Are you moonlighting? Here is what to know when filing your taxes

• The Indian tax department has issued notices to those who earned an income outside their salary but did not report it.
• It is crucial for the individual to report and disclose their additional income from moonlighting activities and pay taxes on it.
• When compensation is provided in the form of goods and services instead of monetary fees, it is essential to consider and record its fair market value accurately and report it.

The Income Tax Department is sending notices to individuals who earned extra income beyond their regular salary but did not disclose it in their tax returns. The Department discovered instances where numerous professionals in IT, accounting, and management were receiving payments from multiple companies. In certain scenarios, the earnings from these secondary sources exceeded their primary salaries.

Most of the 1,100 notices that have been sent out primarily relate to the fiscal years 2019-2020 and 2020-2021, as reported by the Economic Times. In these cases, the income earned from moonlighting, which involves engaging in additional work alongside full-time employment, frequently surpassed the individual's regular salary.

Let us take a look at how you should report income from moonlighting when filing your tax returns so that you do not come under the taxman’s radar.

Moonlighting is the act of engaging in a secondary job or additional work alongside one's primary employment to generate additional income. This typically involves two categories of workers: those who work part-time during evenings or weekends, and those who offer freelance services as independent contractors while holding a regular job.

“In both cases, it is crucial for the individual to report and disclose their additional income to the tax authorities. The mode of tax filing for moonlighting income depends on the nature of employment,” says Saakar Yadav, Director & Founder, myITreturn.com, a tax filing portal.

How income from moonlighting needs to be reported

The reporting and taxation of moonlighting income can vary depending on the nature of the income received.

If income is received as salary

In such a scenario, the calculation is simpler.

“Add your income from the primary job, and the moonlighting job to calculate the total salary income,” says Aashish Sharma, Co- Founder & Litigation Head, Lex N Tax, a tax consultancy firm.

Use Form ITR-1 (Sahaj) or Form ITR-2, depending on your eligibility and income sources. Most individuals with salary income can use Form ITR-1.

If income is received as profits or gains from business:

If the income is earned as profits or gains from a business, individuals are required to file business returns, and must report all sources of income, including earnings from both their employer, and their independent contracting or freelancing work.

“Income tax form ITR-3/ITR-4 (as applicable) should be used in this case,” says Yadav.

If income is received as professional fees

Professional fees are taxed under the head "Income from Other Sources". You will need to file an ITR-2 form if your professional fees income is more than ₹50 lakh.

When filing taxes for professional fees income, one needs to maintain detailed records of income and expenses.

"You can claim deductions for certain expenses related to your profession, such as travel costs, equipment costs, and professional fees. Finally, the tax rate for professional fees income will depend on your total income, and other factors,” says Sanjiv Bajaj, Jt. Chairman and MD, Bajaj Capital.

Disclose all forms of compensation

The compensation received on moonlighting may not always be monetary. When compensation is provided in the form of goods and services instead of monetary fees, it is essential to consider and record its fair market value accurately.

“The fair market value should be considered and accounted for when reporting income in the tax return. It is also necessary to disclose this form of compensation in the return, ensuring transparency and compliance with tax regulations,” says Yadav.

Conditions under which GST is payable

Here are the conditions under which you need to pay GST on the income from moonlighting.

Ways to reduce your tax liability when moonlighting

There are a number of ways to reduce your tax liability in India, even if you have a source of income from moonlighting. Here are a few of the most common:

Opt for presumptive taxation

: Presumptive taxation is applicable if your total turnover or gross receipts from the business or profession do not exceed ₹50 lakh in a financial year, allowing you to choose this simplified tax calculation method.

“This means that you can calculate your taxable income by assuming that 50% of your gross receipts is your net income. You will then be taxed on this net income at the applicable rates,” says Bajaj.

Claim deduction for expenses:

If you are a freelancer or independent contractor while moonlighting and have work-related expenses, such as hiring other professionals for outsourcing, you are eligible to claim these expenses for tax purposes.

“By doing so, you can reduce your taxable income and consequently lower your tax liability,” says Yadav.

Consider paying advance tax: Combining income from multiple employers may place the aggregate income into a higher tax bracket, leading to an increased tax liability. If taxes are not paid in advance, interest may be applied under sections 234B and 234C. “It is advisable to pay advance tax to prevent any interest and penalties,” says Yadav.

Investing in tax saving schemes is another way to reduce your tax liability.

Complying with tax laws

When moonlighting, it is important to take proactive measures to ensure compliance with tax laws and avoid potential repercussions from tax raids and investigations.

Determining the fair market value of goods and services offered in lieu of regular fees can be a complex task.. “These issues highlight the need for greater transparency and accountability in the payment of taxes. Businesses and individuals need to be aware of the tax implications of accepting goods and services in lieu of fees, and they need to ensure that they are properly accounting for these payments,” says Bajaj.

“Unexplained cash credits in the individuals or businesses accounts where the source is not well established can also be a red flag. So can spendings which are far larger than one’s income. Let's say a person earning Rs 6 lakh pays a credit card bill of Rs 15 lakh,” says Yadav.

It is noteworthy that one should always check whether the primary company has any policy against moonlighting to avoid future complications.