Many first-year side hustlers are shocked by their tax bill when they complete their tax returns for their first year of business. If you’re starting a side hustle, the hope is that you’ll be earning some extra cash. If you do, the sad reality is that you’ll have to pay taxes on that money. Here’s what you should consider when it comes to your federal tax liability:
Federal Taxes and Estimated Payments
At a typical job, your employer withholds federal taxes from your paycheck and pays them on your behalf.
But when you’re working for yourself or as a contractor, you’re responsible for knowing whether or not to make estimated tax payments.
According to the IRS’s website, “Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.” To determine what your estimated tax payments should be, consult the worksheet on page eight of this IRS document. You’ll have to reference the instructions earlier in the document to understand the worksheet that the website provides. If you still can’t figure the worksheet out, I highly recommend consulting a tax professional.
Estimated tax payments are due in April, June, September, and January each year. However, the specific date changes based on weekends and holidays.
Unfortunately, because you are your own employer, you will also have to pay the portion that your employer matches that doesn’t show up on your paycheck at your day job. That means you’ll likely have to pay 15.3 percent on most – if not all – of your self-employment income, in addition to what you owe on your federal taxes.
Save as You Earn
I highly recommend that you set aside a percentage of your income for taxes as the money hits your bank account. This is what I do with my earnings, and I’ve never once regretted it. You can figure out what the right percentage is on your own, or else consult with a tax professional. Either way, setting the money aside when you earn it will ensure that you have the money to make estimated payments or pay your tax bill on time.
Other Taxes That You May Be Responsible For
In addition to the taxes mentioned above, you will likely need to pay attention to other state or local taxes. You need to do a bit of research, but it’s well worth your time to do it so that you can avoid an unexpected tax bill. Look for information on state income taxes, sales taxes, local business license taxes, and other local taxes you may be subject to as a business owner in your area. Thankfully, my area doesn’t require me to pay any additional taxes, but if they apply to you, they can add up quickly.
Consulting a Professional is Money Well-Spent
Figuring out taxes as a new side hustler can be incredibly frustrating. It can take you hours to do the appropriate research and to properly understand the information that a professional can explain to you in five minutes. If you plan to be making a decent amount of money with your side hustle, I highly recommend talking with a tax professional before you start earning money from your business. Knowing that you won’t be hit by a major surprise in the form of your side hustle taxes is well worth the small upfront cost. A professional may even be able to help you find a way to reduce your tax bill, too.