You’re not the only one feeling the impact of the rising costs of goods and services on your bank account. Inflation has made everything much more expensive — causing you to go through your income much quicker than normal. To combat this, you may have decided to take on a side hustle to bring in extra cash each month.
Whether you’ve decided to take on freelance virtual assistant duties, sell used goods on Facebook Marketplace, or do odd jobs around your neighborhood, you probably love having some extra wiggle room in your budget each month. However, it’s important to keep in mind that you are still responsible for paying taxes on any income you generate from a side hustle.
Unlike your full-time job, most side hustles do not automatically take out taxes on your extra income. In the eyes of the Internal Revenue Service, you are considered to be a self-employed individual. This means that you need to be prepared to cover both your income tax and self-employment tax when tax season rolls around.
To make sure you’re taking the necessary steps to reduce your tax burden, AA Tax & Accounting Services, LLC has put together a guide covering what actions you should take so you can meet your self-employed tax responsibilities. We’ll help you calculate how much of your side hustle income should be set aside to cover your taxes and understand when your tax payments are due to the IRS.
Calculating Self-Employment Taxes
No matter what type of side hustle you’ve taken on to increase your monthly income, you are responsible for paying taxes on that extra money. Come tax season, the Internal Revenue Service requires all self-employed individuals to pay both income tax and self-employment tax because you are considered the employee and the employer.
Self-employment tax is 15.3% of the first $142,800 of income you receive, plus 2.9% of anything you earn over this specified threshold.
Whenever you receive a paycheck from your side hustle, you should be setting aside at least 25% of it to cover the taxes that are not automatically being dedicated. We recommend having a separate account to store these funds so they don’t accidentally get spent on bills, leaving you without money to pay your taxes come tax season.
To help reduce your tax burden when filing your return, you can (and should) make estimated quarterly tax payments so you can reduce the chances of a large tax bill later on.
For more detailed information on tax withholding from side hustle earnings, we recommend using IRS Form 1040-ES to calculate your estimated tax payments.
Making Estimated Tax Payments
As we mentioned, it is important that you set aside money for taxes any time you earn income from your side hustle. Instead of holding onto this money all year, you can make estimated quarterly tax payments to the Internal Revenue Service if you expect to owe more than $1,000 annually. Estimated quarterly tax payments can be submitted to the IRS by the following dates:
- April 15th
- June 15th
- September 15th
- January 15th
If you are earning money through a side hustle and don’t pay quarterly taxes, you may find yourself dealing with a tax penalty come tax season. By setting aside a minimum of 25% of your extra income and submitting quarterly tax payments, you’ll be setting yourself up for success when filing this year’s taxes. You may even find yourself earning a refund instead of owing additional money!
Tax Consulting Services in Cedar City, Utah
If you’ve taken on a side hustle to bring in some extra cash each month, we recommend consulting certified public accountants like AA Tax & Accounting Services to better understand what you will owe come tax season and how much you should be paying to the IRS quarterly.
The AA Tax & Accounting Services team can help you execute the right self-employment tax strategies for peace of mind. Contact us to schedule an appointment.