When the COVID-19 pandemic hit in March 2020, many individuals were left without a job or had their hours slashed. As a result, you may have decided to take on a side hustle to help you weather the storm and stay financially afloat throughout the pandemic.
From delivering food and selling items on Facebook Marketplace to freelance copywriting and online tutoring, there are many ways to earn a bit of extra cash on the side.
While pay earned from a side hustle is exciting, there are tax responsibilities you need to be aware of. Unlike a traditional paycheck that has taxes automatically deducted, your side hustle paycheck will not. The Internal Revenue Service views you as a self-employed individual, and you need to be prepared to cover your income tax and self-employment tax come tax season.
Without taking the proper steps during the year, you may end up with an expensive tax bill come tax season. Instead, you should be setting aside tax payments from every paycheck so that you can meet your side hustle tax responsibilities. Taxes are already complicated enough, and with a side hustle, they can be downright confusing.
To make prepping for your taxes as a self-employed individual a bit easier, AA Tax & Accounting Services, LLC has put together a quick guide on freelance tax responsibilities.
How to calculate self-employment taxes
Whether you found yourself offering handyman services, delivering groceries, or selling on Facebook Marketplace, you have tax responsibilities to account for.
As a self-employed individual, the Internal Revenue Service requires you to pay both income tax and self-employment tax. As both the employee and employer for your side hustle, you are responsible for all tax payments based on the generated income.
Self-employment tax is 15.3% of the first $142,800 of income you receive, plus 2.9% of anything you earn over this threshold.
As you bring in income from your side hustle, you should be setting aside a minimum of 25% of your income to cover these tax costs. The Internal Revenue Service allows you to make estimated quarterly payments on the taxes that you owe, helping you avoid having a hefty bill come tax season.
For more information on how much you should withhold from your freelance earnings, we recommend using IRS Form 1040-ES to calculate your estimated tax payments.
When to make estimated tax payments
Throughout the year, the Internal Revenue Service expects all self-employed individuals to pay estimated quarterly tax payments. Although you won’t know exactly how much you’ll owe when filing your taxes, if you plan to owe more than $1,000 in taxes due to your side hustle, you should be submitting a quarterly payment by:
- April 15th
- June 15th
- September 15th
- January 15th
By budgeting approximately 25% of your income towards the estimated tax payments, you can be stress-free when filing your taxes, knowing you won’t have a large tax bill.
Are you eligible for the advanced child tax credit?
When taking on a side hustle throughout the pandemic, you’re increasing your annual income. Keep in mind that there are income restrictions for tax credits, such as the Advanced Child Tax Credit.
With the Advanced Child Tax Credit, taxpayers with children under 18 can receive a tax credit if they earn less than $75,000 annually or $150,000 for a married couple filing jointly. Earners above this threshold will earn a smaller credit, ceasing for individual taxpayers earning $95,000 and married couples making $170,000 filing jointly.
If your standard income and side hustle income put you over this threshold, you may not be eligible to receive the tax credit. If you aren’t sure how your side hustle impacts your eligibility, we recommend consulting certified public accountants to better understand all the tax deductions available to you.
Tax consulting services in Cedar City, Utah
If you’ve taken on a side hustle throughout the pandemic, 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.