, but it also comes with tax liabilities that a side hustler should understand. Understanding the tax implications of your side hustle income is crucial for staying compliant and avoiding penalties. It’s advisable to keep accurate records, set aside a portion of your income for paying off taxes, and consult a professional bookkeeper for professional advice. With a proactive approach, you will be able to manage your side hustle taxes efficiently and make the most of your additional income.

Important Disclaimer: The information provided in this article is intended for general informational purposes only and does not constitute professional tax advice. While efforts have been made to ensure the accuracy and reliability of the content, tax laws in Australia can be complex and subject to frequent changes. The author is not a licensed accountant or tax professional, and the guidance offered here may not address all specific tax scenarios or obligations. Readers are encouraged to consult with a qualified accountant or tax advisor to receive personalised advice tailored to their individual circumstances. The author and publisher of this article disclaim any liability for actions taken or not taken based on the information provided here.